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Social Security: New Proposal Could Fix 75% of Funding Issues — Is Privatization the ‘Big Idea’ We Need?
Proposals to privatize Social Security are not new. They’ve been around for at least 30 years, when politicians and think tanks suggested private investment accounts as an option to address the program’s financial problems. Those problems are still around — and so are calls in some quarters to privatize it.
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One of the latest privatization “big ideas” comes from U.S. Sens. Bill Cassidy (R-La.) and Angus King (I-Maine), who are among the lawmakers trying to come up with solutions to the upcoming insolvency of the Old-Age and Survivors Insurance (OASI) Trust Fund. That fund is expected to run out of money by the middle of next decade. When it does, Social Security will have to rely solely on payroll taxes, which currently fund about 75% to 80% of benefits.
Among the proposals Cassidy and King have floated is to create a sovereign-wealth fund to help finance Social Security. The idea is to put $1.5 trillion over five years into the fund and hold it in escrow for 70 years, MarketWatch reported. If the fund fails to generate a return of 8% or higher, Social Security’s maximum taxable income and payroll tax rate would be increased to ensure the program stays on track to be solvent for another 75 years.
During a Bipartisan Policy Center replace up to 75% of the forthcoming Social Security funding shortage. He argued that this would be much better than the 1% to 3% returns typical of Treasury funds, especially with inflation still at a high level.
More recently, Cassidy said the fund would aim to have an average growth rate of 8.5% over 75 years. If successful, the idea would fix three-quarters of the Social Security funding problem, but not all of it.
“We think it’s a really good start on a solution,” Cassidy said. “Now we need leading presidential candidates to step to the plate, be honest with the American people and help us find the additional 25%.”
His idea might be a tough sell, however — especially now, in the middle of a banking crisis. Previous efforts to privatize Social Security have run into a wall of opposition — especially from retirees who depend on the benefits. In 2004, then-President George W. Bush unveiled a plan for people to open their own private retirement accounts and provide the option to redirect payroll taxes into them. But the plan was doomed by resistance by both Democrats and some Republicans.
Nearly two decades later, the debate still hasn’t gone away. As the Britannica Pro/Con website noted, proponents and opponents of privatization can both trot out several reasons to support their positions.
Pros
Here are three reasons why privatizing Social Security might be a good idea.
1. The current Social Security program could become insolvent as early as 2032, so a better system is needed. The CATO Institute’s Project on Social Security stated that moving to personal retirement accounts can “reduce Social Security’s debt and bring the system back into solvency.”
2. With private personal accounts, retirees will get higher returns on their investments because of consistent growth in the stock market. The year-over-year growth rate for private investments has historically been much higher than the return gained by retired workers in the current Social Security program, according to research cited by Britannica Pro/Con.
3. Private accounts give people more control over their retirement decisions because they can choose their own investments instead of having the money sit in a government-controlled entity.
Cons
Privatizing Social Security could also have adverse consequences.
1. Privatizing Social Security will actually do nothing to address its impending insolvency — and maybe even make it worse. The reason Social Security trust funds are running out of money is because the program’s cost is increasing at a faster rate than its revenue from payroll taxes. That will only worsen if a portion of payroll taxes are diverted away from the Social Security trust funds and into private retirement accounts. A 1997 Brookings Institution analysis found that if just 1% of payroll taxes had been diverted to private accounts in 1998, the trust funds would have been insolvent by 2015.
2. Americans’ retirement money will be vulnerable to stock market volatility. Because of the normal up-and-down stock market cycles, those who retire during a selloff would be a lot worse off than those who retire during a boom. Even diversified mutual and bond funds carry risk and are not guaranteed or insured by the government. Economist Dean Baker estimated that average 15-year-olds in 2005 who retire in 2055 would lose more than $160,000 of their scheduled benefits under Bush’s plan and gain less than a third of that back from private account investments.
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3. Privatizing Social Security would dramatically increase the national debt by transitioning to private accounts while also continuing to provide benefits to current Social Security beneficiaries. MIT economist Peter A. Diamond estimated that such a transfer of funds would add $1 trillion to $2 trillion to the country’s national debt and potentially trigger an economic crisis.
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This article originally appeared on GOBankingRates.com: Social Security: New Proposal Could Fix 75% of Funding Issues — Is Privatization the ‘Big Idea’ We Need?