Should Social Security Be Privatized Essays - Economy, Finance

Should Social Security Be Privatized Should Social Security be Privatized? Many people dont understand how the Social Security system really works. There are no separate Social Security accounts set up for each taxpayer to which he contributes his Social Security tax each year. Many people believe these accounts exist, that the money they pay into their accounts grows each year until retirement, and when they retire they get back what they paid in with interest. This is not true. Most people are unaware of the fact that our current Social Security system is a pay-as-you-go program, which means that the revenue the federal government raises each tax year for Social Security benefits is paid out that same year to beneficiaries. Many economists believe that our Social Security system is in need of a major overhaul if today's workers are to receive future benefits. Thomas R. Saving, Director of the Private Enterprise Research Center at Texas A&M University says, What is wrong is that the Social Security system was never set up to be a sound investment-based retirement system. Karl Borden, professor of financial economics at the University of Nebraska recently wrote, Social Security is an unfunded pay-as-you-go system, fundamentally flawed and analogous in design to illegal pyramid schemes. Government accounting creates the illusion of a trust fund, but, in fact, excess receipts are spent immediately. Robert M. Ball, former commissioner of Social Security said, Some of the trust fund money should be put into the stock market. I want to do it to get a better return for the Social Security system. Historically, long-term government bonds have had a real return, after inflation, of 2.3 percent a year, compared with 6.3 percent for stocks. Paul W. Boltz, economist for the T. Rowe Price mutual fund said, When we examine the pending financial crisis of our Social Security system, we find, in effect, the characteristics of a government sponsored Ponzi-type scheme. Michael H. Cosgrove, of the Dallas-based newsletter, The Econoclast says, People need to take the responsibility of investing their own funds for their retirement. The Social Security system assumes people can't make that decision and government can do it better. The result is a bankrupt Social Security System. These economists believe that by investing in the private market, someone currently entering the labor force and retiring at age 65 can expect to receive an inflation adjusted retirement benefit from 1.5 to 5.5 times the current social security benefit. Increasing life expectancy and decreasing birth rates have combined to create the crisis the system is now facing. For example, in 1950 there were 16 workers for every social security retiree, while presently there are only 3.3 workers for every retired worker drawing benefits. Estimates are that by 2030 there will be fewer than two workers for every retiree. Privatizing social security sounds extreme, but it has been done successfully in other countries like Chile. Jose Pinera, who was Chile's minister of labor, privatized the state pension system in 1981. It is now giving retirees generous pensions while fueling investment, growth and improving living standards in that country. The heart of the Chilean system is a mandatory savings plan. All workers under age 45 contribute 10 percent of their monthly earnings in special accounts, known as AFPs (Administradoras de Fondos de Pensiones). Workers between ages 45 and 65 could shift to the new system at their option. The funds in AFPs are professionally managed and invested in stocks and bonds. The money may not be touched until retirement, at which time the worker may begin phased withdrawals or purchase an annuity. At the end of 1995 more than $25 billion was invested in AFP accounts. The old Social Security system is being phased out. By 2030 Chile's Social security will entirely be privatized. This system ensures the money a taxpayer pays for retirement goes to helping that taxpayer retire (not others). It ensures the money paid in taxes is invested and grows. It also gives taxpayers choices over their plans and the age at which they want to retire. If the US were to adopt a system like Chile's, we could save our own failed Social Security system and provide real security and peace of mind to everyone. The money paid into these individual retirement accounts is invested, meaning more capital is available to the business sector for investment. An individual would have their very own pension, with their name on it. The government would no longer control the money that the individual paid in to it. It is the individual's account, just like an IRA. It is essentially a government mandated IRA. Only