Should Social Security go private to secure its future?

Les Rubin: Recipe to convert to a private Social Security System

OPINION — The latest Social Security Trustees Report underscores the urgency of reform. The Social Security retirement trust fund is now projected to be depleted in late 2032, one year sooner than previously forecast.

At that point, the system would be able to pay only 78% of scheduled benefits, resulting in an automatic 22% reduction in benefits for retirees, survivors and future beneficiaries unless Congress acts. 

Since this Trust Fund is U.S. government debt obligations, using it to cover deficits only increases federal borrowing and debt. While policymakers may ultimately intervene to prevent those cuts, the latest Trustees Report demonstrates that the need for reform is no longer a distant concern; it is now only a few years away.

 There are many ways to fix it and many different proposals. The best way is to privatize it. The difficulty of getting from where we are today to a private system lies in the cost of conversion. Because of the serious shortfalls of the current system, significant capital is required. It is too much to do at once, so it must be done over time. 

The concept would be to move an increasing share of Social Security retirement payments into a privately owned account each year. The account would be professionally managed by a fiduciary and selected from a large group of approved funds, subject to specific investment criteria. The owners could draw from this fund only when there was sufficient funding to pay a minimum to each owner for the rest of their expected life plus three years. 

 In the current system, the payment is 12.4% of wages, split evenly between the employer and employee.  Of this, 1.8% goes into the disability fund. The remaining 10.6% goes into a government Trust Fund used to pay current retirees. Of this, 5% of this would be diverted into private accounts in year one, 10% in year two, etc. for 20 years until 100% goes into the privately owned account. 

Benefits would remain at current levels, as determined by the current formulas, and must be maintained until the system is fully converted and operational. As new people retire, they would receive the same payout as would be currently paid, in part from the Social Security Trust Fund and in part from their private account. When the payout from the private account covers or exceeds the current benefits, then there would be no more contribution from the government Trust Fund.

Diverting funds into private accounts will leave a shortfall in the Trust Fund to pay current and future beneficiaries before they have a private account that provides an equivalent amount to what they would have gotten under the current system. This shortfall would be covered by an additional 4 percent fee in the Trust Fund, divided equally between the employee, employer and government.

During the early years of the conversion, the Trust Fund would continue to grow, as the additional 4% fee would exceed the diversion of funds to the private account. As more is diverted in later years, the excesses will be depleted. 

When the system is fully operational, this fee would be reduced to a minimal fee for a continuing “government support fund” to support people who do not achieve a minimum annuity from their private account and to support payments to those who outlive their private account.  

Once fully converted and operational, all 10.6% of the payments will go into private accounts, 1.8% into the disability fund, and the small additional fee, not yet determined, will go into the new “government support fund.” 

The retirement age for most employees becomes irrelevant, as the private account will fund an adequate annuity for most recipients before age 67. For those few who reach 67 and have not accumulated adequate funds, they could start drawing what was available from the private account, and the “government support fund” would provide the difference up to a specified minimum each year.  For those who outlive their fund, a minimum would be paid from the support fund.

While this transition framework necessarily involves temporary additional costs during conversion, these would stop once conversion is complete.  Also, there are several policy adjustments that could be made during conversion that would significantly reduce the overall financial burden of the transition, but are not required for the plan to work.    

The latest Trustees Report makes clear that maintaining the status quo is no longer a viable option. A gradual transition to a privately owned retirement system offers a path toward long-term solvency, greater personal ownership, and the elimination of the recurring financial crises that have plagued Social Security for decades.

Les Rubin is the founder and president of Main Street Economics, a bipartisan nonprofit. He wrote this for InsideSources.com. 

Ben Ritz: Social Security should not be privatized

OPINION — Social Security is the bedrock of nearly every American’s retirement plan — the steady, dependable stream of income they can count on to guarantee them a basic standard of living in old age.

But that foundation is now in jeopardy. According to the Social Security Trustees, the program’s primary trust fund is on track to be depleted before the end of the next president’s term. If no action is taken, beneficiaries face an automatic 22 percent benefit cut.

This structural shortfall is evidence that the system needs serious reform. But privatization is a false solution that would make retirement less secure for seniors while saddling workers with higher taxes and debt.

Investing in stocks and bonds is a good way for individuals to build wealth for retirement, but it carries inherent risk. Social Security, on the other hand, is intended to carry no risk — retirees are supposed to get the same monthly check whether the S&P 500 is shooting to the moon or cratering. Tying its benefits to volatile market returns would obviously make them even less reliable than they are under the current system.

Privatization advocates try to address these concerns by proposing that taxpayers continue to fund current benefits until the returns on investments grow large enough to fund benefits by themselves.

That theory may have been plausible back in the 1990s when Social Security was running annual surpluses, and privatization plans were gaining popularity. Now, there simply isn’t enough money flowing into the system to make the idea feasible.

That’s because all the revenue the government collects in payroll taxes from today’s workers is used to pay benefits for today’s retirees. 

To make privatization work, the government would need to use some combination of borrowing and higher taxes to cover the existing shortfall and make the initial investments into private accounts.

Borrowing to cover the shortfall would be dangerous and counterproductive. After all, the whole point of fixing Social Security’s finances is to prevent the explosion of our national debt, which the federal government is already spending more than $1 trillion yearly to service — that’s more than it spends on Medicare or the military. The more our government borrows, the more expensive the cost becomes and the greater the chance it has of triggering a calamitous debt crisis.

Borrowing to buy stocks would also be counterproductive since the returns likely wouldn’t cover the cost of servicing the new debt, as shown by an analysis published last month by the Center on Retirement Research. In other words, deficit-financed privatization is more likely to make Social Security’s financial woes worse, not better.

The alternative — raising taxes on current workers by more than a third to fully fund both current benefits and investments into private accounts — would be massively unfair. Social Security is supposed to be a benefit people earn. If policymakers ask today’s workers to foot the whole bill for the amount today’s retirees underfunded their benefits, how can that premise possibly persist? It’s particularly problematic, given that seniors in the United States already have higher incomes relative to their country’s workers than seniors in social-democratic states like Sweden and Denmark.

The intergenerationally fair approach to Social Security reform would both increase revenues and slow the unsustainable growth of benefits. Because the current formula gives the greatest benefits to those with the highest lifetime earnings, benefit reforms can reduce costs without jeopardizing retirement security for vulnerable seniors — preserving the program as a foundation people can depend on.

For example, I have proposed that Social Security could — as one part of a balanced reform package — replace the practice of awarding higher benefits to people with higher lifetime incomes altogether. Instead of measuring one’s contribution to Social Security by how much income they paid taxes on, the program could award benefits based on how many years they worked. This change would avoid giving the biggest benefits to those who need them least, while maintaining the concept of Social Security as a benefit people earn through their work.

My proposal is just one approach to Social Security reform. Policymakers can choose a different mix of tax increases and benefit cuts to strengthen the program for current and future retirees. Privatization is not a get-out-of-hard-choices free card; it’s a dangerous gimmick that would jeopardize retirement security and our economy more broadly.

Ben Ritz is the vice president of policy development for the Progressive Policy Institute. He wrote this for InsideSources.com.

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