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Is Privatizing Social Security Good Business?

Why/Why Not Privatize Social Security?
Two types of changes to Social Security have been proposed.  One would keep the current defined-benefit structure but build and maintain a larger trust fund, to be partially invested in stocks and corporate bonds.  The other would set up individual funded accounts, also to be partially invested in private markets.  Both would raise taxes or lower benefits in the near term to increase funds for paying future benefits.

Proposal 1: Privatizing Social Security
Workers below a specified cutoff age would be allowed to divert a portion of their Social Security payroll tax to an individually owned, privately invested account. The remainder of the payroll tax would continue to be paid into the current system to finance benefits to current beneficiaries and those above the cutoff age. Workers in the new system would receive no recognition or benefits for past taxes paid into the system. In addition, individuals in the new system would be responsible for using a portion of their returns to purchase private life and disability insurance, replacing the old benefits. According to Altig and Gokhale, there are 4 key elements that supports this proposal and they are as follow:

Key Elements to Social Security Privatization
Workers under age 32 would be allowed to divert up to 46% of their payroll taxes to individually owned, privately invested accounts
Assuming private investment return below historic averages, individuals will receive retirement benefits equal to or greater than those currently promised by SS.

During the early years of the transition, the government would issue new debt to supplement revenues from the continuing portion of the payroll tax. Once benefits to current and soon-to-be retirees had been paid, the continuing portion of the pay roll tax would be used to service and retire the debt.
No new taxes are required to finance the transition.

How A Privatizing System Works
The plan only applies to future generations and current generations below a specified cutoff age. All current participants above the cutoff age remain under the existing system. Their benefits are financed by the payroll contributions of all current & future workers who are shifted to the privatized system. Despite the diversion of their payroll contributions to meeting benefit obligations to older generations, the enhanced returns available from investments in private capital markets allow the retirement resources of young and future generations to be preserved or increased, on average.

Proposal 2: Keeping Current System Solvent
According to Bethell, he feels that the current system does not face an financial gap. Due to the Baby Boomers, Social Security should have sufficient funds to pay full benefits until sometime between 2042 and 2052. Rather than cash in the bonds held by the system’s trust funds, which would require government to raise taxes, borrow money, or cut budgets, Bethell feels that it would better to take steps soon to keep the system solvent. Nine ways are listed as follow to increase revenue and trim costs:

9 Ways to Keep the Current System Solvent
Increase the payroll tax rate
Raise taxation of benefits
Preserve some of the estate tax, and dedicate it to Social Security
Make Social Security universal

Raising revenue
Invest some of the trust fund in indexed funds
Trimming Costs
Adjust the COLA
Raise the retirement age
Index benefits to prices, not wages
Increase the payroll tax rate – For example, would you be willing to pay a 21% increase in premiums over several decades to maintain and insurance policy that protects you against earnings from disability, pays benefits upon your retirement as long as you live, and pays benefits to your survivors when you die. Its estimated that such a payroll tax increase could eliminate 100% of the long-term revenue shortfall, but we must considered how high the payroll tax is, therefore, pushing it higher could be too hard on lower-wage workers

Raise taxation of benefits
It’s often said that Social Security wastes billions paying benefits to rich retirees who don’t need any help. In order to fix this problem, some believe, to increase the taxation of benefits so that higher income beneficiaries would make a contribution to keeping the system solvent.

The big question is why the sudden push for “privatization” of Social Security? The window of opportunity for such a privatized system is narrow. For example, if the system were implemented immediately, workers under the age of 32 could shift to the privatized system, diverting 46% of their payroll taxes to individual accounts. However, if privatization were delayed until 2011, only individuals under the age of 20 could move to the new system, and those individuals could divert only 22.1% of their payroll taxes. Therefore moving to a privatized Social Security takes on a new urgency.