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Social security privatization

Social Security Privatization

A relevant and current topic today is the privatization of the social security system. Paper Masters will research and present all the facts on the privatization of the social security system from any angle you wish.

When President George W. Bush Jr. was conducting his campaign in 2000, he put forth a big push for partial privatization of Social Security. This controversial proposal sat on a back burner because of the war against terrorism. Write a research paper that reveals the facts about the privatization issue.

  • A survey done in 1974, indicated that people who depend on Social Security tend to save less but increase consumption of goods and services.
  • Your research paper should reveal that they would have a boosting effect on the retail and manufacturing segments of the American economy, but would hurt banking by diverting savings funds (though not necessarily loans) from financial institutions.
  • Other studies that followed reported mixed results, but a your term paper could include more recent studies that show that Social Security indeed affects the U.S. economy, though positively.
  • Those who save less tend to spend more. So, in that aspect, at least, your custom research paper could show that putting aside less in savings and depending on Social Security is good for the macroeconomy.

Information on Social Security

Social Security was created in 1935 in response to the high poverty rates that were experienced by retired workers. Developed as a universal entitlement-in which everyone pays into the system-Social Security was later expanded to include those workers that had become disabled and survivors of retirees that had paid into the system. The Social Security system relies on a pay-as-you-go paradigm, in which benefits paid into the system support those who are retired in the present. Thus as workers age and retire, their entitlements are provided by those that are working at the time of their retirement.

Despite the fact that the Social Security system has worked well since its inception-lowering the rate of poverty among retirees from 50 percent in 1935 to 11 percent in 1996-the awareness of impending changes in the workforce has promulgated many economists and the president to call for changes in the system. Specifically, researchers have noted that as the baby boomer population begins to reach the age of retirement, the number of workers contributing to the system will decline dramatically. This will coincide with an unprecedented number of individuals tapping the system for their retirement. Because the system is one of pay-as-you-go, there is concern that this changing economic reality will serve as the basis to make the Social Security system solvent at some point in the near future. Although the exact estimates of when the fund will run out of money have been debated, this could happen as early as 2018.

With the realization that the Social Security system could begin loosing money, President George W. Bush and many of the Republicans in Congress have begun pushing for Social Security reforms. According to the plans set forth by the president, changes would be made in the collection of taxes, such that individual workers could set aside some of their Social Security benefits into private accounts directly related to the stock market. These accounts would serve as the impetus to move the Social Security system from one of pay-as-you-go to one in which workers are making a direct investment in their retirement. Under this plan, future retirees would not have to rely on the monies of younger workers; rather they would have the money they need for retirement invested in a private account.

Although the president argues that this method of reform is the best way to improve the system, critics have argued that by reducing current payments to the Social Security fund, solvency will happen even more rapidly. In addition, most workers would be forced to place their earnings in the stock market, which entails considerable risk for the average investor. While the instability of the stock market is one issue, the inability of the average citizen to understand the process of investing is another. In most cases, poor and middle class workers that are not savvy enough to manage their investments will find that their savings for retirement will be lost; not because of their unwillingness to take part in the system but because of their inability to utilize the system to make it work for them.

With this in mind, it becomes clear that there are a number of reasons to find alternatives to the president's current proposal for Social Security reform. Considering what could be done to improve the system, it seems feasible to argue that the government needs to exercise some fiscal responsibility, balance the budget and stop borrowing from the Social Security fund. Rosenbaum notes that the current system works such that the government borrows any excesses that are left in the fund after benefits are paid each month by issuing bonds. When the funds fall short, the bonds are redeemed and the fund remains solvent. During the 1980s, President Regan designed a tax system that brought considerable equity into the system and left substantial overages. Clinton used these overages to balance the budget.

If the budget could be balanced, the fund could again retain its profitability. This could continue if the government decided to quit using the excesses from the fund for other governmental projects and keep the money invested in the fund. In short, the government needs to quit spending the taxpayers' money that has been set aside for their retirement. Clearly, the current crisis in Social Security is more a result of government irresponsibility than the changing demographics of the workforce. For this reason, the government has a responsibility to fix the problem, rather than place the burden back on taxpayers.

If the decision to move forward with private accounts is utilized, it seems reasonable that a less risky proposition than the stock market needs to be considered in this process. As noted earlier, investment in the stock marked poses a number of significant challenges to the average worker. With this in mind, Conway suggests that employees be given the option of placing their investments in their 401(k) plans. Although these retirement plans also come with considerable risk, they are less risky than direct investment in the stock market. Further, most low and middle income earners already have access to these accounts. This would facilitate the process of creating private Social Security accounts.

Given the current state of the Social Security system, it is evident that there are better choices for reform. If the government is not willing to own up to its responsibility to improve the system, private accounts created under current 401(k) plans appear to be a reasonable option for some investors. Clearly, options need to be discussed. Otherwise, the system of Social Security could be compromised to the point that no one is offered support during retirement.

Annotated Bibliography Sample of Articles on the Privatization of Social Security

Kotlikoff, Lawrence J. and Sachs, Jeffery. “Pro-privatizing Social Security: It's High Time to Privatize.” The Brookings Review. 15 Summer, 1997.

Kotlicoff and Sachs argue for the privatizing of Social Security because the system is an unfair redistribution of wealth from men to women, from single individuals to married couples, and from the two-paycheck couples and singles to couples with only one wage-earner. Kotlicoff and Sachs note that the average American believes that their Social Security benefits will be the amount that is shown on their yearly statement. Such is not the case because even the Social Security's own actuaries report that the Social Security Handbook is so poorly written that it is hopeless to even try to accurately predict one's benefits.  They further argue that privatizing Social Security would improve benefit-tax linkage and resolve the long-term funding problems of the system.

Aaron, Henry. “Privatizing Social Security: A Bad Idea Whose Time Will Never Come.” The Brookings Review. 15 Summer, 1997.

According to Aaron, Social Security is adequately funded for the next 30 years and its long-term financing problems can be solved by reforms that necessitate no serious modification of the basic structure of the program and no payroll tax increases.  It is Aaron's contention that Social Security benefits are the United States' most important anti-poverty program in that they provide a level of support for those who are disabled, elderly, and chronically ill.  In answering the claim of those who favor privatization of Social Security as some sort of individual retirement account, Aaron notes that Americans are currently saving money at lower rates than ever in the history of the nation and that there is no reason to assume that this behavior would change if they were suddenly allowed to save, through whatever means, for their own Social Security benefits.  He notes that large financial enterprises are spending millions to push the idea of privatizing Social Security because they would gain enormously, while the average American would be the loser.

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