Privatizing Social Security Social Security Can Be

Privatizing Social Security

Social security can be generally defined as a program that provides social protection or protection against conditions that are socially recognized to workers and their dependents. Such social conditions include old age, poverty, disability, and unemployment. This program is funded by the social security tax.

In most industrialized economies and a good portion of developing countries the postwar period has been spent to dramatically expand the pay-as-you-go social security programs that already existed. Although this expansion has led to a reduction of poverty rates among the elderly, it has as well led to the tremendous redistribution of sums from young and future generations, as a group, to simultaneous older generations, as a group (Altig and Gokhale, p.03). The mechanism that causes the redistribution to the initial elderly is clear. A bonus is received by the generations that are retired or close to retirement when an increment on the pay-as-you-go social security benefits is effected. However, the mechanism that causes redistribution away from younger and future generations is not very clear. The understanding of the public is that the expansion of pay-as-you-go social security implies higher payroll taxes for the current and future young workers, but it also recognizes the higher benefits that will be received by these generations when they retire.

However, many countries are facing an impending demographic/social crunch and this has led politicians into considering privatization of social security with a belief that privatization of social security programs may be a painless way out of this demographic dilemma. This is not an obvious case. Ignoring the potential efficiency gains from social security privatization would mean fiscal policy is a zero-sum game (Cooley and Soares, p.89). Consequently, privatizing social security programs as a means of mitigating the prospective increase in the fiscal burden on future generations, it is likely that the current generation will pay the price by facing higher fiscal burden. These possible and varying outcomes make it necessary for those involved in decision making to take a middle ground and analyze both extremes before making a decision.

All social security programs have the intention of providing a safety net protecting workers and the dependents when faced with certain social conditions as those mentioned earlier. Privatizing social security is meant to allow workers to control their personal retirement money through personal investment accounts. Those in support of privatization argue that this will allow retirees to freely invest their retirement money in the stock market as they wish, theoretically this would give them higher returns as compared to government-invested funds. On the other hand, those opposing the privatization of social security programs argue that investing retirement money is complicated and risky since bad decisions can lead to loss of the retirement safety net. In order to come up with a conclusion concerning this topic it is necessary to look at the pros and the cons of privatized social security programs.

When the existing system is used in averting the pending collapse of social security will necessitate deep cuts in benefits, increased borrowing, or significant hikes in tax. Switching to private investment accounts that are funded with existing payroll tax is a better solution, this will avoid benefit cuts or hikes in tax. It is also evident that privatization of social security programs will have retirees pocket more money (Feldstein and Samwick, 1996). Another feature that will be introduced by private retirement accounts is the contractual rights for workers to their retirement benefits, this is a feature that is currently missing. Contrary to the belief that putting social security into private accounts will expose money to risk, it actually does not. The regulation of the current accounts are subject to federal regulation and individuals are only allowed to invest in diversified, approved mutual funds rather than the highly volatile or single stocks. A switch to the personal retirement accounts will also offset any extra costs the accounts incur through the year-over-year growth rate over time, thus it will not end up into burdensome transaction costs. There is also the tendency of the federal government diverting budget surpluses in social security into funding other government spending; privatization will prevent this diversion of social security funds into non-social security purposes. Privatizing social security will also improve the economic growth by injecting money back into an economy that is failing. Another concern has also been on the excessive taxation and since in privatization private accounts will be taxed through the usual income tax process, this burden of excessive taxation will be alleviated.

Regardless of all these positive sides of privatization, there are also a number of disadvantages of privatizing the social security programs. The first and foremost effect would be a reduction in traditional social security benefits; moreover, initiating a privatization system is very costly especially the transition stage. There are special insurance protections such as disability and survivor's insurance that are provided in social security, these will be reduced by privatization (Diamond, p.70). This will be out of the need to fund private retirement accounts thus these programs will have to be trimmed. Privatization will also bring up potentially risky investments thus weakening the federal retirement system since peoples' retirement money will be put at the whim of the stock market. It cannot be denied that there are unscrupulous stock brokers and their existence is a threat to the workers who might fall victims to their trickery, privatization exposes workers to this risk. Most of the people are not aware, or are unwilling to know the process of making sound decisions for their own long-term investment, with privatization this becomes a setback. There are fiscal benefits that may come with privatization but these would be swept away by the upfront cost of setting up the individual accounts and of advising individuals of the system. Privatization would lead to several individual private retirement accounts and this will generate much more bureaucracy, in order to manage this then more personnel must be employed and these have to be trained which will be a very costly affair to the government.