Public Budgeting There Have Been

Public Budgeting

There have been a number of proposals put forth to deal with the different issues in the federal budget. As one of the largest components of the federal budget is Social Security, that program has come under some scrutiny from people seeking to balance the budget. Social Security provides retirement benefits based on the amount that the person has earned during his or her lifetime.

Social Security is funded through payroll taxes, and should be revenue neutral at worst. The baby boomers of today who are expanding Social Security's beneficiary rolls were the ones who paid into it through decades of surpluses. However, from a budget perspective this is a problem because past governments spent those surpluses. Now, tax receipts to pay into the program do not meet the cash outflows of the program. Without those surpluses, the Social Security program is now adding to the deficit, not through any fault of the program itself but of the politicians who spent its surpluses years ago (Ohlemacher, 2012).

A plan to privatize social security would involve allowing consumers to invest part of their Social Security allotments into private accounts. One proposal was tabled during the Bush Administration but was rejected, but the idea was raised during the most recent Presidential campaign as well (Hiltzik, 2012). Such a strategy would dramatically shift the nature of Social Security. The current plan is a defined benefit plan, which was a popular type of retirement plan when Social Security was first enacted. This type of plan provides a specific benefit to retirees, and the government is responsible for managing the money. Clearly, the federal government has proven incapable of doing so, leading to the current proposal to take some of the money management out of the hands of government.

When consumers are able to direct some of the benefit to investment funds, this creates what is known as a defined contribution plan. The amount of money that goes into the plan is known, but what comes out at the other end is not known. The reason this idea is so unpopular -- stock market crashes aside -- is that the defined contribution idea would benefit a specific demographic but would be a risk to other demographics.

In general, consumers who are able to manage their own investments meet the following criteria. They usually will have a higher education, because financial management is complex. Having friends and family with money or such education helps. Again the demographic that is most likely to learn about financial management is wealthy or upper middle class, probably white and probably urban. This demographic understands how investment markets work and is likely to make the smart and responsible choices with these investment funds to ensure that they have a good retirement.

The demographic that is least likely to benefit from such a plan is the demographic at the lower end of the income scale, blue collar workers with less education, minorities, new immigrants, and rural people. These demographics are generally less wealthy to begin with, so they rely more on the Social Security benefits than the demographic that benefits most from having a defined contribution plan for Social Security.

A partially-privatized social security system therefore primarily benefits the type of consumer that is in the best position not to need Social Security at all. Such consumers can use their knowledge of financial markets to enhance their wealth or better protect it. Consumers that are less likely to benefit, having little knowledge of investment markets, are more likely to make bad investments. They may take on greater risk than they should, or make other fundamental mistakes.

The problem with the partial privatization of Social Security is that it does not meet the needs of the most vulnerable citizens. The people with the least amount of leeway in financing their retirements are the most likely to make mistakes under this plan. Government would simply be left with millions of seniors who no longer have money to meet their basic needs, creating a humanitarian crisis within our borders. Such a strategy benefits those who do not need the benefit, and harms those who can least afford the harm. This makes Social Security privatization -- even partial -- a regressive plan.