The Future of Social Security: Reform, Privatization Debate

Introduction and Background

The Social Security Administration makes the current attitude of the administration clear: "Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable retirement is based on a three-legged stool of Social Security, pensions, and savings. American workers should be saving for their retirement on a personal basis and through employer-sponsored or other retirement plans," and not simply rely on Social Security. The FAQ section of the Social Security Administration website also notes that "more than 30 countries, including Britain, Australia, and Sweden, have established versions of personal accounts," in response to these nations' rapidly aging demographics (FAQ Website, 2005).

Democrats, however, argued that the then-current president's idea of cutting future benefits on a sliding scale — with low-income workers seeing no change, middle-income workers seeing some reductions, and the wealthiest sustaining the hardest hit — would transform Social Security into a welfare program for only the most indigent of the elderly. This stood in contrast to the universal pension program it was designed to be when Franklin Delano Roosevelt created it as part of his New Deal legislation during the 1930s (Davis, 2005).

Development and Debate of the Social Security Issue Today

Social Security reform remains one of the most divisive and partisan issues in American politics, largely because of the controversy over privatization. But first, is there really a crisis in the system at all? The Social Security Administration's FAQ website assured current retirees and "near" retirees (over age 55) that their benefits would continue to be increased each year with inflation. However, it warned workers age 35: "unless changes are made, at age 71 in 2041 your scheduled benefits could be reduced by 26 percent and could continue to be reduced every year thereafter from presently scheduled levels." To 26-year-olds it cautioned: "unless changes are made, when you reach age 62 in 2041, benefits for all retirees could be cut by 26 percent and could continue to be reduced every year thereafter. If you lived to be 100 years old in 2079 (which will be more common by then), your scheduled benefits could be reduced by 32 percent from today's scheduled levels." The website added: "Social Security is not sustainable over the long term at present benefit and tax rates without large infusions of additional revenue. There will be a massive and growing shortfall over the 75-year period." (FAQ, 2005)

Even many Democrats acknowledged that the Social Security system is in need of reform, although not necessarily the kind of complete overhaul proposed by the president. But is there another solution to the Social Security crisis besides privatization? The so-called "lock box" alternative approach — requiring set-asides — would mandate that the non-Social Security federal budget be in balance or surplus for the years in which Social Security makes investments. Though the amount of borrowing from the public might be reduced, such a state of balance cannot be relied upon for every fiscal year (FAQ, 2005).

And is the notion of partial privatization so radical? Several proposals recommended that a personal savings account plan for Social Security be modeled after the federal government's Thrift Savings Plan (TSP). This "very popular plan" for federal employees and members of Congress "allows a choice of five highly diversified, low-cost mutual funds. In the TSP, no direct investments in individual stocks are allowed. Later this year the TSP will be adding a new choice — a lifecycle fund that automatically reduces a person's investment in equities as he or she grows older." (FAQ, 2005) Democrats, however, argued that an option-oriented Social Security program that would allow payroll taxes to be funneled into private accounts would weaken Social Security by chipping away at the promise of a guaranteed benefit. "Benefits would be cut for all workers whose annual earnings are more than $20,000 a year," Democrats on the House Ways and Means Committee estimated (CNN.com, 2005).

Opponents cited a government analysis of the privatization plan: a 27-year-old worker earning about $36,000 that year and average wages throughout his working life would receive benefits roughly 16 percent lower than what he was currently promised upon retirement at age 67 in 2045. Higher-earning workers — making about $59,000 a year — would see a cut of nearly 25 percent upon retirement. Those earning $90,000 and above would face a reduction of almost 30 percent. Under the most extreme version of the Bush plan, which would allow younger workers to invest up to 4 percent of their payroll taxes in private accounts, average workers could see their checks reduced by two-thirds, and the wealthiest could see their benefit disappear entirely (Davis, 2005).