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Social Security Privatization

V I E W P O I N T


Social Security is an enormously successful program that offers important protections . Social Security offers workers and their families a monthly income for the rest of their lives following retirement, disability or the death of a wage earner. Almost 48 million people receive Social Security benefits, including over 33 million retired workers and their dependents. Of the 33 million retirees, two-thirds receive over half of their retirement income from Social Security. For over 20 percent of the elderly, Social Security is their only source of income. Without Social Security, over half of older Americans would fall into poverty.

Social Security spreads the financial risks of retirement across a large group. All workers covered by Social Security contribute a portion of their wages to the pool of funds in this basic retirement income program. When they retire, Social Security provides them with a steady income that lasts as long as they live. Also, Social Security has a cost-of-living adjustment so that inflation does not erode the value of their benefits over time. President Bush wants to change Social Security so that every American would be subject to the whims of the stock market. Under his "privatization" plan, Social Security would no longer guarantee income security for retired Americans.

What will Social Security privatization do? Privatization will replace Social Security's guaranteed defined benefits with individual investment accounts. In other words, privatization would take money out of Social Security and have workers invest instead in Wall Street. This transfer would drain the Social Security Trust Fund and would force large reductions in Social Security benefits and unfairly burden all Americans, young and old, with trillions of dollars in additional government debt.

Privatization places all the risk of having a decent retirement income on the individual. With privatization, workers will assume the risk of their retirement security. They will have to cope with the risk of a bad investment, the risk that they will outlive their assets, or the risk of a market downturn. Between 1999 and 2002, market invested 401(k) accounts of people over 60 lost 25 percent of their value .

What does privatization mean for current retirees and people nearing retirement? Because privatization diverts two-thirds of the employee-paid Social Security tax away from Social Security and into private accounts, Social Security's financial status is worsened and benefits for every retiree are threatened . In order to continue to pay benefits to retirees, privatization plans must borrow trillions of dollars over several decades from the general fund of the Treasury, causing an already huge federal deficit to balloon. This will increase the debt burden on all Americans, forcing policy makers to consider cuts in all federal programs, including Social Security.

How will privatization affect young people? With privatization, young workers will have to pay twice - once to fund the benefits of current retirees under Social Security's pay-as-you go system and a second time to fund their own individual accounts. The Congressional Budget Office concluded in a recent study that the costs of the transition to a privatized, prefunded system would reduce the rate of return on today's young people, the transitional generation, to a level lower than the rate of return on Social Security.

Social Security should be strengthened and enhanced, not dismantled through privatization. For less than half the long-term cost of the President's tax cuts, and without diverting all or part of workers contributions into privatized investment accounts, Social Security could continue to provide benefits for decades to come.

Government Relations and Policy/Policy Research, March, 2005


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