The Current Social Security System

The current social security system should not be replaced by a mandatory private pension system.

 In the light of the global pension crisis, there is a growing concern in the US that the current social security system might be replaced by a mandatory private pension system. Such a development is touted in many public media and is beginning to enter public minds as a reasonable option. The main reason is the rising expenditure in the Social Security system that is taking a heavy toll on the US budget.

Ben Bernanke predicts that “government spending on Social Security and Medicare alone will increase from about 7 percent of the total size of the U.S. economy to almost 13 percent by 2030 and to more than 15 percent by 2050” (Aversa, 2004). This is caused by the fact that privatization will not remove the problems associated with Social Security today, even aggravate in fact the financial crisis in the system. Moreover, it will further disadvantage the already disadvantaged members of the society. In addition, privatization of pension accounts has already been a disappointment in many other countries, in particular in Chile.

In the first place, it is hard to see how the privatization is likely to solve the financial problems associated with the Social Security. The projected windfall will not go away because part of the contributions that earlier went to Social Security will go to private accounts. In any case, the Social Security system cannot dishonor its obligations to the citizens that have for years been diligently contributing to its funds and helped pay the benefits for the earlier generations when they were young.

Therefore, advertising the privatization as a solution to the financial problems in the system is totally wrong. Privatization is a costly enterprise as it will take adoption of new laws that could support the new system, would require the creationg of new government infrastructure to oversee the accounts, and in general remove a viable source of funding for the current Social Security. Reducing the size of benefits would be a much more workable way to solve the problem that would then have at least some sort of logical solution.

Besides, Social Security in its current state effectively serves one of its initial goals – serve the underserved and those who are insecure under the current system. For example, research by the Century Foundation shows that African Americans “also have traits that lead to greater benefits under Social Security: a higher disability rate, more survivors receiving benefits, and lower average wages” (Anrig, Wasow, 2004).

This category of people will become more vulnerable if the current Social Security system is replaced by the private system. The same is true for Latinos that have a longer life expectancy which leads them to profit from longer term of payouts. The average woman also stands to lose more than an average man since she “works fewer years outside the home, earns less per year, and lives longer after retiring” (Anrig, Wasow, 2004).

Not to be discarded is the fact that the Chilean privatization of pensions failed to meet expectations associated with the reform. Thus, the 2004 report of the World Bank demonstrated that “investment accounts of retirees are much smaller than originally predicted-so low that 41 percent of those eligible to collect pensions continue to work” (Anrig, Wasow, 2004). In addition, for those who have placed their funds in such accounts, the commissions have taken a large chunk out of expected profits. This is not to mention the hefty transition costs that averaged 6% in the 1980s.

 What is then to be done about the Social Security crisis? Reducing the payouts to the current or future members is certainly an option, it can hardly be a popular one.

An interesting solution is proposed by Nancy Altman (2005), the author of the book entitled “The Battle for Social Security: From FDR’s Vision to Bush’s Gamble”: “keep a residual estate tax, which would affect less than 1 percent of the wealthy—the Paris Hiltons—and dedicate it to Social Security”. This solution can be difficult to realize since the people who will be affected are the ones that usually pull the ropes in the establishment. However, if one thinks for a moment of all the riches that are squandered by millionaires’ children, it is obvious that these funds can be put to much, much better use, and funding Social Security can be one such option.

Another way to rescue the Social Security system would be to accept a partial reduction in benefits. This can be done over a certain period of time before the system can be retooled to be financed through different sources. Alternatively, as the demographic trends prompt, one way can be to accept a raise in age cap. Social Security payouts can start not at 65, but at 68 or even 70. Since Americans have begun to live longer lives, they can just as well accept longer time in the workforce so that the period of life in retirement grows proportionately to the increase in life expectancy. Working longer, senior citizens would also be helping to finance health care that is getting more expensive with the aging of baby boomers.

Thus, the Social Security crisis is a serious issue that has to be dealt with in earnest. The current proposal to reform the system by moving many accounts to private is hardly feasible since it does not solve the problem it addresses: the current windfall in funds. Besides, it aggravates the situation of vulnerable population groups and copycats unsuccessful experience of other nations. In contrast, imposition of a tax on the richest population groups or raise the age cap for retirement can help to find a reasonable solution. In this case, the nation could avoid the need to lower payments and prevent the shortfall in the system.

References

Anrig, G., Jr., & Wasow, B. (2004, December 12). Twelve Reasons Why Privatizing Social Security is a Bad Idea. The Century Foundation. Retrieved December 25, 2006, from http://www.socsec.org/publications.asp?pubid=503#4

Aversa, J. (2004, October). Bernanke: Baby Boomers Will Strain U.S. Breitbart.com. Retrieved December 25, 2006, from http://www.breitbart.com/news/2006/10/04/D8KHUEE00.html

Nancy Altman: Drawing the Line on Social Security. Interviewed by Thomas N. Bethell. (November 2005). AARP Bulletin. Retrieved December 25, 2006, from http://www.aarp.org/bulletin/socialsec/altman.html