Should We Privatize Social Security Benefits?

Should we privatize social security benefits?

Social Security is a social welfare service concerned with protection against socially recognized conditions, including poverty, old age, disability and unemployment. The system is structured like an insurance scheme, where both employees and employers are imposed to pay Federal Insurance Contributions Act (FICA) tax to fund the system. The current United States Social Security System is a pay-as-you-go program. The revenue that the federal government raises each year for social security benefits is paid out that same year to beneficiaries. Social insurance is an essential feature to guaranty a minimum standard of living to all citizens, but the current system has also some flaws that are indispensable to repair. In 2005 president Bush raised awareness of the critical situation of the United States social security system. “Social Security is sound for today’s seniors and for those nearing retirement, but it needs to be fixed for younger workers – our children and grandchildren. The government has made promises it cannot afford to pay for with the current pay-as-you-go system” the US president stated. I believe that partial privatization of the existing social security system is absolutely necessary in order to guarantee adequate benefits to future generations. The following three arguments led me to this conclusion.

Social Security essentially represents an intergenerational "social contract," whereby the next generation implicitly promises to pay for the retirement of the previous generation. But the future generations will not be able to stick to this contract. In 1950, there were 16 workers to support every one beneficiary of Social Security. Today, there are only 3.3 workers supporting every beneficiary. And the average is going to decline even further. Baby boomers begin to retire, better medical care extend people’s life expectancy and the United states birth rate hit an all time low in 2002. Since 1983, tax receipts have exceeded benefit payments but all these factors invert this trend. Forecasts show that in just 13 years from now, in 2017, the government will begin to pay out more in Social Security benefits than it collects in payroll taxes. The only solution to avoid dramatically higher taxes or severe cuts in future Social Security benefits is a reform of the system. A partial privatization is the closest and maybe only solution to guarantee young tax payers their pension benefits once they retire.

Another reason why I think a reform of the Social Security System is needed are the low returns in confront to other investments. Based on historical performance the Heritage Foundation computed that the average 40 year old male with an income just under $60,000, will contribute $284,360 in payroll taxes to the Trust Fund over his working life, and can expect to receive $2208 per month under the current program. If these money would have been invested in more profitable but at the same time not too risky assets like treasuries and high-grade corporate bonds over his working life he would have received an at least three times