Accounts For Their Social Security Funds example essay topic

Social Security is a major concern in American society today. Social Security first started in 1935 under President Roosevelt when he signed the Social Security Act that provided the elderly with guaranteed retirement income. In 1939, benefits for spouses, dependent children of retirees, and survivors of workers who die before retirement were implemented by congress. In the 1950's, disabled workers were also given benefits. Now days, Social Security is under close scrutiny.

Funds are depleting, and Social Security is in need of some serious revamping. Many solutions have come forth, but the most workable plan is to create privatized investment accounts that allow individuals to have more influence over their own money for retirement. (Weisman) In 2000, $402 billion dollars were spent to give over 45 million people benefits from Social Security. 63%, or $348 billion dollars, went to retired workers while the other 37%, or $54 billion dollars, was distributed among disabled workers and their families. As of 1950, there were 16 people paying Social Security taxes to every one retiree receiving benefits. Now, the ratio is at a dismal 3.4 tax payers to every one recipient.

(Clayton) Projectionists are saying that with the current taxes and the current spending, more money will be paid out than brought in by the year 2016. In fact, some say the deficit will reach numbers totaling $17.4 billion in 2016. More over, if this trend continues, debt will reach $99 billion by the year 2020 and $271 billion in 2030; projections show that funds will be completely dried up by 2038 if nothing has still been done. (Weisman) Economists have several different proposals for how to fix the problem. Some say that individuals should have complete control over their money to invest in the stock market as they choose. They see investing some of Social Security in the market as the only way to eliminate the deficit.

They say the deficit will soon increase with the baby boomers generation primed to retire in the next 12 years, and they believe the market is the country's best bet to keep Social Security afloat. (Weisman) Others believe that just a few minor adjustments are needed to fix the problem. Ideas, such as the raising of maximum wages subject to a payroll tax and investing 15% of Social Security's surplus in stocks, have been proposed to combine in the aid of eliminating the deficit projected. Some feel that private investment accounts subject to some government regulation need to be implemented over the existing system. Still others feel that America needs to do nothing and the only measures needed are good economic policies. They feel that the situation can work itself out, and as long as the economy is kept healthy, then Social Security will be just fine.

(Strengthening) Of all the ways posed, the best way to solve both the need for Social Security reform and economic growth simultaneously is private investment accounts. This solution is one of allowing the younger generation to start privatized accounts for their social security funds. Martin Feldstein, a professor of economics at Harvard University and president of the National Bureau of Economics Research, states: "Our current Social Security system is acting as a drag on economic growth in two important ways. First, the payroll tax distorts the supply of labor and the type of compensation sought by workers. These losses are inevitable because of the low return implied by the pay-as-you-go character of the unfunded Social Security system.

Second, the system reduces national savings and investment. Privatizing Social Security, transforming it from an unfunded pay-as-you-go system to a system of mandatory private savings accounts, would solve both of those problems and increase economic growth". (Feldstein) As Social Security stands right now, the rate of return to the individual is only 2%. With a shift to privatized accounts, individuals will be free to invest some of their money in order to accumulate wealth instead of pouring 12% of their overall income into the Social Security system. (Feldstein) Individuals will be allowed to choose either a private option or Social Security.

If one opts for Social Security, one will receive recognition bonds from the federal government that will pay a portion of one's future Social Security benefits equal to the proportion of lifetime taxes one has already paid. In the private plan, workers and employers will pay 5% of their wages, instead of the current Social Security payroll tax of 6.2%, into private investment accounts. The accounts will be mandatory and one's money will be invested in a mix of stocks and bonds that will allow the individual to gain a return on capital to use for retirement. This will eventually result in a payroll tax cut of 20%.

The private accounts will also finance private life and disability insurance, eliminating Social Security survivors and disability benefits. Overall, the shift to privatized accounts will lead to more money for the nation and the individual. Projections say that if the privatization accounts are put in place, then the gross domestic product will increase 5% every year that it is running. The total projected gain for the shift to privatized accounts would be as much as $10-20 trillion. (Ferrara / A Plan) The biggest objection in shifting to privatized accounts is the shift itself. People fear the side effects of the shifting of money in the economic system from public to private hands.

(Orszag) Some feel the risk is too high and not worth taking. Another possible downfall of the privatization of account is the "Doomsday" scenario. This is where the private funds don't produce as projected or even become ineffective completely. If this were to happen, people contributing to the funds would be left with nothing and the government would be called into question. More adjustments would have to be made and a sense of panic may rise over the nation.

There is also fear that with the huge number of baby boomers primed to retire, the shift may eliminate the baby boomers retirement benefits. Not only will the shift impact the contributing individuals, but it will also affect ones who are supposed to benefit from it currently. For all these fears, there is a plausible answer. First, Social Security benefits are more risky than privatized accounts because Social Security is currently so badly under funded that if nothing is done, it will be gone anyway.

Second, the stock market has never lost money over a long range continuum. Young people starting a privatized account in their early twenties and thirties have very little risk, especially if investing in a conservative range of managed funds offered as choices by the government. The government could control risk by offering only well-managed, conservative funds as options for privatized accounts. To insure that current baby-boomers will not lose their social security benefits in the short run, only a portion of the current 6.2% payroll tax would be allowed to be invested in a private account, and the rest would continue to be placed in Social Security. This percentage could be scaled back gradually as the fund builds and as baby boomers die out. (Ferrara / Failed) With the growing problems in the economy, Social Security is forced to suffer drawbacks.

Funds are depleting and the future is dim according to the current path Social Security is on. The most plausible solution to prevent this is to create privatized accounts to be implemented in the younger American generation. This will save social security for its future recipients and create a better foundation for the upcoming generation. The fact of the matter is, Social Security will change, and it must change or else retirement for all will cease to exist.

Bibliography

Clayton, Gary E. Economics Principles & Practices. Columbus, OH: Glencoe McGraw Hill. 2003.
Feldstein, Martin. "Privatizing Social Security: The $10 Trillion Opportunity". Social Security Privatization. 11 Nov. 2004.
Ferrara, Peter. "A Plan For Privatizing Social Security". 11 Nov. 2004.
Ferrara, Peter. "The Failed Critique of Personal Accounts". 8 Oct. 2001.
11 Nov. 2004.
Orszag, Peter R. "Costs of Voluntary Individual Accounts for Social Security". 5 May 2000.
15 Nov. 2004.
Recht man, Yi gal. "The Idea of Privatization". Social Security and Privatization. 11 Nov. 2004 "Strengthening Social Security".
The White House. 11 Nov. 2004 Weisman, Jonathan.