Private Markets With Social Security example essay topic

Introduction I have decided to write my paper on smaller government versus bigger government. The question is are we better off with lots of government programs with higher taxes to pay for them or with smaller government with lower taxes? With smaller government there would be fewer programs with fewer government employees. The tasks of these government programs would be taken up by the private sector. Is Social Security worth saving?

Would we be better off by privatizing Social Security? Or do Americans need the security of knowing if they are unable to save for retirement on their own; the federal government will do it for them. I will compare private markets with Social Security to see where the better returns are. Some people would like to see a national healthcare program for everyone. They feel that would be the answer to our healthcare crises. By healthcare crises I mean rising out of control healthcare cost and so many Americans being uninsured.

To determine whether or not a national healthcare program would be a viable solution I analyzed two national healthcare plans that have been in existence since 1965, Medicaid for the poor and Medicare for the elderly. I see no reason to expect different results as far as the quantity and quality of service from a national healthcare plan for everyone as we are currently getting from Medicaid and Medicare. Therefore I will use these two federally sponsored programs as a model for a future national healthcare program for all Americans. One of the perks of small government is less regulation. Let the American people make more decisions for themselves. However, are government regulations all that bad?

I guess it depends on how you want to look at it. Fewer regulations mean more freedom for individuals but perhaps many of the regulations on the books make this a better country as a whole. I will show a cost-benefit analysis for government regulations to determine whether or not we are getting our money's worth for the taxes we are paying. Social Security vs. Private Retirement Plans There are several problems that can be easily identified with our government controlled retirement plan called Social Security.

For instance, individuals have little control over their savings, no wealth is built, low return of investments, no diversification and the system is going broke. Under current law, most workers have no control as to how much or how their Social Security money is invested. Also, what happens to your Social Security retirement savings if you die before you are eligible to draw from it? The answer is you loose some or all of it depending on whether you have children. Therefore, Social Security is dispersed like a welfare program. That is if you die your spouse would have to meet certain eligibility requirements to receive your Social Security benefits.

This is because it is not looked at by the federal government as your money even though you paid into the system for many years. Given the facts on Social Security, most politicians don't like to talk about changes to Social Security. Any mention of Social Security reform can be detrimental to a politician's career, considering that a good portion of voters are the elderly. For instance, in 1998, the proportion of people age 65 and over who voted in congressional elections was sixty percent; this was higher than any other age group. To the elderly, any type of social security reform puts their Social Security in Jeopardy.

Therefore, it has been a taboo subject for many years. During President Bush's 2000 presidential campaign, he made a bold step in talked about giving people the option of privatizing a small portion (two percent) of one's social security. He stressed that a partial privatization is needed to strengthen the federal retirement and benefits program. He said, "One way would be to let participants invest part of their Social Security tax in private markets". However, Social Security reform opponents say privatization is unfair and undermines the long-term stability of the program. With the declines in the stock markets, privatization of Social Security has been quiet as this is not a good time for the Bush Administration to try and sell the ideal of investing Social Security in private markets.

However, history shows that private markets have outperformed Social Security. The key is that we must look at the long haul. Yes, stock markets loose money. Some years they make a lot of money and other years they don't make much or maybe even loose value. With a diversified portfolio, over time, the stock market has given a much better return on investment than Social Security, not even taking into account that one does not build wealth with Social Security.

For example, the commentator James Glassman has noted, "Returns to the investment portion of Social Security are extremely low. For persons born in 1960, returns are estimated at between 1 percent and 2 percent in real (inflation-adjusted) terms... By contrast with Social Security, the real returns to large-capitalization stocks between 1926 and 1997 have averaged 7.2 percent". Figure 1 shows a comparison of money invested in the private sector versus Social Security. The blue line shows the total retirement savings of a worker who begins work in 1956, earns a constant $18,000 annually and invests 9 percentage points of his payroll taxes in an account holding just the S&P 500. The red line shows his total savings had he invested at the average rate of return Social Security will produce over the next 75 years - 1.34 percent annually after inflation (both account balances include inflation).

Figure 1: Worker earning $18,000 annually invests 9 percent of wages in account earning either the historical yield from the S&P 500 stock index or the projected return from Social Security of 1.34 percent annually. Therefore, I believe people should be given an option of staying with the current Social Security system or investing part or all of their retirement savings in the private sector. There needs to be, however, government regulations to make sure that money that is not invested into the current Social Security system is indeed invested for retirement and in well diversified funds (not individual stocks). I would like to say that people should have the option of planning for retirement or not planning for retirement. And if they don't plan for retirement they keep on working when they get to 65. The problem with this is they would cry to the federal government for assistance.

So it is necessary to require everyone to have a retirement plan. Regulations are needed to make sure private retirement plans are relatively safe. The problem with Enron was that the employees' retirement plan was invested 100% in Enron. If their retirement savings was well diversified, they would not have suffered large losses like they did. That is why regulations are needed to make sure retirement plans are diversified. National Healthcare vs. Private Healthcare The rising cost of healthcare and the uninsured is definitely a problem in this country.

Figure 2 shows a graph of increases in health insurance premiums compared to other indicators from 1988 to 2001. The rising healthcare cost (depicted in figure 2) is the most commonly cited reason for why individuals do not take up or buy healthcare coverage or why employers do not offer coverage. We can make sure everyone is insured by a national healthcare plan for all citizens of this country. A national healthcare plan can also keep costs under control. However, are we better off? To answer this question, I looked at a national healthcare plan for the poor (Medicaid).

I see no reason to believe a national healthcare plan for everyone would be better than Medicaid. Therefore, looking at Medicaid as a model gives us a glimpse into what we can expect from a national healthcare plan for everyone. In Olympian, Washington they are experiencing a shortage of physicians. The closing of Memorial Clinic resulted in the loss of seventy-four physicians. Physicians and clinic administrators say low insurance payments for health care, particularly in government programs, and mounting administrative costs are forcing them to close their practices entirely or at least to patients with some insurance plans. In 1997 the Rhode Island Department of Human Services (DHS) and the Department of Children Youth (DC YF) created a Foster Children Workgroup to determine the needs of foster children in fee-for-service Medicaid.

The workgroup determined that a focus group with foster parents was needed to elicit comments on their foster child's health care experience. The major purpose of the focus group was to determine if foster children had access to health care and were satisfied with the healthcare they received. The study concluded that many foster parents were dissatisfied with their foster children's healthcare. The problem was that many health care providers did not accept fee-for-service Medicaid and many foster parents felt a stigma being on Medicaid. Now let's look at the Medicare program for the elderly.

Reported in April 2002 by the Heritage Foundation paper-"Stung by falling reimbursement rates and frustrated by a growing body of complex rules and regulations, a significant number of doctors are refusing to take new Medicare patients". In fact, over-regulation and under-payment-particularly the 5.4 percent cut in reimbursements this year-have led some doctors to withdraw from the program altogether, writes Robert Mof fit, Heritage's director of domestic policy studies. According to the American Academy of Family Physicians, 17 percent of family doctors refuse to take new Medicare patients. I see the same problem with Medicare as with Medicaid. That is, both government controlled programs cut their expenses by regulating their fees for services below the fair market value for these services.

As a result, doctors are refusing to accept these government plans. Private healthcare providers also regulate fees for services, but at the fair market value. Therefore, the chances of getting the best services are with private healthcare providers. However, it is true that some doctors do not accept HMOs because they tend to have too much control over doctors and don't pay as much as non-HMOs but this is far less common than with government controlled healthcare plans. I believe whatever healthcare plan people have they need choices. Without choices, government or private healthcare plans won't offer the best insurance coverage for the best price.

Obviously, with a government plan there are no choices unless the government is subsidizing private insurance. However, even with private insurance, many Americans have no choice because their employer only offers one plan. Cost-Benefit Analysis of Government Regulations The Office of Management and Budget (OMB) released a draft report on the costs and benefits of federal regulations. The report includes cost-benefit information by agency program as well as by agency.

According to the report, benefits far exceed costs. The draft report estimates that major federal regulations provide benefits of from $135 billion to $218 billion annually, while costing taxpayers between $38 billion and $44 billion. The thirty-seven page full draft report can be found at web 2003 draft%5 Cost%2 Benefit%5 Frp t. pdf. Federal regulations enforcing the EPA's clean air and water laws accounted for the majority of the regulatory benefits to the public estimated over the last decade.

Clean water regulations accounted for benefits of up to $8 billion at a cost of $2.4 to $2.9 billion. Clean air regulations provided up to $163 billion in benefits, while costing taxpayers only about $21 billion. Costs and benefits of some other major federal regulatory programs included: o Energy: Energy Efficiency and Renewable Energy Benefits: $4.7 billion Costs: $2.4 billion o Health & Human Services: Food and Drug Administration Benefits: $2 to $4.5 billion Costs: $482 to $651 million o Labor: Occupational Safety and Health Administration (OSHA) Benefits: $1.8 to $4.2 billion Costs: $1 billion o National Highway Traffic Safety Administration (NISHA) Benefits: $4.3 to $7.6 billion Costs: $2.7 to $5.2 billion o EPA: Clean Air Regulations Benefits: $106 to $163 billion Costs: $18.3 to $20.9 billion o EPA Clean Water Regulations Benefits: $891 million to $8.1 billion Costs: $2.4 to $2.9 billion Also in the report, OMB encourages all federal regulatory agencies to improve their cost-benefit estimation techniques and to carefully consider costs and benefits to taxpayers when creating new rules and regulations. Specifically, OMB calls on regulatory agencies to expand use of cost-effectiveness methods as well as benefit-cost methods in regulatory analysis; to report estimates using several discount rates in regulatory analysis; and to employ formal probability analysis of benefits and costs for rules based on uncertain science that will have more than a $1 billion-dollar impact on the economy. The report also reminds regulatory agencies they must prove that a need exists for the regulations they create. When creating a new regulation, OMB advises, "Each agency shall identify the problem that it intends to address (including, where applicable, the failures of private markets or public institutions that warrant new agency action) as well as assess the significance of that problem".

The draft report also calls for public comment on how federal regulatory agencies are currently assessing and managing emerging risks to human health, safety, and the environment, particularly those risks that are subject to substantial scientific uncertainty. For future homeland security regulations, the report seeks public comment on how agencies and OMB can do a better job of identifying, quantifying, and weighing the consequences of the rules. The draft report is required by the Regulatory Right to Know Act and it will now be subjected to a 60-day public comment period, peer review by academic experts, and a formal process of interagency review. Table 1-Estimate of Benefits and Costs of 47 Major Rules October 1, 1992 to March 1995 in Millions of 2001 dollars Table 1-Continued Estimate of Benefits and Costs of 47 Major Rules October 1, 1992 to March 1995 in Millions of 2001 dollars Conclusion Social Security has been shown to yield smaller returns than private investments such as stocks.

Many citizens may feel more secured with Social Security because there isn't the roller coaster ride. However, stocks in the long haul tend to give much higher returns than Social Security. The key to lower risk with stocks is diversification. Ones retirement should not be tied up in one stock such as Enron. When spread over hundreds or even thousands of stocks the risk is minimal. Therefore, when you make little or even loose in some years you will make up for it in other years.

Also, no wealth is built with Social Security. With Medicaid and Medicare one is limited on quantity and quality of service. The government keeps the cost down by reducing reimbursements to healthcare providers. As a result, the services become scarce to those who have to rely on Medicaid or Medicare. From this perspective, I would have to say you get what you pay for. Private insurance may cost more but in general one has more services available to them and better quality services.

As far as government regulations go, the cost-benefit analysis conducted by the Office of Management and Budget (OMB) we are getting our money's worth. These regulations are important for the health, safety, and well-being of all Americans. The EPA, for example, will do a much better job in controlling air pollution than any private organization. Things like controlling air pollution can not be profit motivated so we need a government agency to get involved.