As Social Security Program (SSP) is projected to be in deficit in the near future, there is a proposal to privatized SSP and giving workers the chance to invest their payroll taxes to investment opportunities with higher return. However, it is barred by four major alternatives; namely, current system, tax increase, benefit cuts, and government-led investing. It is found that privatization approach combined all the advantageous feature of the major alternatives and most importantly providing greater autonomy and worker satisfaction in the long-run. As a result, it is recommended that further discussion must be opened to public, expert and politician debates to concretize privatization strength and also its weaknesses.
Officially referred as Old-Age Survivors and Disability Insurance (OASDI), SSP is a payroll tax funded social insurance program of the US. In 2005, there is a proposal from President Bush to upgrade the current SSP by splitting the benefits to be shouldered by the Government and the benefits to be shouldered by the retirees themselves. It calls for Thrift Savings Plan-like investment opportunities observed in Government workers which can be channeled to several investing options in bonds and securities market.
Bush plan intends to divert part of payroll taxes to private social security accounts. Democrats disagreed and assure that the Trust Fund is in good form until 2042. Social Security and Medicare are two primary important national issues among voters. The pay-as-you-go scheme is the current strategy of the SSP which makes current retirees beneficiaries of current taxpayers. Also, due to this scheme, the proceeds from payroll taxes surpassed disbursements for two consecutive decades. As a result, these surpluses are being diverted to other Congressional projects other than SSP. As early as 2018, however, the surpluses would turn out to be deficits because of the fund diversion.
Creation of private accounts is argued to minimize long-term liabilities on one hand while this benefit could have short-run difficulties on the other. The former is supported through the ability of private accounts to reduce payment to future retirees (e.g. the invested amount and interest). The latter, however, recognized the tendency of those accounts to lengthen in the investment pot as prospective retirees suspend from going out the labor force. As a result, the pre-retirement period will finance payment through a fund that suffers from a deficit (e.g. revenues/ payroll taxes are less than expenses/ retirement benefits).
The surpluses since1983 are invested in US Treasury Bonds and gained at least $1.8 Trillion in 2005. The importance of this figure would supposedly be eminent as there are forecasts that expenses will exceed revenues in the coming years. However, the truth is that the Government is merely borrowing those surpluses to reduce budget deficits. When the Trust Fund demands redemption, this would result to problematic scenarios such as increase in taxes, postponing of projects, rising debt and selling state properties. This is the cause of turmoil on how to curb SSP direction. If no action is done, the Trust Fund is bound to exhaust between 2042 and 2052 with emergency financing is only capable to cover at most 75% of SSP expenses.
There is also a lobby to increase quality of life of retirees by raising the rate of return of the SSP contributions in level with interest paid via Government borrowing. Although the proposal of President Bush addresses part of this, there is suspicion that the privatization strategy is tarnished by libertarian principles against redistribution of state income. In 1980s, a single-earner couple would receive at least 7% return to their SSP investment. In contrast, similar couples who are bound to retire in 2010 would only expect an earning of 3.6% return. There are three elements of such plunge; namely, the aging workforce, rise of total benefits and minimal investment exposure of the Trust Fund. The third element is vital to the concept of conservative investing as SSP is a means for retirees to remain independent in terms of financial support and be empowered regardless of age.
Privatization provides the future retirees to shoulder investment risks and channel their contributions based on their return expectation. They are benefited because customized needs will be addressed and retiree satisfaction is optimized. In macroeconomic terms, it can trigger increase in wealth of retirees that can trickle down to rise in consumer spending which can lead to economic expansion. In contrary to the current SSP, however, privatization houses moral hazards because excessive risks that will be confronted by individuals can proceed to investment crash. The current system is characterized by lower risks and management costs compared to the possibility of zero returns and reduction of principal in privatization. As the current system is bound for bankruptcy, it is aggravated by high payroll taxes, poor return and discrimination against women, low-waged and minority workers. However, it minimizes the issues of insolvency that privatization failed to resolve.
Along with the current system, there are three non-privatization alternatives with regards to SSP; namely, tax increases, reduction of benefits and obtainment of greater return by real capital asset investing. Increasing tax rates is supported by the research that US citizens are willing to pay indefinite amount of tax as long as it targets appropriate programs in which apparently Social Security is inclusive. Further, it is projected that in the near future gross domestic product or GDP will outgrow Social Security taxes by at least 10% caused by pressures of aging population.
To save the solvency of SSP from 2016 forecasted deficit, tax rise should meet $103 per worker and by 2030 such increase is required to hit $1,543 per worker. In this course, adverse effects of tax increase option will result such as reduction in jobs as well as slower economic growth. There will be also less incentive for workers to work because their Social Security contributions are viewed as pure tax rather as investment that they will receive when they retire.
The second option is benefit cut. One advantage of this is that retirees would be able to receive greater face value even after the reduction of benefits because the payment is done periodically. The privatization alternative also offers benefit cuts but on extreme terms such as ad adjustment of benefit indexing formula with inclusion of adjusted wage productivity and setting a non-greater-than inflation rate ceiling for rising benefits. The benefit cut option will most likely follow the economic growth to prevent adverse economic impacts. Specifically, the current SSP plan of increasing the benefits should be lowered to 3%. Considering excessive benefit cuts of privatization approach, some analysts believed that reduction or even eradicating spouse benefits can be employed. This strategy is said to solve the issue of small-wage earners.
The third alternative is government-led investing by which the state will have the discretion of putting the money from the SSP to private assets. Privatization also allows this feature with the difference of decision-maker who will make the call which is the workers themselves through creation of private accounts. Government-led investing reduces the probability of individual workers to manager their finances on sub-optimal and risky manner. It addresses the lacking of the current system for higher returns with limitation of risks from private accounts. Potential retirees can enjoy greater returns on one hand and minimal risks on the other. However, there is bottleneck on this approach. One of the major hurdles is that the substantial finance eminent in SSP can buy a major stake on US companies. In effect, the negative image of Government agencies and even politicians can mix in corporate world.
There is what analysts called ostrich method that supports the current system. It challenges the very extreme view in projecting the insolvency of SSP. For example, the growing economy will pus wages and payroll taxes up that can sustain the needs of the Trust Fund. However, not only solvency issues are important at this stage of US economy. Apart from the fact that unmet levels of economic growth yet experienced by the country is required to maintain SSP in the decades to come, there are issues of higher rate of return, elimination of minority and women life expectancy-to-benefit inequalities, greater opportunities for wealth creation and absence of right to benefits (e.g. lack of property ownership of contributors).
When workers are able to invest their Social Security taxes on their own terms and choosing, it provides sense of ownership and control to their finances and necessarily results to addressing the issues cited in the preceding statement. Seemingly, privatization is a better option compared to the three alternatives including the option of retaining the current system.
It is recommended that the Government should execute due diligence going to final decision on how SSP will be managed. The public must get involve with deliberations of economic, political and historical experts with authorities and the President on top of the discussion. This effort would not be very demanding to them as Social Security is one of the most important national issues for US citizens and can serve as the primary source of politicians vote in coming elections. With relevance on the household and national levels, SSP resolution would be a mere part of US challenge to sustainable growth.
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