Fixing Social Security: Privatization and the Alternatives 


Spring 2005


Former President George W. Bush


The federal Social Security Administration has predicted that the current Social Security system will start paying out more in benefits than it collects from taxes by the year 2018.


Heating up is the debate over just how to fix the over 60 year-old system. 


“We have known about this problem for quite some time,” Scott Frey, of the National Committee to Preserve Social Security and Medicare, www.ncpssm.org, told the American Retiree. “Now, there seems to be an atmosphere of crisis being created in order to push unfavorable, radical changes to the forefront.” 


Frey, a Democrat and policy advisor for the national committee—one of the country’s largest senior advocacy groups, strongly opposes plans put forth by the Bush Administration to overhaul the current system. 

Making the situation worse, he said, is that fact that “Social Security was barely discussed during the 2004 election. Still, it is an issue that concerns all Americans.” 



Privatization 

Shortly after reelection, President Bush, who will begin his second four-year term in 2005, announced his agenda to refocus attention on what some have long-considered a controversial plan to privatize Social Security. 


Privatization would allow younger workers to divert some payroll taxes into individual retirement accounts similar to 401(k) plans. Those near retirement would remain on the current system. 


At present, workers pay 6.2 percent of their taxable income into the Social Security system. Employers match that amount bringing the total contribution to 12.4 percent per worker. 


However, the system will begin to fall short in 2018 and will fund only 73 percent of scheduled benefits by 2042, according to the federal government. 


The presidential Social Security Commission outlined three privatization plans to fix Social Security in 2000; however, the ideas were shelved after the September 11 2001 terrorist attacks. 


One proposal would divert 2 percent of workers’ taxable income into private accounts, while the remaining 4.2 percent and the taxes employers pay would go into the system to help fund benefits for current retirees, reported the Associated Press (AP). 


The proposal, according to the AP, leaves an estimated shortfall of about $2 trillion over 10 years to continue funding current benefits. Bush has not said how the $2 trillion transition costs would be funded, nor has the commission. 


The American Retiree recently spoke to Michael Tanner, who is director of health and welfare studies for the Cato Institute Project on Social Security Choice, www.cato.org, a Liberal public policy group in support of privatization. Tanner also served as an informal adviser to the Social Security commission. 


Tanner acknowledged that stabilizing the Social Security system in its current form is impossible. 


“We can’t afford to sit back and do nothing,” said Tanner. “Every two-year election cycle that we wait makes Social Security reform approximately $320 billion more expensive.” 


Tanner believes that the same risks critics associate with privatization, ultimately the use of a market-based system, exist in an entirely public system. 


He wrote several works that examine the future of Social Security in America and authored his own privatization proposal. 


Under Tanner’s proposal, individuals would be allowed to divert their half of the Social Security payroll tax to individually-owned investment accounts. The remaining 6.2 percent, or the employer’s half of the tax, would be used to pay transition costs and to fund disability and survivors’ benefits, according to Tanner. 



Surplus to Deficit 

In June 1934, President Franklin D. Roosevelt announced his intention to provide a program for Social Security. 


The first monthly benefit check was issued to a retired legal secretary from Vermont in 1940. 


In the late 70s and early 80s, the system faced what appeared to be eminent bankruptcy. 


While running for a second term in office, former President Ronald Reagan said during the 1980 presidential debates “Social Security system was based on a false premise, with regard to how fast the number of workers would increase and how fast the number of retirees would increase.”


Former President Ronald Reagan

The Clinton Administration throughout the 90s held a series of town hall meetings around the country to warn of the system’s bleak future. In addition, the Administration left behind a multi-trillion dollar Social Security surplus. 


Approximately one month before the September 11 2001 terrorist attacks, CNN reported that the federal government would cover $9 billion of federal spending by dipping into retirees’ Social Security surplus. 


Many blamed a $1.35 trillion tax cut championed by President Bush for the decision. 



In the book the Looting of Social Security written by economist Allen Smith, Smith blames President Bush for “stealing” approximately $1.5 trillion in Social Security money. “President Bush has used the surplus money mostly to fund tax cuts for wealthy Americans while robbing many of their hard earned money and their rights,” Smith wrote. 


According to Tanner, of the Cato Institute, the system still has a surplus today and continues to generate more money than it takes in. 


Michael Tanner of the Cato Institute Project on Social Security Choice


Finding Alternatives 

But the retirement of nearly 76 million "baby boomers" will leave fewer people paying into Social Security in a little over a decade. 


Groups like For Our Grandchildren Social Security Education Project, www.forourgrandchildren.org, a Virginia-based non-profit organization, have made it their mission to raise awareness about the urgent need for Social Security reform. 


Nevertheless, opponents of privatization have pledged to fight plans to overhaul the current system. 


Some argue that the system can be altered through benefit cuts for future retirees and raising the retirement age to improve future funding. Alternatives to privatization also include raising caps on earnings subject to the Social Security tax and investing a portion of the program’s income in low-risk investments. 


According to Frey, of the national Social Security committee, the public institution, once privatized, would be at the whim of corporations and Wall Street brokers. And no matter how you look at it, privatization possesses inherent problems, he said. 


For one, transition remains a huge hurdle. Diverting any percentage of the Social Security payroll tax into a private account would create a problem for current retirees. 


Frey said that proposals in support of Social Security privatization will become increasingly unpopular once people understand the risks and the trade-offs. 


“If we are going to move ahead to fix the inherent problem with the Social Security system, let’s put all of the proposals on the table and let Americans vote before decisions get made,” said Frey. 


 

Useful Links 
-www.ncpssm.org
-www.forourgrandchildren.org
-www.cato.org
Reforms to the nation's Social Security system are currently being debated in the White House and on Capitol Hill. If you would like to voice your opinion on the issue, follow this link to find out how to contact your representatives.
-www.congress.org

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