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Essay on social security privatization

This latter figure is the one commonly reported in the media. Ideology plays a major part of framing the Social Security debate.

Privatization of Social Security :: Exploratory Essays Research Papers

Key points of philosophical debate include, among others: [34]. Retirees and others who receive Social Security benefits have become an important bloc of voters in the United States. Indeed, Social Security has been called "the third rail of American politics" [35] — meaning that any politician sparking fears about cuts in benefits by touching the program endangers his or her political career. The New York Times wrote in January that Social Security and Medicare "have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run".

Conservatives and libertarians argue that Social Security reduces individual ownership by redistributing wealth from workers to retirees and bypassing the free market. Social Security taxes paid into the system cannot be passed to future generations, as private accounts can, thereby preventing the accumulation of wealth to some degree. Conservatives also argue that the U. Constitution does not permit the Congress to set up a savings plan for retirees leaving this authority to the states , although the U. Supreme Court ruled in Helvering v.

Davis that Congress had this authority. Liberals argue that government has the obligation to provide social insurance, through mandatory participation and broad program coverage. During , Social Security constituted more than half of the income of nearly two-thirds of retired Americans. For one in six, it is their only income. Economist Lawrence Summers wrote in August that raising the Social Security payouts could reduce the savings rate, as the economy faced a post-crisis savings surplus, which was driving down interest rates: " More generous Social Security would likely reduce the saving rate, thereby raising the neutral interest rate [the rate required to achieve full employment] with no change in budget deficits.

The conservative position is often pro-privatization. There are countries other than the U. Such systems are referred to as 'privatized. The experiences of these countries are being debated as part of the current Social Security controversy. In the United States in the late s, privatization found advocates who complained that U. But in the meantime, several conservative and libertarian organizations that considered it a crucial issue, such as the Heritage Foundation and Cato Institute , continued to lobby for some form of Social Security privatization.

The liberal position is typically anti-privatization. Those who have taken an anti-privatization position argue several points among others , including: [44]. Advocates of major change in the system generally argue that drastic action is necessary because Social Security is facing a crisis. A liberal think tank , The Center for Economic and Policy Research, says that "Social Security is more financially sound today than it has been throughout most of its year history" and that Bush's statement should have no credibility.

In Nobel Laureate economist Paul Krugman , deriding what he called "the hype about a Social Security crisis", wrote: [55]. But it's a problem of modest size. The [CBO] report finds that extending the life of the Trust Fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0. That's less than 3 percent of federal spending — less than we're currently spending in Iraq.

Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come. Social Security is totally funded by the payroll tax levied on employer and employee. If you reduce the outgo of Social Security that money would not go into the general fund to reduce the deficit. It would go into the Social Security trust fund. So, Social Security has nothing to do with balancing a budget or erasing or lowering the deficit. The claims of the probability of future difficulty with the current Social Security system are largely based on the annual analysis made of the system and its prospects and reported by the governors of the Social Security system.

With these predictions in hand, it is possible to make at least some prediction of what the future retirement security of Americans who will rely on Social Security might be. It is worth noting that James Roosevelt, former associate commissioner for Retirement Policy for the Social Security Administration, claims that the "crisis" is more a myth than a fact.

The Social Security public trustees including Charles Blahous warned in May that the "window for effective action" to take place was "rapidly closing", with less favorable options available to rectify the problems as time passes. Proponents of the current system argue if and when the Trust Fund runs out, there will still be the choice of raising taxes or cutting benefits, or both. They say that demographic and revenue projections might turn out to be too pessimistic—and that the current health of the economy exceeds the assumptions used by the Social Security Administration.

These Social Security proponents argue that the correct plan is to fix Medicare , which is the largest underfunded entitlement, repeal the — tax cuts, and balance the budget. They believe a growth trendline will emerge from these steps, and the government can alter the Social Security mix of taxes, benefits, benefit adjustments and retirement age to avoid future deficits.

The age at which one begins to receive Social Security benefits has been raised several times since the program's inception. Robert L. Clark, an economist at North Carolina State University who specializes in aging issues, formerly served as a chairman of a national panel on Social Security's financial status; he has said that future options for Social Security are clear: "You either raise taxes or you cut benefits.

There are lots of ways to do both. David Koitz, a year veteran of the Congressional Research Service , echoed these remarks in his book Seeking Middle Ground on Social Security Reform: "The real choices for resolving the system's problems It was the Commission's recommendations that provided political cover for both political parties to act. The changes approved by President Reagan in were phased in over time and included raising the retirement age from 65 to 67, taxation of benefits, cost of living adjustment COLA delays, and inclusion of new federal hires in the program.

There was a key point during the debate when House members were forced to choose between raising the retirement age or raising future taxes; they chose the former. Senator Daniel Patrick Moynihan indicated the compromises involved showed that lawmakers could still govern. Koitz cautions against the concept of a free lunch ; retirement security cannot be provided without benefit cuts or tax increases. Economist Alice M. Rivlin summarized major reform proposals in January "Fixing Social Security is a relatively easy technical problem.

It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future and then indexing it to longevity , raising the cap on the payroll tax, fixing the cost of living adjustment, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago.

Social security privatization essay

Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence. Various institutions have analyzed different reform alternatives, including the CBO, U. The CBO reported in July the effects of a series of policy options on the "actuarial balance" shortfall, which over the 75 year horizon is approximately 0. Key reform proposals include: [67]. One way to measure mandatory program risks is in terms of unfunded liabilities, the amount that would have to be set aside today such that principal and interest would cover program shortfalls spending over tax revenue dedicated to the program.

These are measured over a year period and infinite horizon by the program's Trustees:. Raising the early retirement age from 62 to 64 has little impact, as those who wait longer to begin receiving benefits get a higher amount. Revenues credited to the Social Security trust funds in would increase by about 28 percent. It summarized its views on a series of reform options during October The Urban Institute estimated the effects of alternative solutions during May , along with an estimated program deficit reduction: [66].

In addition, the final report proposed the steps to ensure the sustainability of Social Security, such as: [9]. His website indicated that he "will work with members of Congress from both parties to strengthen Social Security and prevent privatization while protecting middle-class families from tax increases or benefit cuts. The current system sets the initial benefit level based on the retiree's past wages.

The benefit level is based on the 35 highest years of earnings. Recent COLA were 2. According to the CBO: "Many analysts believe that the CPI-W overstates increases in the cost of living because it does not fully account for the fact that consumers generally adjust their spending patterns as some prices change relative to others". Reducing each year's COLA results in an annual compounding effect, with greater effect on those receiving benefits the longest. There is disagreement about whether a reduction in the COLA constitutes a "benefit cut"; the Center for Budget and Policy Priorities considers any reduction in future promised benefits to be a "cut".

However, others dispute this assertion because under any indexing strategy the actual or nominal amount of Social Security checks would never decrease but could increase at a lesser rate. CBO estimated in that raising the retirement age to 70 gradually would eliminate half the year funding shortfall. The Social Security full payout retirement age in was 66 years of age; it is gradually rising to However, most Americans begin taking reduced early benefits at age While Americans are living longer, much of the increase in life expectancy is among those with higher incomes.

Chiles privatized social security may risk bankruptcy

The Social Security Administration estimated that retirees who made above-average incomes in their working years live six years longer than they did in the s. However, retirees in the bottom half of the income distribution live only 1. In addition, many lower-income workers have jobs that require standing or manual labor, which becomes increasingly difficult for older workers.

The Congressional Research Service reported that: [83]. Progressive indexing," would index initial benefits for low earners to wage growth as under current law , index initial benefits for high earners to price growth resulting in lower projected benefits compared to current-law promised benefits , and index benefits for middle earners to a combination of wage growth and price growth. President Bush endorsed a version of this approach suggested by financier Robert Pozen , which would mix price and wage indexing in setting the initial benefit level.

The " progressive " feature is that the less generous price indexing would be used in greater proportion for retirees with higher incomes. The San Francisco Chronicle gave this explanation:.


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As under the current system, all retirees would have their initial benefit amount adjusted periodically for price inflation occurring after their retirement. Thus, the purchasing power of the monthly benefit level would be frozen, rather than increasing by the difference between the typically higher CPI-W and typically lower CPI-U, a broader measure of inflation.

CBO estimated in that removing the cap on the payroll tax i. Peter A. Diamond and Peter R. Orszag proposed in their book Saving Social Security: A Balanced Approach that Social Security be stabilized by various tax and spend adjustments and gradually ending the process by which the general fund has been borrowing from payroll taxes. This requires increased revenues devoted to Social Security. A January Pew Research Center poll indicated that "Making Social Security system sound" was the 5th highest priority of out 23 topics. According to a July Gallup poll, many Americans doubt they will get Social Security benefits, although the level of doubt is similar to readings going back to Critics argue that privatizing Social Security does nothing to address the long-term funding concerns.

Diverting funds to private accounts would reduce available funds to pay current retirees, requiring significant borrowing. The Economic Report of the President found that the federal budget deficit would be more than 1 percent of gross domestic product GDP higher every year for roughly two decades; U. Privatization proponents counter that the savings to the government would come through a mechanism called a "clawback", where profits from private account investment would be taxed, or a benefit reduction meaning that individuals whose accounts underperformed the market would receive less than current benefit schedules, although, even in this instance, the heirs of those who die early could receive increased benefits even if the accounts underperformed historical returns.

Opponents of privatization also point out that, even conceding for sake of argument that what they call highly optimistic numbers are true, they fail to count what the transition will cost the country as a whole. Gary Thayer, chief economist for A. And this is really a key to understanding the debate, because if, on the other hand, a system which mandated investment of all assets in U. Treasuries resulted in a positive net recapturing, this would illustrate that the captive nature of the system results in benefits that are lower than if it merely allowed investment in U.

Treasuries purported to be the safest investment on Earth. Current Social Security system advocates claim that when the risks, overhead costs and borrowing costs of any privatization plan are taken together, the result is that such a plan has a lower expected rate of return than "pay as you go" systems. They point out the high overheads of privatized plans in the United Kingdom and Chile. Even some of those who oppose privatization agree that if current future promises to the current young generation are kept in the future, they will experience a much lower rate of return than past retirees have.

The proponents' argument is that projected returns higher than those individuals currently receive from Social Security and ownership of the private accounts would allow lower spending on the guaranteed benefit, but possibly without any net loss of income to beneficiaries. Both wholesale and partial privatization pose questions such as: 1 How much added risk will workers bear compared to the risks they face under current system?

For workers, privatization would mean smaller Social Security checks, in addition to increased compensation from returns on investments, according to historical precedent. A technical economic argument for privatization is that, without it, the payroll taxes that support Social Security constitute a tax wedge that reduces the supply of labor, like other tax financed government welfare programs. Liberal economists like Peter Orszag and Joseph Stiglitz have argued that Social Security is already perceived as enough of a forced savings program to preclude a reduction in the labor supply.

In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted [by economists] from household's earnings and should not be included in the tax wedge. To the extent that pension contributions are perceived as giving individuals rights to future pensions, the behavioral reaction of program participants to contributions will differ from their reactions to other taxes.

In fact, they might regard pension contributions as providing an opportunity for retirement saving, in which case contributions should not be deducted from household's earnings and should not be included in the tax wedge. Supporters of the current system maintain that its combination of low risks and low management costs, along with its social insurance provisions, work well for what the system was designed to provide: a baseline income for citizens derived from savings.

From their perspective, the major deficiency of any privatization scheme is risk. Like any private investments, PRAs could fail to produce any return or could produce a lower return than proponents of privatization assert, [] and could even suffer a reduction in principal. Advocates of privatization have long criticized Social Security for lower returns than the returns available from other investments, and cite numbers based on historical performance.


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Supporters of the current system argue that the long-term trend of U. The general upward trend has been punctuated by severe downturns. Critics of privatization point out that workers attempting to retire during any future such downturns, even if they prove to be temporary, will be placed at a severe disadvantage. Proponents argue that a privatized system would open up new funds for investment in the economy, and would produce real growth. They claim that the treasuries held in the current Trust Fund are covering consumption rather than investments, and that their value rests solely upon the continued ability of the U.

Michael Kinsley has said that there would be no net new funds for investment, because any money diverted into private accounts would produce a dollar-for-dollar increase in the federal government's borrowing from other sources to cover its general deficit. Meanwhile, some investment-minded observers among those who do not support privatization, point out potential pitfalls to the Trust Fund's undiversified portfolio, containing only treasuries.

Many of these support the government itself investing the Trust Fund into other securities, to help boost the system's overall soundness through diversification , in a plan similar to CalPERS in the state of California. Among the proponents of this idea were some members of President Bill Clinton 's Social Security commission that studied the issue; the majority of the group supported partial privatization, and other members put forth the idea that Social Security funds should themselves be invested in the private markets to gain a higher rate of return.

Another criticism of privatization is that while it might theoretically relieve the government of financial responsibility, in practice for every winner from moving risk from the collective to the individual there will be a loser, and the government will be held politically responsible for preventing those losers from slipping into poverty. Proponents of the current system suspect that for the individuals whose risks turn out badly, these same individuals will support political action to raise state benefits, such that the risks such individuals may be willing to take under a privatized system are not without moral hazard.

There are also substantive issues that do not involve economics , but rather the role of government. Conservative Nobel Prize -winning economist Gary S. Becker , currently a graduate professor at the University of Chicago , wrote in a February 15, article that "[privatization] reduce[s] the role of government in determining retirement ages and incomes, and improve[s] government accounting of revenues and spending obligations".

Social security privatization essay

Opponents of privatization also decry the increased management costs that any privatized system will incur. Dishonest schemes can be sold to naive buyers in which pension values are bled through fees and commissions such as happened in the UK in — Since the U. Advocates of privatization at the Cato Institute , a libertarian think tank, counter that, "Based on existing private pension plans, it appears reasonable to assume that the costs of administering a well-run system of PRAs might be anywhere from a low of roughly 15 basis points 0.

Opponents also claim that privatization will bring a windfall for Wall Street brokerages and mutual fund companies, who will rake in billions of dollars in management fees. Other analysts argue that dangers of a Wall Street windfall of such magnitude are being vastly overstated. This amount would represent only 1. He concludes that privatization is "hardly likely to be a bonanza for Wall Street".

A range of other proposals have been suggested for partial privatization, such as the 7. One, suggested by a number of Republican candidates during the elections, would set aside an initially small but increasing percentage of each worker's payroll tax into a fund, which the worker would be allowed to invest in securities. Another eliminated the Social Security payroll tax completely for workers born after a certain date, and allowed workers of different ages different periods of time during which they could opt to not pay the payroll tax, in exchange for a proportional delay in their receipt of payouts.

Most state pension plans invest a portion of employer and employee contributions in a mixture of stocks, bonds, real estate, etc. President George W. Bush discussed the "partial privatization" of Social Security since the beginning of his presidency in But only after winning re-election in did he begin to invest his " political capital " in pursuing changes in earnest. In May , he announced establishment of a member bipartisan commission "to study and report specific recommendations to preserve Social Security for seniors while building wealth for younger Americans", with the specific directive that it consider only how to incorporate "individually controlled, voluntary personal retirement accounts".

He outlined, in general terms, a proposal based on partial privatization. After a phase-in period, workers currently less than 55 years old would have the option to set aside four percentage points of their payroll taxes in individual accounts that could be invested in the private sector, in "a conservative mix of bonds and stock funds". Workers making such a choice might receive larger or smaller benefits than if they had not done so, [ citation needed ] depending on the performance of the investments they selected.

Although Bush described the Social Security system as "headed for bankruptcy ", his proposal would not affect the projected shortfall in Social Security tax receipts. Partial privatization would mean that some workers would pay less into the system's general fund and receive less back from it.

Administration officials said that the proposal would have a "net neutral effect" on the system's financial situation, and that Bush would discuss with Congress how to fill the projected shortfall.

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As illustrated by the CBO analysis, one possible approach to the shortfall would be benefit cuts that would affect all retirees, not just those choosing the private accounts. Bush alluded to this option, mentioning some suggestions that he linked to various former Democratic officeholders. He did not endorse any specific benefit cuts himself, however.

United States Government and Social Security Privatization

He said only, "All these ideas are on the table. Later that month, his press secretary, Scott McClellan , ambiguously characterized raising or eliminating the cap on income subject to the tax as a tax increase that Bush would oppose. In his speech, Bush did not address the issue of how the system would continue to provide benefits for current and near-future retirees if some of the incoming Social Security tax receipts were to be diverted into private accounts.

On April 28, , Bush held a televised press conference at which he provided additional detail about the proposal he favored. It has access to legal advice and personal connections to key governmental decision makers. In contrast, poorly educated rural people are defenseless when new land titles are suddenly claimed out of the blue.

They do not understand what is going on until it is too late. With little understanding of formal legal procedures and no financial and political backing, they have barely any chance of successfully defending their traditional claims. However, law is based on mutual acknowledgement, without which there is no legitimacy. The problem is a clash of norms.

The formalized legal rights invoked by the elite are allowed to override the customary rights of the poor and marginalized to regulate their own commons. The abuse of law to sanction this power play is pushing many states into a state of de facto anarchy. It is of no surprise, then, that in many cases the results of privatization do not meet the stated expectations. Land is not allocated to the best users, but to speculators. Land often remains unused. Ways of life and economic models with a low ability to pay are severely disadvantaged in this context. It means that the diversity of forms essential to a sound social and economic organism, is reduced.

The disappearance of traditional ways of life and economic models often goes hand in hand with migration to big cities and the rise of new slums or to peripheral regions. Yet the influx of displaced people into peripheral regions, combined with a lack of effective access controls, only causes further degradation of natural resources that had been stable commons in the past. A telling example is the province of Pailin in Cambodia, where about 50 percent of the primary forest has been destroyed, and agricultural land gradually degraded, in recent years.

The central state bears responsibility for much of this harm. Oftentimes environment and social impact assessments are conducted inadequately or not carried out at all. The resulting overlapping land claims often lead to disputes, which concessionaires do not even try to solve by negotiating agreements with the people affected.

The people who lose their livelihoods then join the queue of landless migrants. Considering the disastrous impacts of the privatization agenda in many countries, the proponents of the agenda have become more cautious. This has not led to a reconsideration of the privatization paradigm in general, however, but rather to ad hoc modifications of how it is administered on a case-by-case basis. When challenging the privatization paradigm, several principles are essential:.

If community interests in shared natural resources are to survive, a new development agenda will need to be advanced, and it will need to sail against the wind. It is time to adjust the compass. His research focus is property rights and land. Content on this site is licensed under a Creative Commons Attribution 3. Website by Pattrn. Skip to main content. Anatomy of property rights So where does this fixation on private property come from?

One size fits all? Toward a paradigm shift in development policy 5 Considering the disastrous impacts of the privatization agenda in many countries, the proponents of the agenda have become more cautious. When challenging the privatization paradigm, several principles are essential: Neutral planning should provide space for a diversity of lifestyles and economic models. This refers in particular to social and institutional forms that have a low ability to pay. Such forms are of inestimable importance for social cohesion and ecological functionality, and to enhancing a coexistence of formalized law and customary rights.

A diversity of lifestyles and economic models might be supported, for instance, by allocating collective land titles to communities where customary rights are in place. Any legal relationships to outsiders to such communities, however, should be based on formalized law.

The state should be as free from special interests as possible, in order to guarantee neutral planning and to provide scope for forms beyond the capitalist exploitation logic. This could be executed by an intelligently designed leasing or land taxation framework. It is clear that this requirement is difficult to enforce in countries where political decision makers are closely connected to owners of large estates and developers. In addition, state policymaking should be reflect the principles of subsidiarity.

Lower administrative levels, e. References Demsetz, H. Feder, G. Fitzpatrick, D. June: 61—