Privatizing Social Security: Could it be the long awaited answer?

Privatizing Social Security: Could it be the long awaited answer?

by Thomas Temple, December 2009

Just the mention of privatizing Social Security can cause panic in Washington D.C. circles. Politicians know that pushing Social Security reform is tantamount to political suicide. And, they aren't the only ones concerned. Baby boomers are rightfully anxious about losing their portion of the retirement pie. The reality looks grim. Depending on whose projection you believe, Social Security will only be able to fund itself until roughly 2029. So, when the $53 trillion dollars owed to the first round of boomers in 2008 comes due, will the nation be ready?

Historically, Social Security is one of the few programs to support the middle class and others without savings. Social Security was designed as a safety net to keep the elderly out of poverty during the Great Depression in the 1930's. Since then, the birth rate has dropped from a 1950's high of 25 births per 1,000 to about 15 today. In short, the money taken in from the payroll tax is shrinking. It's like when four college kids are splitting the rent and two of them can no longer contribute their share. Without some changes, a worker in his twenties today can expect less than one dollar for every dollar he 'contributes' to the plan.

Keeping the social security status quo, however, simply will not do, despite what AARP and other economists tell you.

Keeping the status quo, however, simply will not do, despite what AARP and other economists tell you. AARP's research director, John Rother, argues it's not the size of the liabilities (53 trillion, plus interest) that matter, but the economy's future health. But placing the survival of the program entirely on the shoulders of an unpredictable economy seems overly optimistic.

As with individuals, unforeseeable events strain our nation's ability to cover its obligations. Wars, stock market downturns and natural catastrophes create budget pressure, which in turn squeezes social programs such as Social Security.

So, where do we go to create a more secure path for the future? Privatizing at least part of the Social Security system has promise, but only if it's done carefully. The Bush Administration has suggested removing 1 trillion dollars of surplus from the trust fund to apply to personal accounts. But something else would have to give in order to cover any future shortfall. The system needs deep cuts in promised benefits plus a multi-trillion dollar infusion of new revenue.

A safer way to adjust the system may lie in a combination approach. One part could be investing a portion of trust monies in equity markets. The other part might be making private savings mandatory. Mandatory saving is an uncomfortable idea to most of us. However, it's been successfully done in countries like Australia, China and Singapore. Relief could be achieved by combining personal savings with investing part of the Social Security fund in equity markets. With a bloated program that's going to fail us eventually, we need to think radically.

Whatever combination of privatization and public fund administration we choose, not to act soon would be next to criminal. Maybe the younger generations have it right. They typically expect little if anything in the future from Social Security. "It's clear today that the Greatest Generation and the boomers are currently delivering an economic disaster to their children," says Laurence Kotlikoff, a Boston University economist concerned with the national debt.

Until some of the above proposed changes can take effect, some sacrifices will have to be made. Benefits may need to be lowered, the tax ceiling on income raised, and some private investment of funds to generate revenue will have to take place. To not do so, at least for the majority of us, will create a grim scenario of financial hardship in the future. Hopefully, this will not be a story of too little too late.