Social Security, as we know it, is on a course to utter disaster. The trust, which operates in almost the same way it did at its inception as part of the New Deal, is paying out benefits at a much higher rate than premiums are being paid in. Based on current projections the government will be distributing an extra $200 billion by 2027, $300 billion by 2033 and, by 2042, the program will be bankrupt. This cannot be allowed to happen. Social Security is an essential service, providing 90 percent of income for as many as one third of all individuals over 65. A cessation of benefits to these individuals would be devastating.
The program needs to be reformed and it needs to be reformed now. The Bush administration has offered a proposal that should be favorable across the board. It is a broad plan, able to accommodate numerous possibilities for fixing the system. Some of these options, which would only apply to workers born after 1950, include lowering benefits for wealthier individuals, changing the payment schedule to include penalties for early retirement and increasing the minimum retirement age. One other option that Bush has put on the table, the one getting all the media attention, is voluntary private retirement accounts. This idea, which has met harsh criticism from Democrats in Congress, is beneficial to everyone.
Opponents of these personal accounts claim that Bush is trying to “privatize Social Security.” Howard Dean was quoted as saying, “I don’t believe the way to fix Social Security is to have Wall Street run it so that it can be invested in Enron and Tyco and MCI.” This assessment is a misrepresentation of the truth.
In reality, workers would be given the option of diverting some percentage of their benefits to a personal account that would be invested in a closely managed mix of stocks and bonds. While this brings with it a lower guaranteed benefit, there is the possibility of greater rewards. Given historical trends, over a person’s lifetime, there is no better place to keep money than in stocks. Studies have shown that over any 10-year period in the history of the market, stocks have been the best investment mechanism, never losing value, including the period that overlaps the Great Depression.
This addition of personal accounts to Social Security would be most beneficial to lower income earners. Many of these individuals have no personal retirement account of their own and rely solely upon Social Security to retire. These people pay into Social Security their whole life and if they die young, their families never see the money. Private accounts allow workers to build personal equity that they can leave to a surviving spouse or their children. The money that individuals pay into Social Security should be their money, for their retirement, not somebody else’s.
Opponents of this reform have been fighting vigorously to prevent it from passing. Left-wing organizations have been putting intense pressure on lawmakers and financial services firms not to back the program. As recently as Tuesday, financial services firm Waddell & Reed withdrew from a lobby effort supporting private accounts, after intense pressure from the AFL-CIO. It is unfortunate that big labor unions are working to undermine a program that will serve to greatly benefit their own membership.
It is a well known economic fact that increased national savings is beneficial to national economic growth and productivity. Converting a portion of Social Security into a personal savings program will drastically add to national savings. There will be a huge addition of funds into capital markets, a move advantageous to everyone from an unemployed factory worker looking for a job to the richest industrialist. Social Security is in desperate need of reform, and this reform should include private savings accounts.
Adam Smith ([email protected]) is a senior majoring in economics and political science.