Ideas for Privatizing Social Security

Publication Date: April 1998

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

There has been considerable interest recently in privatizing Social Security. Although dormant for many years, the idea is not really new. It dates back to the system’s inception 60 years ago when Congress rejected amendments to delete “old age benefits” from the Social Security Act of 1935 and to exempt workers from the system if their employers provided more generous pensions. The renewed interest is wide-ranging: from adoption of a totally-revamped system of personal retirement accounts, similar to an approach taken by Chile in 1983, to permitting optional earmarking of a portion of existing payroll taxes for personal savings, to using federal budget surpluses to create them. Others suggest that additional payroll withholding be required, over and above today’s payroll taxes, for personal savings. Still others suggest that the government should invest the Social Security trust funds in stocks and bonds instead of federal securities.

Many privatization advocates feel that with expenditures approaching $400 billion a year, Social Security has gotten too big. They argue that it is outmoded, that the public is skeptical about its future, and that there would be more economic growth if people saved and invested privately instead. Some take issue with the system’s social features, which they contend are inappropriate for a retirement program that workers pay for. They argue for an approach that aligns benefits more closely with what people pay. Still others feel that the system cannot survive for long, as evidenced by Congress’ repeatedly having to address its long-run deficits, and that a more “reliable” means of retirement savings must be adopted.

The system’s supporters contend that it is not “broken” and that moderate fixes will solve its problems. They fear that privatization would erode the social purposes of the system and tilt it in favor of highly paid workers, and argue that features such as inflation adjustments and the system’s disability and survivor benefits are not easily replicated in private plans. They stress that the risks inherent in personal investing are high and may leave many people who made unwise or unlucky choices with inadequate retirement income. They further contend that to the extent that privatization requires foregoing taxes, federal budget deficits would be larger, there may not be enough revenue to finance existing benefits, and drastic benefit cuts may be needed to restore long-run solvency.