Social Security accounted for one-quarter of the federal government’s spending in 2015. Yet the Social Security trust fund has paid out more benefits than it has collected in employee taxes across the past six years.
The fund will likely run out of money around 2030. This is a major problem as a significant number of people rely on Social Security payments for a decent quality of life during retirement. The only solution left is to privatize the program
Social Security is Doomed Unless it Changes
While America has somewhat recovered from its unemployment surge during the early years of Barack Obama’s presidency, many blue collar workers are still struggling to compete with automation and free trade policies.
The current Social Security system requires a continual expansion of the workforce to provide for beneficiaries. Beneficiaries are living longer due to improvements in medicine and the rise of new healthcare techniques and technologies. The system will not stay afloat as more and more workers are displaced by automation.
A whopping 10,000 baby boomers turn 65 each day. This is a shocking statistic that spells bad news for Social Security. Too many people are retiring, and too few people are working to support these retirees. If the system is not significantly changed, it will implode in the coming decades.
How Privatization Would Work
The privatization of Social Security would allow people to manage their retirement savings in personal investment accounts. This approach empowers individuals to retain control of the money they worked so hard to earn.
The process would no longer be “pay-as-you-go”, meaning today’s workers would not pay for retirees. Rather, a portion of one’s earnings would be placed in an individual account for his retirement.
This is a stark contrast to the current Social Security system that is akin to a Ponzi scheme.
Private investments of savings would yield a higher return than the current Social Security system that allegedly adjusts to account for the rate of inflation. Furthermore, the larger rate of return might even make the system solvent again.
Consider a system in which employees and employers are required to contribute a percentage of earnings to workers’ private Social Security investment accounts. If such investment accounts generated a return between 3% and 6% on an annual basis, enough money would be available for the retiree to enjoy a high-quality of life in his golden years.
The beauty of a privatized Social Security system is that it is not reliant upon the government’s taxation of workers. Many workers will be displaced in subsequent years by advances in technology.
Furthermore, a privatization of Social Security is not dependent on demographic trends. Those who work will generate Social Security savings for their own retirement rather than having an entire group of retirees depend on today’s workers. If the population dips, it won’t matter as there won’t be a need for current workers to support retirees.
What Happens if the Market Slumps?
If one is concerned about a market slump zapping his retirement savings, he could purchase an annuity. It would also be possible draw down a capped amount (3% to 5%) of the savings each year if desired. These options would also appeal to those who are concerned about outliving their assets during an extended market slump.
It would also be prudent to limit Social Security investments to highly diversified, low-cost options. This way, workers would not be able to put their money in a high-risk investment that could lose the majority of its value in the coming months or years. An example of the ideal investment for Social Security accounts is target-date funds. Such funds are not overly risky, yet they provide solid inflation-adjusted returns.
What Would Happen to Those Who Lose Money?
The odds of a worker’s private Social Security account dropping by a significant percentage would be low, especially if investment options were limited to low-risk choices. However, there would likely be some instances where the market dipped enough to take a sizable chunk out of a worker’s retirement account. In this case, it might be possible for the federal government to come to the rescue.
However, government assistance would be a last resort reserved for instances when a considerable portion of one’s investment was lost due to a series of market downturns. Even if the federal government stepped in to rescue these workers, such a burden would pale in comparison to that of the government’s current Social Security system.
~ Conservative Zone