Good Afternoon, I am Corey Jordan and for My Policy Analysis I will be covering social security and the alternative of privatizing
If action is not taken, the Social Security program will go bankrupt within the next century which has created a lot of skepticism about the program. The public distrust of the program comes from the idea that either you will not reach retirement age or you will not receive as much as you put in, similar to a “Ponzi scheme.” The program that every working American pays into, may not be there for them when they get to retire. In light of recent Republican primary debates, most candidates have endorsed the idea of reforming Social Security. The main policy alternative to the current program that candidates are pushing is the idea of privatizing the annuity market entirely. The idea of privatization is only one of many reforms, but this policy alternative is gaining momentum as more of the baby-boomer generation is retiring. So, if one of the candidates were to take office, what would the new program look like? How would we raise funds for the program? Would the program be sustainable? How do we pay for current beneficiaries of the Social Security Program? Overall, the guiding question will be: is privatizing Social Security a better solution to put the US government on sound financial footing? All of these questions will be addressed in my case study.
In 1929, the United States economy collapsed and the Great Depression began. This economic collapse had ripple effects throughout the world and would last for over 10 years. As the values of assets dropped and life savings vanished in the blink of an eye, Americans questioned if they would have enough money to lead a normal life and more importantly, retire. Arguably the hardest hit group of Americans were the elderly whom had saved hundreds if not thousands of dollars so that they could retire and live comfortably for the rest of their lives. When the Great Depression hit and they were left with nothing but their home (if they were lucky) and the clothes on their back, the outlook was bleak. Then in 1935 as a part of President Franklin Delano Roosevelt’s New Deal Program, the Social Security Act was implemented to help aid the elderly in their time of need. Although the program was also set up to help out those with permanent disability and single household survivors to collect their spouse’s benefits, it was a major benefit provider to the elderly. The Social Security program would essentially function as a government backed pension that would pay out a lump-sum of money to people who were eligible to receive it. The program has survived and thrived since its creation
The Social Security program is an entitlement program provided to the elderly upon reaching eligible retirement age. The 6.2% tax on every paycheck is paid out by both the employee and the employer to total up to a 12.4% tax. However, the employer only has to pay up to the first $102, 000 in earnings over the course of the employee’s tenure. All of that money is then deposited into a trust fund, invested in government bonds. Furthermore, Social Security is an impure public good in that it is non-excludable but it is rivalrous in consumption comparable to private pensions. This secure saving plan will not increase or decrease over time as when you pay into the system, you are supporting current recipients and the same will be done for you when you decide to retire.
Employees are eligible to retire at the early entitlement age of 62 in which they receive 20% less benefits over the course due to an “actuarial reduction” to account that they will get more payments than those who wait for full benefits age. The full benefits age is 65 in which you are also eligible to receive Medicare benefits, however the full benefits age will likely rise to 67 in coming years as our budget deficit keeps going and the government looks to cut spending. However, the prerequisite no matter the age is that the worker must have worked for 10 full years over the course of their lifetime.
Upon retirement and enrolling into the program, the retiree begins to receive benefits. In order to calculate the benefits the person receives the government calculates a 35 year average in which they earned the highest amount of money, this calculation is known as the Average Indexed Monthly Earnings (AIME
privatizing Social Security is one set of reforms favored by fiscal conservatives so that you would only get what you paid into it. Everyone would pay into the system exactly like any privately-backed pension plan
The private annuity market has been around longer than Social Security, but has never been fully trusted by the American people. In 1928, it was measured that 119,000 annuity policies were on the market and for individuals over 65 that owned annuities, which equates to less than 2% of their population. This lack of participation in the market has been attributed to Americans preferring more speculative (equity) investments which have been reflected by the massive amount of bonds purchased during the Great Depression and WWII. The amount of annuities would increase to about 300,000 annuities in 1933, covering almost 4% of the elderly population. Insurers were viewed as “safe havens for investment” in the wake of the 1929 crash because the banks could not be trusted to hold on to the public’s savings. The purchases of private annuities would only increase post WWII as older generations began to think about retirement.
In 1998, the Advisory Council on Social Security for Reforming Individual Accounts had provided two suggested contribution amounts if consumers would like to receive similar coverage to social security. They had proposed contributing either 1.6% or 5% of every paycheck into the annuity account. Under the 1.6% plan, assuming everyone is contributing to the market, the insurers could have provided $2.9 billion (1998 dollars) in benefits in 2000. However, under the 5% proposal insurers could not provide benefits until 2005 and the beneficiaries would have to pay for 20 years into the system in order to achieve the same benefit, but this proposal was optional for employees and would provide $37.5 billion in benefits. Both proposals have their benefits, but ultimately it is up to employees how much they would like to contribute into their individual accounts in order to provide them with enough money to live off of when they retire.
A “Ponzi Scheme” is an investment in which a person invests a certain amount over time and never receives back the full payment in which they are entitled to. People will hardly ever receive the same amount in benefits as they paid in because of their life span and stability in employment.
The purpose of the case study was to discover if privatizing Social Security was a better solution to put the US government on sound financial footing. It has been shown that neither system will make the United States more financially stable. In my opinion, other alternatives should be entertained to the status quo. Privatizing has its benefits, but does not solve all of the problems for the system. Social Security has its benefits, but it is on the brink of collapse and this analysis would have never been done had it been on safe ground to survive another 100 years. Again, other alternatives should be analyzed to see if we can implement a more financially sound publicly provided retirement plan. In conclusion, both systems are inequitable in their own respects. Social Security and privatizing will not put us on sound financial ground as more baby boomers retire and less people are in the workforce. More alternatives will hopefully be entertained in order to make social security more solvent and put us on the right path to fiscal responsibility.
Social security presentation
Privatizing our RetirementSOCIAL SECURITY
INTRODUCTION Social Security is in trouble and needs reformation
BACKGROUND OF SOCIAL SECURITY 1929 Stock Market Crashed 1935 Social Security Program Created under FDR’s New Deal
HOW SOCIAL SECURITY WORKS Payroll Tax on every paycheck Impure public good
ELIGIBILITY Early Entitlement Age Full Benefits Age Requirements
ALTERNATIVE: PRIVATIZE Favored by Fiscal conservatives
BACKGROUND OF PRIVATIZING 1928: 119,000 policies 1933: 300,000 policies Has gained massive popularity
HOW DOES IT WORK? Buy an annuity from a private insurance company Pay a fixed rate and receive a benefit later on
SUGGESTED CONTRIBUTION AMOUNTS FROMADVISORY COUNCIL 1.6% Plan 5.0% Plan
TWO PROPOSALS Maintain the Status Quo Privatize
BENEFITS OF THE STATUS QUO 60% of beneficiaries derive half of their income from the program while 60% derive 90% of their income from the program 40% of its beneficiaries above the poverty line
NEGATIVES OF THE STATUS QUO Within the next 75 years, it has been estimated that the program will pay out $5.6 trillion more in benefits than it will collect from workers By 2050, 35% of our working population will be over the age 65 and will soon be retiring There will not be as many workers supporting beneficiaries People are living longer than they used to There is a lack of revenue into Social Security is the growth in wages slowing down dramatically in conjunction with the unemployment rate Estimated $15.1 trillion as an unfunded obligation from Social Security Ponzi Scheme Persona
STATUS QUO DISCRIMINATES AGAINST High income workers Same tax rate but contribute more and receive less because of AIME Men Usually die earlier and won’t receive as many benefits as women Single person households Cannot collect the same as a married household Widows or widowers Ability to take over spouse’s benefits instead of your own
BENEFITS OF PRIVATIZATION Create a considerable amount of business for private insurers Boost our economy Freedom
NEGATIVES OF PRIVATIZATION Charge any amount of money for a premium Leaves out the other beneficiaries from the program such as disability and survivor’s Time consuming process for consumers Administrative Feasibility
COMPARATIVE ANALYSISFactors Social Security PrivatizationAdministrative Feasibility XPolitical Feasibility XSolvencyConsumer Freedom XEasy to Understand XFavors High Income XWorkersAnti-Ponzi Scheme
OPINION AND CONCLUSION Neither option is feasible Entertain more options