Ask the Readers – Would You Support the Privatization of Social Security Accounts?



Privatization of Social SecurityIt’s official: According to a recent article on CNN Money, you can now expect to receive less from Social Security than what you paid into it them.  Here are the figures:

  • $600,000 paid in.
  • $579,000 in expected benefits.

This will come as no surprise to the skeptics and nay-sayers who have long felt that Social Security has been heading south and in need of some desperate revision.

In the spirit of conversation, I thought this topic would make an interesting “Ask the Readers” topic:

 If the government were willing try something different, would you be in favor of the privatization of Social Security accounts?

 

Pros:

I think one of the biggest benefits of privatizing Social Security would be shifting away from the uncertainty of its future.  Right now it’s considered by many to be like a Ponzi Scheme where it gets funded by the dollars of the young (the new investors) to pay for the benefits of the seniors (the older investors).

If Social Security were to take on more “401k”-like aspects where the money is yours and not in some ambiguous pool of funds to be shared among everyone, then you would have more confidence that the money will actually be there when you go to retire.  Right now Social Security is only expecting to payout 75% of what’s available by the time a couple in the 30’s gets ready to retire.

Also by taking on a privatized approach, investors would have more control over how the money gets invested.  You’d likely get to invest your earnings in a wide variety of choices ranging from mutual funds, stocks, cash, real estate, annuities, etc.

 

Cons:

The biggest con to the privatization of Social Security would be not having guaranteed income for life.  Right now if you happen to live to be 120 years old, you’re still getting paid every month.

Another nice feature to Social Security is that you don’t have to know anything about investing or the plan itself to reap its benefits.  If there was some kind of privatization, there would likely be great debates as to whether we could really expect everyone to make their own financial decisions.  Perhaps their fund could be some default hybrid stock / bond index fund or target date fund?

And would contributions be optional?  I certainly hope not!  Given the savings rates of 401k plans and other retirement funds, if Social Security were suddenly optional, there would unfortunately be a ton of people who simply wouldn’t participate at all.  And that would lead to a lot of problems later on.

Finally, let’s also consider why Social Security was started in the first place: To take care of those who couldn’t take care of themselves.  There are many “welfare” elements to Social Security that a lot of people don’t realize until they need them.  If the privatization of the plan were to reduce or eliminate those benefits for others, you would again have a lot of problems on your hands with people who are less fortunate going without.

 

The Privatization of Social Security:

What do you think?  There are good arguments either way.  Which direction would you rather see things go in?

 

Related Posts:

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  2. Social Security Spousal Benefits – Hook Me Up Elderly Sugar Momma!
  3. When Can I Retire – It All Depends On How Badly You Want To!

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Comments

  1. says

    I don’t like the idea of privatization at all. Too many companies would try to get in on it and sell people their high-cost investment vehicles. The idea of personal accounts is interesting, and you wouldn’t have to privatize things to do that.

    One option would be to give everyone access to the Thrift Savings Plan that government employees get, which has amazing investment options. I think any plan would need to have mandatory contributions and extremely limited, low-cost investment options to force people to make good decisions for themselves. I know people will yell about freedom and the like, but sometimes the government has a responsibility to help people help themselves.
    Matt Becker recently posted..The Simple, Effective Approach to Investing (Part 1): Where Do Investment Returns Come From?My Profile

    • MMD says

      I’ve never heard of a Thrift Savings Plan before. That is something I’ll have to look up.

      I couldn’t agree with your last line more. The government already knows they have to force you to pay tax, pay in to medicare, and pay into social security. It’s unfortunate, but when left to their decisions, I’d bet that the majority of people won’t save for retirement. If the Government ever were to opt for some type of DIY retirement plan, they’d definitely have to make sure that we participate.

    • MMD says

      I feel the same way. 12.4% may not sound like a lot, but that could be almost 5 figures for some households.

    • says

      Ditto. Social Security probably won’t even exist by the time many of us retire, or we will have paid in far more than we get out. The government is well-known for their inability to manage money effectively, social security is no exception unfortunately. I’d much rather opt out and handle my own retirement savings (with that 12.4% within my control).
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      • MMD says

        There will be something in there for us when we retire. But I just don’t think it will be a whole lot.

        Even though you and I might do a better job managing that 12.4%, don’t you think there would be some hard questions about whether the general public would be able to put it to as good of use?

    • MMD says

      Although I think the same, the biggest problem I see with this whole thing is that it would create an even larger gap between the haves and have-nots. Arguably you could say that that’s not your fault and every man has a responsibility to himself to decide which side of the fence he wants to be on. But then the moral and ethic questions come into play about whether we should just let those less fortunate than us suffer.

  2. says

    I’d be interested in seeing it turn into more of a disability program exclusively. If you lose the ability to work (no matter what your age), and don’t have the means to support yourself you can get disability payments which are quite small. But if you can still work and just feel like quitting at a certain age, you would need to have your own separate savings (or privatized social security account) to do that with.
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    • MMD says

      That’s an interesting take on the situation. I actually wonder with all the under-funding and proposed age increases if that’s where its heading anyways …

  3. says

    I’d love to see it privatized and would gladly opt out. The government hasn’t really ever shown it can run anything successfully and in budget, why should they start now? Access to the Thrift Savings Plan seems to be the best way to go about a transition. It’s already built in with millions of workers’ accounts so we’d just be adding to it. Everything I’ve heard about the TSP is that it’s great, although I’ve never researched it since it’s never been something I’ve run into. I would be worried about those that don’t know much about investing or the purpose of the account. SS is a fall back program, it wasn’t meant to support you for 20+ years. I don’t really expect this to go through but would love it if it did.
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      • MMD says

        I hear you. As long as they don’t put any silly policies in place where they restrict age, this would be a pretty big accomplishment for us early retirement seekers.

        I have played around with the calculator on Social Security’s website. As you might guess (using their standard terms), retiring early (between 45 and 55) does impact your payment quite a bit.

    • MMD says

      That’s another comment in favor of the TSP! You are correct that Social Security is supposed to be a fall back. However, I’m not sure that the general public is educated enough to realize that that’s all that it is. More often than not I hear people make the comment that they will just rely on Social Security to take care of them when they get older. Yet most have never gone on SS’s website and calculated out what they would actually receive. The results would shock them!

    • MMD says

      I think it is more the role of the Government to help the people help themselves. That doesn’t necessarily mean that they have to manage our money, nor might they be the best ones for the job. They should still, however, make it required that you do participate no matter what option they put on the table.

  4. says

    I’m a big fan to having social security privatized, since it will control to those who have paid in all those years. Social security may be a guaranteed income now but I don’t count on that happening when I retire.

    One things I would like to see the government do if they won’t privatize it entirely is to allow people the option to switch to a private account and invest it the way they want.

    • MMD says

      I can completely agree with that last part. Although I think the transition would be rather difficult. Although I was somewhat tongue and cheek to mention that some people think of Social Security as a Ponzi Scheme, that is in fact the way it works = you pay in now, people who paid in before you get your money. To move to a private and more 401k-like setup would take a tremendous amount of shift that I doubt SS would be prepared to handle.

  5. says

    Hell, no! It is not designed to take maximum earnings from the market, it’s meant to protect the vulnerable from poverty and starvation. Plus, there’s another benefit all investors can believe in: that little thing called a stable society. Disrupt the stability of the system by chasing greed and we’ll be facing market-collapsing revolution.
    Pretired Nick recently posted..Pretirement is punk rockMy Profile

    • MMD says

      I was wondering when someone was going to bring this up and I’m glad you did Nick. Although it stinks to receive less money than you paid into it, we all need to remember that Social Security was designed to keep old people from starving in the streets and the less fortunate from hitting absolute bottom. Much like tax, these are things we have to pay into and accept if we want our communities and society to behave in some civil form. As much as I’d like to see there be some shift or re-construction to Social Security (since the current structure is clearly losing money), the biggest drawback I can think of to this whole argument is the inevitable (and probably dramatic) widening of the gap between the wealthy and the poor.

  6. says

    I’m no fan of government programs. They’re typically wildly inefficient. I don’t even see the need for a forced savings program. The governments job is not to dictate lives, it’s to protect liberties. If folks aren’t smart enough to save for retirement, that’s their own fault.
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    • MMD says

      Part of those liberties are to make sure that Society doesn’t have people starving in the streets. That’s why Social Security was created in the first place. Even though it has become slow and inefficient, there still has to be SOME government involvement to make sure people can take care of themselves. Part of me feels the way you do about “if you’re not smart enough to save, then its your own fault”. But I also know that when left to their own devices, the general public will make terrible choices about how to handle their finances. Whether its our current broken system or some new reformed system, there has to be some “force” telling us to save.

  7. MomofTwoPreciousGirls says

    I would like a hybrid idea, bc not everyone wants or is capable of making good decisions about their investments (ex. People who think its a good idea to have CDs paying half a percent bc they’re “safe”). I would have no problem with the 12+% being taken out if I could make my own choices on what to do and is like the idea of using the same thrift plan the government employees use.

    • MMD says

      Another vote for the Thrift Plan! This seems to be the popular vote on this subject. Someone needs to send a letter to the SS department.

  8. says

    There is a lot of controversy about this topic and some say that people won’t be able to take care of themselves and they would screw their retirement, so when Government has a hand on it they will get at least something.

    I do not care who screws the SS whether the participant or government, so if it should happen I would like to screw it myself rather than the government.

    So I am for private SS and have my own control over it and teach my kids to do the same.
    Martin recently posted..Safeway (SWY) hikes its quarterly dividendMy Profile

    • MMD says

      That’s precisely what holds me back in this debate. I DO care if other people screw their Social Security. Not only because I don’t want to see my friends and neighbors suffer. But also because if society did run themselves into the ground, the government would come looking to the one people they know they could take money from – the people like me who actually did okay and saved money. So I think to some degree we must be careful about what extent we let people try to handle these things on their own. I don’t mind paying into a government program, but I would like to see it setup more like the private fund that many of the other commentors had mentioned.

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