Liberty Lighthouse Journal: SHOULD SOCIAL SECURITY BE PRIVATIZED?

“Social Security accounted for 23% ($1 trillion) of total US federal spending in 2019. Since 2010, the Social Security trust fund has been paying out more in benefits than it collects in employee taxes, and is projected to run out of money by 2035.”

So, the question is should social security be privatized and thus give retirees higher returns, especially when starting out doing this in their 20s?

The major negative against this would be the fluctuation of the stock market over decades. But the average return would be 6.38% between the years 1984-2014. During the same period of time, the social security return would be 2.67% to 3.91% via median income.

The other advantage of an automatic deduction for a retirement fund instead of going to the Feds social security “fund” is that people would have more control and say about the funds they invested.

While some economists state that this would boost the economy by injecting funds into the financial system – others, like MIT economist, Peter Diamond, states that the costs incurred during the transfers to private accounts would add $1 trillion to $2 trillion to the country's already high national debt. And I say, our national debt is so high because of the spend-happy members of Congress. Another negative made by the MIT economist was that private social security accounts would boost Wall Street, where banks and investment advisors could receive over $100 in fees for each account.

With the uncertainty of the present social security system, a private retirement account could alleviate that. [Edward Lazear, PhD, formerly chairman of President's Council of Economic Advisors]

The negative towards that would be that future budget shortfalls can be eliminated by reducing benefits, increasing taxes, and/or raising the retirement age. This has already been done over the years. And certain economists state that higher returns (more money per month for social security benefit check) could be offered if retirees allowed the Social Security Trust Funds to invest in equities in addition to bonds.

And here is the biggest negative comment concerning social security and privatization, which was stated in a speech made by President Bill Clinton while in office:

“Many people lack the basic financial literacy to make wise investment decisions on their own, and if workers had to adopt private accounts, unscrupulous financial advisors could take advantage of novice investors.”

That could be possibly solved if a list of “approved” investors was given in order to steer away from the “unscrupulous” financial advisors. Also, more middle-class citizens have been buying stocks since 1980s, the “Reagan” years.

Another advantage that people often forget: Any unused social security funds cannot be passed to your heirs. This means, you work for 30 years, retire at 65 and die at 66-70. The Feds keep that money. Whereas, in a private account, as stated in President G.W. Bush State of the Union speech – “you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children or grandchildren.”

Remember, that when you start collecting social security, you do not collect any interest or dividends; whereas if you were collecting a given monthly check from personal investment account, the interest/dividends continue off the balance.

Not including dividends and interest paid on balance while receiving a monthly check and based upon average wages and social security deduction percentages over a 30-year work period, you would have accumulated if your retirement lasted 12 years just about $500,000 at the social security rate of 6.2% (which would be higher if privatized). This does not include dividends. If you figured on living the average lifespan of 77 and retired at 65, this would give you $815 per month not including dividends and interest accumulating during that 12 year period. Of course, people who earn more than that average wage would certainly get higher checks.

Then the question is: If one collected a retirement check from personal investment account at 65 and beyond – would the Feds (and/or state) government deduct taxes?

Maybe we should look to Sweden for an answer who has already privatized their social security system.

But when you look at investment and compare to social security – you can find you can earn at least $500,000 more, but how much of that would the government take if it continues on the income tax system instead of the consumption tax system if Fair Tax Act was passed?

NOTE: In my calculations, I did not add the factor that your employer matches what you pay social security out of your check – which means you can double amount you invest until retirement when calculating.

A conundrum indeed.