Background:
The US Social Security program is intended to provide a safety net protecting American workers and their families in the event of retirement, disability, and early death. Moving Social Security benefits into private accounts is one proposal to prevent Social Security's predicted future financial shortfall. Privatization of Social Security would allow workers to control their own retirement money through personal investment accounts. Supporters of private accounts contend that retirees would have the freedom to invest their retirement money in the stock market as they wish, theoretically earning higher returns than with government-invested funds. Critics of privatizing Social Security argue that investing retirement money is complicated and risky because individuals can lose their retirement safety net through bad decisions.
Pros:
1. When Social Security began in 1935, the contributions of 17 workers paid for the benefits of one retiree. In 2035 the estimated ratio will be 2.1 workers per beneficiary. Allowing individuals to contribute to their own private accounts may reduce future loss of money from fewer worker contributions.
2. Using the existing system to avert the pending collapse of Social Security will require deep cuts in benefits, heavy borrowing, or substantial tax hikes. A better solution is to switch to private investment accounts that will be funded with existing payroll tax thereby avoiding any benefit cuts or tax hikes.
3. A medium income worker born after 1965 can expect less than a 2% rate of return with the existing Social Security system. Privatizing Social Security will put more money in the pockets of retirees. Over the last 80 years, private investment in the US has earned an average return of nearly 8%.
4. Private retirement accounts will give a worker contractual rights to retirement benefits, a right missing from the current Social Security system. In the 1960 US Supreme Court case Flemming v. Nestor, a retiring legal immigrant eligible for Social Security benefits, who paid into the system for 19 years, was denied his Social Security retirement money after being deported as a member of the Communist Party.
5. Putting Social Security into private accounts does not expose retirement money to risk. These federally regulated personal accounts would allow individuals to invest only in diversified, approved mutual funds and not in single stocks or highly volatile stocks.
Cons:
1. Moving Social Security into private accounts would cause substantial reductions in traditional Social Security benefits. Privatization would, over the next 47 years, reduce benefit levels by as much as 44% below 2005 levels.
2. Getting a privatization system started is too costly. The transition costs of setting up new personal accounts while continuing to provide benefits to Social Security's current beneficiaries would require an extra $1 trillion to $2 trillion.
3. Private accounts would reduce special insurance protections, such as disability and survivor's insurance, that are also provided by Social Security. Cuts will have to be made to these programs in order to fund private retirement accounts.
4. Privatizing Social Security, which essentially is putting peoples' retirement money at the whim of the stock market, will weaken the federal retirement system through potentially risky investments.
5. Putting their Social Security funds into private investing accounts exposes US workers to be victims of unscrupulous stock brokers and of their own investment choices.
6. Many people either do not know, or do not want to know, how to make the sound decisions about their own long-term investments that private accounts require.
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