Why Privatization is Not the Cure for Social Security’s Financial Woes
The Social Security trust fund has reached the deficit level, and the program is now facing a severe funding shortfall. It could be forced to cut benefits in the coming years. This dire situation has many calling to privatize Social Security.
According to Yahoo! Finance, “Privatization refers to diverting some or all of workers’ Social Security taxes into individual investment accounts instead of the Social Security Trust Fund.”
How Privatization Works
Social Security is funded by payroll taxes. The taxes paid by workers are used to pay benefits to retirees. The money the government collects is held in the Social Security trust fund, where it is invested in Treasury securities.
The problem is that the workforce is shrinking, and the number of retirees is increasing, so the trust fund is facing a deficit. The time is near when Social Security will not have enough money to pay out fully promised benefits.
Critics are calling for the privatization of Social Security. Several Latin American countries have already adopted this system.
The Yahoo! Finance article explains that with privatization, “rather than having worker taxes go into a fund to pay the benefits of current retirees, money would instead go into private, individual accounts. These accounts would function something like an IRA, in that each worker would have control over the contributions to and investments in their individual accounts.”
This is problematic for two reasons. First, privatization would cut off the funding from payroll taxes to pay benefits. This would further strain a struggling system. Second, most workers aren’t financially savvy enough to manage their own investment portfolio.
Saving Social Security
There are ways to shore up Social Security solvency without dismantling the program to privatize. The Seniors Trust believes the best option is the Social Security Expansion Act. Not only will this landmark piece of legislation ensure the long-term solvency of Social Security, but it will also provide seniors with bigger benefits.
Under this bill, seniors would receive an extra $2,400 in benefits each year. In addition, it would recalculate the way the Social Security cost-of-living-adjustment (COLA) is calculated, using the Consumer Price Index for the Elderly (CPI-E) instead of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-E more accurately reflects the actual spending of seniors, which tends to be on expenses such as healthcare and housing.
To fund the proposed benefits boost and maintain solvency far into the future, we need to “scrap the cap.” The Social Security Expansion Act calls for applying the Social Security payroll tax on all income above $250,000. Currently, earnings above $176,100 aren’t subject to the Social Security tax.
If enacted, the Social Security Expansion Act could keep Social Security solvent for decades to come ensuring that retirees receive all the benefits they have earned.
