October 25, 2014 · 1 Cheshvan

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The Latent Threat of Privatization

 

Many plans currently being proposed would allow individuals to invest some of the money they pay to Social Security in private markets. Such plans give people a choice of investment options for money accumulating in their government-administered accounts, including stock-index funds and treasury securities. There are, however, significant problems with these privatization schemes:

1. Privatization would destroy the "safety net" aspect of the Social Security system. The stock market is volatile and a drop in asset value before a worker reaches retirement could destroy his/her benefits. Most plans that include privatization would limit the ways that workers could invest their money to relatively safe investments (such as index funds), and many privatization plans call for the establishment of minimum benefits.

2. Privatization would destroy the progressive element of the Social Security system. The current system benefits lower-wage workers. Under a privatized system, on the other hand, benefits would be based solely on workers' contributions into their personal accounts.

3. Finally, it would be difficult to pay for individual accounts for younger workers while still maintaining benefits to those current retirees who have not built up private Social Security savings accounts.



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