Do We Need Private Accounts for Social Security Beneficiaries?

At the end of this article you will have the opportunity to cast your vote on this issue.

(3/28/17)- Back on 10/16/08 we asked our viewers to vote on the question of private accounts for Social Security beneficiaries. The vote was resoundingly in favor of the nays.

The March 26th edition of the Wall Street Journal has an article “Should Social Security Be Privatized.” In the article, George “Gus” Sauter, argues “Yes”, while Nancy J. Altman writes for the “No” side.

At the end of this article, you our viewers will have another chance to vote on this issue.

(10/16/08)- In light of the decline in the stock market in the last year, we thought it would be interesting to go back to this article so that you will be able to cast your ballot to see how this vote would go three years after we took the previous vote. In that earlier vote those opposing privatizing social security investments on an individual bases won the poll by a slight majority.

The ballot is at the end of this article and we will post the results in two weeks.

(3/17/05)- Under the current structure, payroll taxes will begin falling short of what will be needed to pay benefits in 2018, according to the latest estimate by the Social Security Administration. According to this same estimate the Social Security Trust fund will be exhausted by 2042. The only money left to pay Social Security benefits in 2042 will be what is paid in as Social Security taxes. This amount will be enough to pay about 75% of scheduled benefits that year.

(6/99)-Updating this article the House Ways and Means Committee met in closed session on Thursday, June 17, 1999 as planned. The meeting was arranged between the Committee Chairman Rep. Bill Archer (R-Tex) and Rep. Charles Rangel (D-N.Y.) with the avowed purpose of arriving at a bipartisan solution to Social Security's solvency problem. House Speaker Dennis Hastert (R-Ill) attended the meeting but no results were announced. Further meeting are planned but no new date for the next meeting was set.

Even though there is much talk about Social Security reform, many of us are at a loss to understand why this reform is needed. Those who are working look at their payroll stubs and see a substantial deduction therein for Social Security taxes. If this money is being properly invested, why isn't there enough to pay us our benefits whenever we retire?

To find the answer to this question you have to understand what happens to the money that is being withheld from your paycheck. Under current law, all moneys from the Social Security taxes that are withheld must be used to purchase special government bonds that pay interest of about 3 % above the rate of inflation. For the last few years we have enjoyed a low rate of inflation, so the return on the bonds purchased during this period has been lower than many of the prior periods in the history of Social Security.

The problem is worsening because of the fact that many of the "baby boomers" will soon be reaching the age where they become eligible to receive Social Security retirement checks. We will reach a point in the next few years where there will be more people getting benefits than there are people are paying into the fund.

We are at the point now where most of the money that comes into the trust fund goes right out to pay the current retirees. The combination of low rate of return on the money invested as written about above, and the costs and expenses of administering the plan, means that almost all money coming in must go right out to pay current beneficiaries.

Many experts feel that this problem could be resolved if we allowed individuals to set up individual accounts that could invest in stocks and non-restricted bonds. Incidentally this would mean establishing about 150 million individual accounts.

If we did set up individual accounts you would have to tap into the Social Security surplus for the money, because of the fact that all money coming in right now goes right out to pay current beneficiaries. Remember that having a single trust fund would mean much lower administrative costs than setting up and keeping track of 150 million individual accounts. In some of our other articles we have written about the fact that the surplus is now being utilized to stay within the bounds of the Balanced Budget Act of 1997, and therefore is not really available for other purposes.

Advocates of the single trust fund investment concept argue that the law could be changed so that the fund could be enabled to buy non-restricted bonds that pay more than 3 % over the rate of inflation. The fund could also be enabled to invest in individual stock issues as well as bonds. One huge problem that would result from investing in individual stocks would be the issue of liquidity or lack thereof. The centralized fund would be spending many billions of dollars to buy individual stock positions, and thus would in and of itself drive the price of the stock up excessively. The corollary would occur when the fund tried to sell a position. You could also encounter a political issue as well if you allow individual stocks to be purchased by the centralized fund. Even if you had non-political appointees to run the fund could it really stay non-political?

As we all know the stock market can be very treacherous. The 1990s have been terrific years for the upside in the Dow Jones. We must not lose sight of the fact that the stock market can go down as well as up. It is argued that through sophisticated hedging techniques the investor in the stock market could be "insured" against the downside. The cost involved in buying the insurance, even if it does work, may be so substantial that it is not worth taking the risk in the first place.

In effect the government has been the beneficiary of the purchase of the lower interest restricted bonds by the fund since the government therefore has a cheaper borrowing outlet. If the government has to make higher interest payments it would have to borrow more to make these payments.

Thus you can see the issue is a complicated one. As all sides on this issue posture back and forth we will attempt to keep you posted on this topic. Recently Rep. Bill Archer (R-Tex) , the Chairman of the House Ways and Means Committee, and Rep. Charles B. Rangel (D-N.Y), the panel's senior Democrat agreed to hold private sessions on how to deal with this problem. The reason why private sessions are needed is so that neither side will therefore be "playing up to the public".

We would like to conduct our own independent survey on this important issue. We would appreciate your taking the time to cast your vote on this matter. If you would like to vote on this matter please click here.


Allan Rubin
updated March 28, 2017

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