Question

In: Economics

explain whether you believe we should privatize Social Security or not.

explain whether you believe we should privatize Social Security or not.

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Expert Solution

President George W. Bush repeatedly has emphasized that one of his foremost second-term priorities will be to transform Social Security fundamentally. Enacted in 1935 and amended many times since-including major changes in 1983-Social Security provides benefits to workers and their family members upon retirement, disability, or death. Since the program’s inception, the size of those benefits always has depended on the earnings of workers over the course of their careers. President Bush wants to change the system so that the amount that each worker collects from Social Security upon retirement instead would hinge on the size of investments in his or her own personal account.i think we should not privatizing social security these are some reasons :-

REASON 1;-Today’s insurance to protect workers and their families against death and disability would be threatened.

“Rate of return” calculations neglect the value of Social Security’s insurance protections. Of the 45 million Americans who collect payments from the Social Security program, over one-third (almost 17 million) are not retired workers. Among those currently receiving Social Security payments are 5 million spouses and children of retired and disabled workers, 7 million spouses and dependent children of deceased workers, and 5 million disabled workers. Proposals to privatize Social Security involve shifting some of the money financing the current insurance program into investment accounts assigned to each worker.

REASON 2:-: Creating private accounts would make Social Security’s financing problem worse, not better.Social Security is funded by a flat tax of 12.4 percent of each worker’s wage income, up to $90,000 in 2005, split evenly between employers and employees. About four out of five of those tax dollars go immediately to current beneficiaries, and the remaining dollar is used to purchase U.S. Treasury securities held in the system’s trust funds. Beginning in 2018, well after the huge generation of baby boomers born between 1946 and 1964 begins to retire, a portion of general income tax revenues will be needed to pay interest and eventually principal on those bonds to fully finance benefits. A “crisis” is not forecast to arise until the program becomes entirely “pay as you go” again (as it was throughout its history before 1983) in either 2042 according to the trustees’ forecast or 2052 according to the Congressional Budget Office. (By way of perspective, in 2052 the oldest surviving baby boomers will be 106 years old and the youngest will be 88.)

REASON 3:- Creating private accounts could dampen economic growth, which would further weaken Social Security’s future finances.Privatizing Social Security will escalate federal deficits and debt significantly while increasing the likelihood that national savings will decline-all of which could reduce long-term economic growth and the size of the economic pie available to pay for the retirement of the baby boom generation. The 2004 Economic Report of the President included an analysis of the fiscal impact over time of the most commonly discussed privatization proposal by the president’s commission. It found that the federal budget deficit would be more than 1 percent of gross domestic product (GDP) higher every year for roughly two decades, with the highest increase being 1.6 percent of GDP in 2022. The national debt levels would be increased by an amount equal to 23.6 percent of GDP in 2036.

REASON 4:-Privatization has been a disappointment elsewhere.Advocates of privatization often cite other countries such as Chile and the United Kingdom, where the governments pushed workers into personal investment accounts to reduce the long-term obligations of their Social Security systems, as models for the United States to emulate. But the sobering experiences in those countries actually provide strong arguments against privatization.A report this year from the World Bank, once an enthusiastic privatization proponent, expressed disappointment that in Chile, and in most other Latin American countries that followed in its footsteps, “more than half of all workers [are excluded] from even a semblance of a safety net during their old age.”

REASON:-5: The odds are against individuals investing successfully.Privatization advocates like to stress the appeal of “individual choice” and “personal control,” while assuming in their forecasts that everyone’s accounts will match the overall performance of the stock market. But studies by Yale economist Robert J. Shiller and others have demonstrated that individual investors are far more likely to do worse than the market generally, even excluding the cost of commissions and administrative expenses. Indeed, research by Princeton University economist Burton Malkiel found that even professional money managers over time significantly underperformed indexes of the entire market.Current Social Security insurance protections have served the country well for decades. Diluting those protections in exchange for new accounts poses all kinds of new risks while making the relatively manageable long-term challenges confronting Social Security far more immediate and severe.


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