Dr. Sandra Coyle, Ph.D.
Social Security reform has been a political issue for years due to the
threatening possibility of the system’s collapse. The possible collapse of
Social Security is merely the “tip of the iceberg” and just one of the many
problems of this system. The current system treats women, minorities, the
poor and the traditional family unjustly (Tanner 16). “Social Security
acts like a reverse Robin Hood, taking from the poor and giving to the
rich” (Tanner 18).Because of Social Security’s imperfections, many
people have suggested an alternative system in which workers have the
freedom to choose to stay with the old system or invest their money into a
private account. This private investment would be much like an IRA or 401-
K (41). This would give every American an option to earn nearly three
times more than normally earned under the Social Security system. Several
countries have already adopted this system and have a much improved
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Why is Social Security so unjust for today’s workers? Social Security
is a pay-as-you-go system (Tanner 14). In almost every financial situation
that we deal with on a regular basis, there is the idea of an “account”.
For example, when you put money into a bank, it is understood to be “your
money” and it goes into an account with your name on it. The same thing
happens when you contribute to your 401(k) plan at work — you have an
account with your money in it, and if you change employers the money in the
account is yours. You also have accounts for your credit card, mortgage,
car loan, and so on. In any of these accounts, you add money to the account
and take money out of it, and whomever holds the account keeps track of how
much you have or you owe.The Social Security system is nothing like
that. In the Social Security system, the money you pay into the system gets
immediately paid back out to the people who are currently getting Social
Security checks. This arrangement came into being because of the way the
system started. In 1935, when President Roosevelt signed the Social
Security Act into law, there were a lot of people who needed benefits
(because of the Great Depression), but there was no money to pay those
benefits with. The idea at the time was that people currently working would
pay into the system, and their money would immediately go back out in the
form of benefit checks. Each generation of retiring workers would get paid
by the people currently working, and therefore the system would fund itself
forever despite the fact that the system had no money to start with.
This interesting system worked great in in the past, but it is going
to have a problem in the future for two reasons. First, there will be so
many retired people that the working people will not be able to support
them. If the population had grown at a steady rate this would not have been
a hinderance, but there is no good way for the design of the Social
Security System to handle a population spike like the baby boomers.
Second, people have become so used to the idea of a 401(k) plan that the
idea behind the Social Security system becomes difficult to accept.
A privately-invested system has been considered as an alternative to
Social Security. This system would allow workers the freedom to choose to
stay with the old system or invest that money in a private system
consisting of stocks and bonds. Workers that choose to invest their money
would have the option of creating a bond fund, stock fund, or mixed stocks
and bonds fund. Each one of these three funds allows the worker to retire
with a personal retirement significantly higher than that of Social
Security. Over the past seventy years, stocks on the New York Stock
Exchange have earned an average annual return of 7% (7). Based on this
data, a person who earns $36,000 would retire with only $24,144 annually in
benefits under the current system. A person that earns the same, but
invests in a privatized system, would retire with $124,187 from an all-
stock fund, $64,937 from a mixed fund, and $34,795 from a bond fund (7).
This private system not only creates more wealth than Social Security
but allows the minority and low-income worker to accumulate wealth. A
privately-invested system would also allow working women to receive
benefits based on every dollar she contributes to her account rather than
her benefits being based on her spouse’s benefits. Both she and her
husband would accumulate a significant amount of wealth under a privatized
system. In this system, it doesn’t matter how long an individual lives.
You have property rights to those earnings unlike Social Security. If an
individual dies early, then the money goes to his or her heirs.
America is not alone in its problems with government retirement
systems. Many other countries have experienced similar crises. The
difference is that many of these countries have already changed their
systems to privately-invested ones. Some of these countries include Great
Britain, Southeast Asia, China and Chile. Chile had the same problems that
our system faces today. Chile developed a completely new system that is
based on individually-owned, privately-invested retirement accounts (32).
The Chilean workers were given the choice of investing in a private system
or remaining in the government-run system. Within eighteen months, 90% of
workers chose the private system (34). Chile’s economy has increased
dramatically jumping from a 3% return to a 7% return in just twelve years
(35). “…..in less than ten years the average Chilean worker will have
more retirement savings than the average American worker, even though the
average American worker earns seven times the annual income of the average
Chilean worker” (35).
Huge tax increases and lower benefits are the only solutions that
will save the current Social Security system. Even if we do this, however,
the system will still get worse as time moves on. The best fix to social
security is a privatized system. A private system could allow many
Americans to retire as millionaires. The poor would get a chance to get
ahead in life and every American would be able to follow their hopes and
dreams.Other countries have already switched to a private system and are
being rewarded, so if the current system does not change, America will be
Tanner, Micheal. Common Cents Common Dreams: A Layman’s Guide to Social
Security Privatization. Washington D.C.: Cato Institute, 1998.
“Social Security Falsehoods.” The Cato Institute home page. 23 May 2002. 3
“African Americans and Social Security.” The Cato Institute home page. 23
Feldstein, Martin. Privatizing Social Security. New York. University of
Chicago Press., April 2000.