How can social security be saved

This source of financing for private accounts will not last forever, however. Even if workers under age 40 are completely excluded from collecting Social Security pensions, benefit payments will exceed Social Security taxes by around see figure 1.

Thus the strategy of diverting a small part of Social Security taxes can work only if current benefits are scaled back. In addition, workers must contribute much more than 1 percent of their wages if they hope to accumulate enough private savings to enjoy a comfortable retirement. More ambitious privatization plans would divert half or more of the present Social Security payroll tax into private retirement accounts and slash Social Security payments available to young workers for example, those under age forty-five.

These plans would require borrowing or new federal taxes to pay for existing Social Security liabilities. The diversion of payroll taxes would starve the Social Security system of revenue, forcing the program to run huge deficits. To cover these deficits Congress would be forced to raise taxes or borrow funds. The need for extra taxes or borrowing would eventually shrink as pensioners collecting Social Security were replaced by pensioners who received benefits from the new private accounts, but this process would not be complete for several decades.

In the interim, the federal government would need to impose extra taxes temporarily replacing most of the lost Social Security taxes or sell a large amount of additional public debt. Any discussion of reform should begin by recognizing that the current retirement system is already a mixture of public and private plans. The public plan is universal but skewed toward protecting low-wage workers. Private or employer-sponsored plans cover about half the full-time work force, but they tend to leave part-time and lower-wage workers uncovered.

Advocates of privatization see a number of advantages in increasing the size of the private system and shrinking the size of the public one. For some proponents of privatization, ideological concerns are paramount. They are fundamentally opposed to public provision of retirement benefits. More common are people who see important economic advantages in privatizing Social Security. They believe workers will receive larger pensions and the economy will grow faster under a private rather than a public retirement system.

Finally, some advocates of privatization believe the United States is more likely to take needed steps to prepare for a rising aged population if the retirement system is reformed to include a bigger private role. A few critics of Social Security, who are particularly distrustful of public intervention, believe it is an unwarranted intrusion on personal freedom to require workers to contribute a fixed percentage of their pay to a retirement plan.

Libertarians who hold this view oppose all mandatory saving schemes for retirement, whether or not the retirement funds are placed in private accounts. Most advocates of privatization acknowledge that it makes sense to compel workers to save for old age, disability, and early death. In the absence of mandatory saving, many workers would save too little and could become destitute and be forced to rely on public aid when they stop working.

Most privatization advocates believe that decisions about the investment of retirement saving are best left up to workers and their employers. Nearly all advocates of privatization try to appeal to these interests. They argue that pension contributions would be more affordable or benefits more generous if the nation moved toward a private retirement system. Stated crassly, most workers could expect a better deal under a private system than they can obtain under Social Security.

This argument is based on a straightforward calculation. If workers invested Estimates are displayed for workers born in a variety of years who earn steady wages at three different earnings levels. The low-wage worker is assumed to earn roughly the minimum wage; the average-wage worker earns the average covered earnings under Social Security; and the high-wage worker earns about two-thirds of the maximum taxable wage.

The Actuary then computed the interest rate that would be required so that the discounted value of real tax payments would be exactly equal to the discounted value of real benefit payments. Two facts about Social Security stand out in figure 2.

Low-wage workers get a better deal than high-wage workers, and workers born before get a much better deal than workers born later.

Even more striking than the disparity between low-wage and high-wage workers is the difference in returns enjoyed by people born before and after The high return enjoyed by workers born before helps explain the current popularity of Social Security, especially among older voters. In particular, workers born around enjoyed two pieces of good fortune. When they entered the work force in the early s, the combined employer-employee tax rate was just 2 percent.

More recently, the tax rate has been raised to cover much more generous pensions to a far larger number of retirees. Workers born in , for example, faced a combined contribution rate of People born in were also fortunate in enjoying rapid wage growth throughout most of their careers.

Real annual earnings climbed 2 percent a year between and , rising about percent over four decades. Rapid growth in real wages produces a good rate of return in a pay-as-you-go pension system. Unfortunately, real wage growth slowed dramatically in the mids. The economy-wide average wage did not grow at all in the twenty years from to Slow wage growth will be reflected in slow growth in pensions and a lower rate of return on Social Security contributions for future generations of retirees.

In fact, because taxes will have to be hiked or benefits cut to keep Social Security solvent, workers born after will probably receive lower returns than those shown in figure 2. Many advocates of privatization believe that full or partial privatization will boost U. The low rate of capital accumulation contributes to the slow growth of national income and wages.

If saving could be increased, income growth would accelerate, making it easier for the nation to afford the extra burden of supporting a large retired population in the next century. Unlike the present Social Security system, which is largely financed on a pay-as-you-go basis, a private retirement system would involve huge accumulations of assets in individual retirement accounts. Because workers would be setting aside a percentage of their pay in private accounts for their own retirement instead of sending in contributions that are immediately spent on pension payments, the introduction of a privatized system could lead to a jump in saving.

In theory, national saving can be raised within the existing Social Security system, even if there is no move toward privatization. This could occur if Congress raised the present contribution rate or reduced benefits, increasing the annual surplus of the program.

The Social Security trust funds would accumulate larger reserves than are anticipated under current law. Instead of accumulating assets in tens of millions of individual retirement accounts, as in a private system, the saving would take place in a single public fund.

Advocates of privatization doubt, however, that the funds accumulated within a public fund would actually be saved. They fear Congress would use the funds to finance growing deficits in other government accounts, such as Medicare. In the absence of larger Social Security surpluses, the Congress would be forced to deal with the deficit in other programs, either by curtailing spending or by increasing taxes.

A larger surplus in Social Security makes it easier for Congress to avoid this unpleasant choice. Privatization advocates therefore think it is safer for the accumulation to take place in tens of millions of privately owned accounts, outside the reach of a revenue-hungry Congress. Privatization also offers a politically acceptable method of managing the accumulation of huge reserves and corporate stocks. In a system where the accumulation takes place in a single public system, legislators and public officials would be responsible for allocating the funds among investment alternatives and across individual companies.

Their investment decisions might be guided by political rather than economic considerations, reducing the yield of the investments, diverting investments into unproductive uses, or intruding on the business decisions of company managers.

In a private system of individual accounts, decisionmaking authority over the accumulation would rest on the shoulders of millions of workers. Through their choices among investment alternatives and specific investment funds, workers and private fund managers rather than public officials would exercise ultimate authority over the allocation of investments.

A private retirement system, with its broad dispersion of asset ownership, also has an advantage over a public retirement fund when it comes to accumulating corporate stocks. The U. If retirement asset accumulation took place within a single public fund and if the public fund owned shares in thousands of companies, Congress or public trustees would have to decide how these shares should be voted.

Voting decisions might be determined by political rather than economic criteria, possibly reducing the efficiency and profitability of American business. Some advocates of privatization also maintain that voters would be more willing to accept an increase in their combined contribution to the retirement system if percent or more than percent of their extra contribution took the form of deposits into individually owned and managed investment accounts.

While voters would reject a hike in the payroll tax, they will tolerate — and may actually welcome — compulsory saving in individually owned accounts. This argument for privatization is essentially pragmatic. Because the work force is growing older, it is important to raise national saving. Voters and Congress are more likely to take the steps needed to increase saving if workers have direct ownership of their extra contributions to the retirement system.

This fear is exaggerated but not completely unfounded. In order to pay promised Social Security benefits, the future contribution rate must be increased. Others have pushed a variety of cost-cutting measures, including raising the retirement age, limiting benefits for those with large personal retirement accounts and privatizing the program for Americans over a certain income threshold. The extra costs would be covered by savings that come from allowing the government to negotiate lower prescription drug prices.

Raising the future retirement age, while not a popular proposition, encounters less political risks than reducing retirement benefits and increasing taxes. Privatizing Social Security — or at least letting individuals opt-out of the program so they can escape the sinking ship — would be a huge win for younger workers who have time to save on their own. There are many methods for doing so.

For example, if liberals were willing to accept privatizing half of the contributions and conservatives were willing to accept using the other half as a safety net for only those retirees with the least resources, then the system could be saved and privatized.

Yes, and the fixes are actually rather straightforward and manageable. Congress could save hundreds of billions of dollars by modestly paring back the initial benefit formula for future wealthy retirees. Debates over the solutions are irrelevant if politicians are too afraid to tackle the problem. Send your suggestions to the yahoonews. The duchess stepped in for the Queen who missed Sunday's ceremony. Trump was admitted to the hospital on October 2, , while Christie checked himself into Morristown Medical Center in New Jersey the day after.

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Javascript must be enabled to use this site. Please enable Javascript in your browser and try again. Now Reading:. Membership My Account. Rewards for Good. Share with facebook. Share with twitter. Share with linkedin. Share using email. Myth 1: Social Security is going broke The facts: As long as workers and employers pay payroll taxes , Social Security will not run out of money.

Myth 2: The Social Security retirement age is 65 The facts: Full retirement age, or FRA — the age when a worker qualifies to file for percent of the benefit calculated from lifetime earnings history — is 66 and 2 months for people born in Myth 4: Members of Congress don't pay into Social Security The facts: A common complaint about Social Security is that members of Congress don't bother fixing the program because it doesn't cover them.

Myth 5: The government raids Social Security to pay for other programs The facts: The two trust funds that pay out Social Security benefits — one for retirees and their survivors, the other for people with disabilities — have never been part of the federal government's general fund.

Myth 6: Undocumented immigrants drain Social Security The facts: Some have blamed problems with Social Security's financial health on undocumented immigrants draining the system's resources. Myth 7: Social Security is like a retirement savings account The facts: The government does not stow your payroll tax contributions in a personal account for you, to be paid out with interest when you retire.

Myth 9: An ex-spouse's benefits come out of your own The facts: If you are divorced, your former spouse may be eligible to collect Social Security benefits on your earnings record and vice versa.

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