Social Security Reform

.. uce them or are politically apprehensive. These proposals include, but are not limited to, privatization of social security in stocks, Personal Security Accounts (PSAs), raising taxes – lowering benefits, Cost of Living Adjustments (COLAs), and abolishment of many Social Security benefits. The most controversial and popular proposition offered has been that of privatization of some parts of the social security system. By this approach the government would invest 40% of the Social Security surplus into Wall Street on numerous private and public stocks. This would give Rose 4 the Administration “a $1.3 trillion stake in Corporate America by 2020” (McNamee, How We Should..).

This system would allow workers to also invest at least 11% of payroll taxes in their own accounts. Under the boldest plan, proposed by the Clinton Administration’s Advisory Council on Social Security, exactly 50% of the retirement fund would be “replaced with mandatory personal security accounts”, which would be invested in stocks or bonds (McNamee). The other 50% would finance basic government benefits for all retirees. The privatization of accounts could theoretically reduce the length of time before the trusts go insolvent by substituting savings accounts for some part of Social Security’s PAYG system. This would ensure that the government would have a surplus of funds for entitlement expenditures.

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By 2020, PSAs could hold assets worth around $6.0 trillion dollars if put on the market within a few years. “Such a huge balance [just for benefits] would give a kick to the nation’s capital stock and [spur] growth” (McNamee). But the Advisory Council and others have come up with this plan not to balance the economy, just fix Social Security. The Council and Social Security Trustees have concluded that if nothing else is done to reserve funds for the upcoming insurgence of retirees, Social Security will exhaust the trusts by 2029, and PAYG “taxes will cover only 75% of promised benefits”. To ensure solvency for another 75 years Congress would have to choose now to privatize, raise “the 12.4% payroll tax, cut benefits”, or all three (McNamee).

The limitations of privatization also come into play when considering the best reform platform. Questions arise as to how the government could do this without taking over the market and the consequences if there were a crash. Putting SS funds into the stock market for higher returns is agreed to be a very likely idea, but would individuals be willing to obey a compulsory law requiring letting the government manage funds on the stick market? There is also no true way to insulate investment planning from political pressures. If the market fell, the funds invested would go down also, and if they succeeded too well the stocks would raise interest rates on debt, hurting the economy (Business Week, How to Resecure SOCIAL SECURITY.). Compulsory saving in stocks would also require tax increases or cuts in government spending (Samuelson).

Privatization, though, may be worth a try. Currently, the US Government can afford to experiment as there exists no immediate SS crisis, and if funds are not raised for saving the benefits being paid after the trusts go bankrupt will not be at paid at 100%. A small amount of investment therefore definitely seems worth a try. The next practical solution is seen as the very risky, at least to politicians hoping for reelection. That is the raising of the already high payroll tax at 12.4% and the lowering of benefits Rose 5 to save for the coming tide of retirees and entitlements.

This controversial move would ensure that Social Security would be paid in full for at least 75 years, but is challenged greatly by those already on OASDI, who have strong political footholds. Interest-group politics can weigh in greatly. The American Association of Retired Persons, for one, pledges to keep Social Security as a government guaranteed plan. Labor, too, is opposed. Free-market agencies and business would favor any change, however (McNamee). Neither the Executive nor the Legislative Branches of the government are anywhere near willing to make a move like raising taxes and/or lowering benefits because of this. A very practical, and yet controversial, method being proposed for saving is that of lowering the Cost Of Living, or making a Cost Of Living Adjustment (COLA).

Last year it was discovered that the consumer price index (CPI) has been over-stating the annual cost of living by 1.1%. Social Security payments are directly tied to the CPI and determine the annual payment amounts. In other words, beneficiaries have been doing a little better than the true rate of inflation. Simply by reducing the CPI by 1.1 percent a year the government could save approximately $1 trillion in 12 years (Thomas 2). The benefit payments would still rise with the true cost of living, but the Social Security trust funds would be able to remain solvent well past the expectation dates proposed by the trustees. This simple solution also has been thwarted by political apprehension. US economist Daniel Patrick Moynihan states that “politicians are scared of each other and the AARP” (Thomas 2).

It may be likely, though, that President Clinton will appoint a non-partisan committee to review the Social Security Issues and lower the CPI, and thus benefits, through protected legislative order, sparing any legislators. The final proposal by radicals is to abolish many programs, including Medicare, which may not be necessary to the substantial living of some individuals. They also feel that a means test be established to decide who and who does not need assistance. These ideas have been mostly shot-down due to a favorable opinion of the Social Security system in general, and the fact that it requires more government regulation to institute the means tests. All of the plans are impractical, if implemented solely. Alone, each creates large practical risks for the system.

Perhaps the best plan is to drop economic ideals and to find a compromise in the different economic fervors that put the idea people at each other’s throats. A solution may be found to solve the different aspects of Social Security by combining different plans. The president needs to appoint an independent (completely independent) and non-partisan committee to propose a Rose 6 total solution that would ensure complete payment of all Social Security entitlements for at least the next 75 years. Perhaps with this, a real fix can come about so the up-coming generation (gen-X) will receive benefits that are currently being paid from earnings. Bibliography Adde, Nick. “Nunn: Social Security Key to Cutting Deficit.” Navy Times 14 Apr.

1997: Issues. McNamee, Mike. “The Bullet not Bitten.” Commentary. Business Week 11 Nov. 1996; N/A . “Social Security: A Program’s Rise.” Journal of Economic Perspectives 1995. “Social Security Alternatives.” New York: Capital Publishing Ltd., 1996.

United States. Office of Management and Budget. Implementing Welfare Reform. Washington: OMB, 1997.