Social Security: Will It be There?

Solution 

Social Security is a public saving program. To fund future retirement we need to privatize the program. A private savings program will grow the investment and capital that we need in a struggling economy. Currently every working American has about 6.25% of their wages given to social security and their employer matches that contribution(1).  We need to take that 12.5 % and phase it out of social security and phase it into private savings. Private saving will yield a higher return, as the current program is limited to federally insured funds.  By investing in other funds, like the stock market or mutual funds, that have a much higher yield and the pay off is much different. (See table 1) The table is based on a worker making $20,000 annually and paying into the fund the current rate of 12.5% (Employer + Employee) or about $2,500 a year.  The numbers also assume constant rates of inflation 3%, treasury bills at 4% and S&P at 10%. These percentages are historically conservative.  It is also assumed that a person will contribute to the fund for 40 years and then retire for 20 years.  

Table 1 

S&P 500

In 2048 Dollars In 2008 Dollars Per year for 20 years (2008 dollars) 

1,106,481 $339,199.44 $16,959.97 

Treasuries

In 2048 Dollars In 2008 Dollars Per year for 20 years (2008 dollars) 

$237,563.79 $72,826.80 $3,641.34 

Assuming inflation of 3%, Treasuries at 4% and S&P at 10%. 40 Years of work 20 years of retirement.  

With this program a 25 year old who starts into the program making $20,000 (2008 dollars) dollars a year will retire on almost $17,000 (2008 dollars) a year, all things held constant. There is a big difference even with paying in the same between earning a private return and earning a public rate of return.

 A phase out that starts now will still provide people retiring with about the same funds that they planed retire on. They will have a mix of the two programs that will shift slowly over to the new program. The phase out process would be over the next few decades and would not be a complete phase out. A small part would be left to service those in need and without access to other funds.  This solution will please both the rising generation and the older retiring generation, as both will be able to enjoy a better retirement. 

Conclusion 

Our elected officials need to improve the current social security program before it becomes a major issue. A plan like privatization is needed to pleases and benefit both parties, those who are planning on social security and those who are not.  By phasing out Social Security and phasing in a private savings we will have less crowding out of private investment freeing up funds for the private sector.  With more funds available to the private sector there will be more capital investment witch will strengthen the economy by increasing jobs and GDP. 

References

(1)Taub, S. (1997, September). Restoring security to Social Security. Financial World, p. 8. Retrieved October 27, 2008, from MasterFILE Premier database.

(2) Moffatt, M. (2007,Febuary) Soviet Canuckistan? Retrieved October 2008 from http://economics.about.com/b/2007/02/08/soviet-canuckastan.htm

Figure 1

Publication of Social Security Administration

Retrieved October 2008  from http://geocities.com/seapadre_1999/socialsecurity2034.jpg