Although it is only a rumor, there are more and more voices talking about a governmental reform of the Social Security Administration in the United States. Since its creation and until today, the function of the Social Security Administration is to offer a pension system that guarantees social welfare, being a public system. However, it seems that the idea of privatizing the system is becoming more and more popular.
This legislative change would mean that it would be the citizens themselves who would manage their savings and would be able to live on them once they reach retirement. This idea would have a serious economic impact, since there would be no guarantee of a fixed monthly amount as the current public SSA system offers. Leaving their retirement in the hands of the citizens seems a very risky decision.
Social Security and retirement
The Social Security Administration has provided for the economic welfare of society in the United States since 1935. Since then, it has administered the Supplemental Security Income (SSI) program for the retired, blind and disabled. Once you retire, it will pay you – on a monthly basis – an amount corresponding to your contributions to the administration during your working life. It is the government’s way of making sure to eliminate the economic gaps in the United States and to guarantee a dignified lifestyle after retirement.
Privatizing Social Security
It is no surprise to anyone that there is concern about the Social Security trust fund and its long-term sustainability in the United States. Economists and legislators are studying ways to reshape the retirement model, as it is uncertain how long the current one can be sustained over time. One of the ideas being contemplated is the privatization of Social Security. The current retirement system is based on the payment of 6.2% of workers’ salaries to the administration through the Federal Insurance Contributions Act (FICA). On the other hand, employers also have to pay the same percentage per month.
This means that 12.4% per month goes to Social Security retirement funds, from which the pensions of former workers will be drawn when they retire. However, privatization of the system would mean that 6.2% of their paychecks would go to private retirement accounts, funds or any other type of investment or savings. Those who support this idea argue that it would give citizens more power over their own retirement and the amount they would receive. In addition, it would provide significant financial relief to the federal government.
Why privatize?
Today’s society is characterized by a marked decline in fertility and an increase in life expectancy. This translates into more people retiring, but fewer people available to work, so the retirement pension system is experiencing an imbalance that is expected to worsen by 2080. By then, 23% of the population is expected to be retired, compared to a working population that will not be able to support the current pension system.
Disadvantages
With the explanation of the future that awaits us, privatization seems like a seamless plan. I organize my savings and do not depend on the State to ensure my quality of life when the time comes for me to retire. However, the reality is that the vast majority of the population does not have the training or knowledge to manage their investment portfolios. Many are likely to make risky decisions, leaving them with no savings for their retirement. If something were to go wrong (a bad investment or withdrawal at the worst time), there would be no safety net to guarantee any kind of income for retirees.
This is the main difference with the current public system; you have the security of being paid every month. Partial privatization has also been assessed as a middle ground. However, what will happen when people choose more private accounts? Less money would go into the traditional Social Security system, which would create more problems. At the moment, the system seems to be unchanged, but you never know what the next unexpected turn of events will be, especially in the United States.
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