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Social Security Reforms

Social Security system, and many economists would agree with this proposal. [6] Were it to adopt such a system, the US government would not in the future have the kinds of problems that we currently face. Indeed, the Social Security reforms of the 1980s can be considered a step away from pay-as-you-go and toward a fully funded system. At that time, the government stopped keeping the system in (approximate) balance and instead started to build up the Social Security Trust Fund. But this is not a way to solve the current crisis in the United States. It is already too late to make the baby boomers pay fully for their own retirement. Think about what happened when Social Security was first established. At that time, old workers received benefits that were much greater than their contributions to the system. That generation received a windfall gain from the establishment of the pay-as-you-go system. That money is gone, and the government cannot get it back. Suppose the United States tried to switch overnight from a pay-as-you-go system to a fully funded system. Then current workers would be forced to pay for Social Security twice: once to pay for those who are already retired and then a second time to pay for their own retirement benefits. Obviously, this is politically infeasible, as well as unfair. Any realistic transition to a fully funded system would therefore have to be phased in over a long period of time. Privatization Recent discussion of Social Security has paid a lot of attention to privatization. Privatization is related to the idea of moving to a fully funded system but with the additional feature that Social Security evolves (at least in part) toward a system of private accounts where individuals have more control over their Social Security savings. In particular, individuals would have more choice about the assets in which their Social Security payments would be invested. Advocates of this view argue that individuals ought to be responsible for providing for themselves, even in old age, and suggest that private accounts would earn a higher rate of return. Opponents of privatization argue, as did the creators of Social Security in the 1930s, that a privatized system would not provide the assistance that elderly people need. Some countries already have social security systems with privatized accounts. In 1981, Chile’s pay-as-you-go system was virtually bankrupt and replaced with a mandatory savings scheme. Workers are required to establish an account with a private pension company; however, the government strictly regulates these companies. The system has suffered from compliance problems, however, with much of the workforce not actually contributing to a plan. In addition, it turns out that many workers have not earned pensions above the government minimum, so in the end it is not clear that the private accounts are really playing a very important role. Recent reforms have attempted to address these problems, but it remains unclear how successful Chile’s transition to privatization will be. As with the move to a fully funded Social Security system, a big issue with privatization is the transition period. If, for example, the government announced a plan today to privatize Social Security, it would have to deal with the fact that many retired people would no longer have Social Security income. Furthermore, many working people would have already paid into the program. Thus proposals to privatize Social Security must include a plan for dealing with existing retirees and those who have paid into the system through payroll taxes.

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