On The Privatization of Social Security

Reform Social Security has been talked of Capital Hill for many years. However, it is just put in a real action by President Bush recently. The reason is Social Security could have shortage to pay retirees by year 2018 and bankruptcy by year 2042 because the growth of retirees is faster than the contributors of Social Security. Privatization is the process of putting percentage of payroll tax of Social Security into private account that can be invested into stocks and bounds markets. Stocks and Bounds usually make more interest than the growth of Social Security. Thus, in turn, we respect more money to make up the shortage of Social Security. If it does, the Social Security is saved. Otherwise, It does not. This involves timing, ratio, management, and evidence.

Timing. Someone says SS is not in danger. If legal retirement is 65 years old, then from 2005 to 2018 is 13-year, 65 - 13 = 52. This means if you are 52 years old or older, you have not in the era of the shortage of Social Security Fund. So, Social Security is not in danger for you. From 2005 to 2042 is 37 years, 65 - 37 = 28. This means if you are 28 years old in 2005, you will meet the SS bankruptcy by the time you retire. So, Social Security is in danger for you. However, 37 - 13 = 24 (period from shortage to bankruptcy) If in 2042 you are 65 years old, 65 - 24 = 41. This means you are 41 years old now and you need to do something right now before it is too late. If you are 20 years old in 2005, 28 - 20 = 8. This means that the timing of SS reform is 8 years too late. If we get it done 8 years ago, we won't have bankruptcy in 2042.

Ratio. Argument on what percentage should we deduct from SS tax for private account. There are so many theories. But I believe that SS should keep 60% and private account 40% because we need 60% of SS tax to support the people who retired now. If 60% cannot cover, it means we have shortage now. For example, you start to work at 20 years old, you have 45 years working history. Your total life income is 45 thousands. 60% is 27 thousands and 40% is 18 thousands. 27000 x 0.3 = 8100 (Interest made from SS. Social Security pay 3% interest). 18000 x 1.1 = 19800 (Interest made from stocks and bounds. Interest is from 11% to 15% ). 45000 x 0.3 = 13500 (stay in SS only). 8100 + 19800 = 27900 (SS + Stocks and bounds).27900 - 13500 = 14400. This means even if your SS is bankrupt you still have 14400 in your private account. Under this ratio, private account can save SS. This is a hypothetical answer. We can choose a real person to reconstruct his working history base on his real 60% SS tax and past 45-year income of stock average on 40% of private account. We will see the real picture and the feasibility of privatization of SS.

Management. Is it true this transition from regular SS to privatization cost us a trillion? And our kids of kids will suffer from this big deficit? It really depends on how we manage private account. If we manage this private account with our regular bank deposit and employers send 40% SS tax to employees' bank account directly and give a copy to SSA at the same time. There won't be any transition cost. What trillion dollars are just 40% of private account and our kids of kids are the beneficiaries of this privatization. However, You do not always gain on stocks and bounds, and you may have a chance to lose. Therefore, the new laws need to be established so that investors can move their account from stock account to CD deposit freely and vice versa. When stocks price fall, you move it to saving account. Although the interest of saving account is lower than paid by SS, (current 1.25%) yet you won't have a complete loss. The government should encourage financial institutions to compete for this business by telling investors how much you can benefit from their financial programs and the government is hand off but supervise the activities. I don't know who designs the transition plan for the president. Is this plan aim for saving SS? Or boosting the stock market? Or both?

Evidence. President says that he just widens the coverage of federal employees used to have to the general public. I took his words for it. My own experience to prove the advantage of private account is that I put my IRA (Individual Retirement Account) into stock market and was handling by Washington Mutual Bank. The result is much better than my regular IRA account. If it is not for the down fall stock market in 2003, I would have made 4 times more interest than regular IRA account. This is why I suggest to establish new law to governing the practice of financial institutions and ask them to tell the investors when the stock market has big turbulence. Thus, investors' loss will be minimal. Now everything is on internet, and I can watch stock IRA account closely. I don't think there will be any big loss. Not all stocks are expensive one. Some stocks, called 'Small Caps,' cost only 38 cents per share and turn into $1.25 within a month. So, government should not limit certain stocks for private account. The limitation is financial institutions' promise what they can do for the investors. All government does is watch financial institution closely and be sure they do what they have said.

In conclusion, majority of Americans go for president's privatization of SS, but hate the cost of the transition plan. My friend Danny says 'It is the bankrupt of America.' Even president has said the transition cost 700 millions. I would rather leave SS alone because it may have some chances for next 37 years that can save SS. Such as 'Increase immigration.' 'Encourage baby booming.'. And 'Double the interests of SS.' etc. It will not be too late on spending 700 millions or trillions to save SS then. If everybody follows my simple transition plan and opens a private account in his/her bank. Either 60% or 40% is lost, and he or she still has a manageable income to live. If he or she can have both in success, he or she will have a swell retirement.

Footnote.

Increase immigration. Start from year 2018 we increase immigrants to meet the shortage of workers who contribute the SS tax. Encourage baby booming. Give more birth of babies from year 2005 to year 2010. They become part of work force when they are 20-25 years old in year 2025 to year 2030. 2025 - 2018 = 7 this means that we only need portions of 700 million to support seven years. Or increase immigrants to cover that. 2042 - 2025 = 17. This means that new work force has 17 years to save SS bankruptcy. Double the interest of SS. There are 3 ways. 1. Lend SS tax for governmental projects (e.g., build highways.) Then collect the money from the users of highways to pay back SSA with interests. 2. Sell SS tax as bounds. The price of bounds goes up when more people use the highway. 3. Make the rich pay more tax because they enjoy society more. SS is a social program and is meant to help the poor and disables. The SS account is closed after you died but the private account can be passed on next generation. So, the rich have to pay more for it. We can apply all three in the same time. That is, we need the privatization of SS now but we don't need to spend so much money for the time being.

Click on Translator choose language, just type in URL & click. You only type in once, it will translate the entire page. And page after page until all done. This page URL is http://drmasiw.tripod.com/privatiz.htm

Dr. Alexander Ma graduated from School of Language and Linguistics, Georgetown Unuversity, Washington D.C.

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