Reforming social security

By Shane Cronin

According to a recent Gallup poll, more than three-quarters of Americans age 18-34 believe they will not benefit from Social Security when they retire. Among the two wars in the Middle East, the retiring baby boomers, and the astronomical spending of the George W. Bush and Barrack Obama administrations, it is easy to see why so many younger Americans subscribe to the fear that the United States’ flagship entitlement program is headed for bankruptcy. However, they are wrong. Sort of.

At present, Social Security is running a surplus. The $2.5 trillion nesting in the Social Security Trust Fund is sufficient to pay retirees through 2037. After that year, the program will be able to meet about three-quarters of its obligations.

So how best to fix this projected shortfall? The most commonly circulated remedies are raising the retirement age and raising taxes. Both of these are unpopular, though the former is likely to happen sooner rather than later. President Bush’s plan to privatize the system during his tenure faced intense opposition. However, I think he was on to something.

The best way to reform Social Security without raising taxes or reducing benefits is to partially privatize the program. This will nudge Americans into investing a small portion of their Social Security taxes in the stock market, while the bulk of their taxes are directed to the Social Security Trust Fund as it is now. Since its inception more than 70 years ago, Social Security was not intended to be a full benefit pension plan. Its function was and is to supplement each individual American’s private savings. The more than 10 million Americans who rely on Social Security alone as income (almost one quarter of recipients), are testament to the fact that the U.S. should update the plan to prevent future recipients from doing so in addition to a future monetary shortfall in the program.   

Although Bush was lambasted for attempting to do so in 2005, partially privatizing social security through personal savings accounts is a sagacious idea. Privatization should resemble the Roth IRA plan, which is a sensible, lower risk method of participating in the stock market. Unlike Social Security, money can be withdrawn from Roth IRAs under certain conditions and without penalty prior to the legal retirement age. These include serious illness, paying for college, a first time home purchase, and paying for medical insurance premiums after losing employment. Therefore, in addition to being retirement accounts, Roth IRAs also act as personal safety nets. Furthermore, investors can withdraw any or all of their contributions at 59 1/2 years – several years before qualifying for reduced Social Security benefits. In order to minimize the risks of the market’s fluctuations and better insure investors, the government should create a handful of default private plans. Americans should be allowed to choose their own investment strategies. However, considering the difficulties the majority of Americans experienced at the inception of Medicare Part D, the average citizen needs professional investing advice (myself included).

I propose that 25 percent of an individual’s Social Security taxes fund her own private retirement account while 75 percent continues to fund the traditional program. For example, a person who contributes $100 in monthly Social Security taxes will now allocate $25 to her own private account. Therefore, if she retires in an economic downturn, the majority of her money will remain free of risk. The small portion subject to risk will be mitigated through years of dividend yields.

These private accounts should mostly include blue chip stocks such as AT&T, Proctor and Gamble, and Colgate-Palmolive. Private investment funds, such as American Funds Investment Company of America, should manage these personal accounts (Full disclosure: I hold a Roth IRA with American Funds Investment Co. of America and invest in AT&T) This particular fund’s strategy includes investing in many of these blue chip corporations. Operating since 1934 the fund has weathered depressions, booms, and recessions. AFI aside, the investment options in the private sector are copious. This should alleviate skeptical Americans who worry that investing in the market is nothing more than a high stakes gamble. Steadily investing in blue chip stocks can position the average retiree to earn hundreds or even thousands of dollars in quarterly dividends. Because of the heavy taxation of corporate investments and dividends, the government should significantly lower or eliminate these taxes to make partial retirement privatization more attractive. Roth IRA plans are not subject to tax because contributions to them are already taxed.

That being said, our government must take proactive measures to accommodate a population facing increasing longevity. Yes, investing in the stock market poses risks. Millions of Americans with 401(k) plans and IRAs already know this. However, what is even riskier than investing a portion of one’s money in the stock market is relying solely on Social Security payments. The average monthly check is about $1000. For a family of two, this is the equivalent of living at the federal poverty level. The key to smarter savings resides in partial privatization of Social Security.

Shane Cronin is a Collegian columnist. He can be reached at [email protected].