Private Accounts in Social Security Reform

Should Social Security be reformed to include private accounts
Roosevelt signs the Social Security Act in 1935. Private accounts are an option to improve the Social Security System, although these accounts have benefits along with risks and issues. (Photo: Public Domain)

The social security system has significant problems in funding. Critics argue that the system will not be able to continue to support payouts in the near future. Many factors and possible solutions have been considered. One of the possible solutions is the use of private accounts. Private accounts are seen as a possible way of ensuring the adequacy of social security financial resources. The advantages point to ensuring long-term survival of the social security system. However, private accounts have disadvantages, too. These disadvantages must be considered in evaluating the suitability of such accounts as a means of improving the social security system. In spite of the disadvantages and risks, private accounts could prove to be the reform solution for sustainability of the social security system.

This article examines the debate on whether or not social security should be reformed to include private accounts. Should Social Security be reformed to include private accounts?

What are private accounts in social security?

Private accounts are special accounts that represent a percentage of members’ regular payments to the social security system. Private accounts are special because this percentage can be used to invest in various bonds and stocks, instead of just the usual government treasury bills used in the traditional social security system.

In using private accounts, part of the activity that generates money in the social security system is shifted away from treasury bills and toward private financial tools such as bonds and stocks. Thus, private accounts provide an additional channel for growing the financial resources of the social security system.

Advantages of Private Accounts in Social Security

The inclusion of private accounts in the social security system is based on the need to generate funds to support the system. At present, the system has limited contributions even when the demand for benefits payouts increases over time. Supporters argue that, if nothing would be done to change the social security system, the system would fail in the near future. The social security system would fail to provide benefits for future pensioners. To increase funds of the social security system, private accounts can be used. Private accounts have a high probability of allowing the social security system to earn from revenues of these accounts. For example, investments in stocks and bonds can earn more than investments in government treasury bills.

Disadvantages of Private Accounts in Social Security

The use of private accounts in the social security system can lead to the risk of lower social security funds because of possible mismanagement of the funds and investments. Critics show that, even though investments in stocks and bonds can have great potential to earn more money for the system, there is the risk that the investments would lead to an overall reduction in the actual funds of the system. This could be so if the investments were poorly judged and not properly managed. The mismanagement of portfolios can lead to lower total funds of the system. The social security system could become even more unable to provide benefits for pensioners in the future.

Final Note

Private accounts come with risks linked to investments in stocks and bonds. However, portfolios can be managed properly through strict guidelines and investment requirements. The government can control the use of private accounts to minimize risks. This would allow for better chances of earning more funds for the social security system. The use of private accounts in the social security system is one of the best means of ensuring the sustainability of the system. The social security system must be reformed to include private accounts.

References
  • Behaghel, L., & Blau, D. M. (2012). Framing social security reform: Behavioral responses to changes in the full retirement age. American Economic Journal: Economic Policy4(4), 41-67.
  • Beland, D., & Waddan, A. (2012). The politics of policy change: Welfare, Medicare, and Social Security reform in the United States. Georgetown University Press.
  • Bell, D., & Hill, D. (1984). How social security payments affect private pensions. U.S. Bureau of Labor Statistics.
  • Biggs, A. (2009). Social Security and Private Savings – Causes and Effects. American Enterprise Institute.
  • Imrohoroglu, S., & Kitao, S. (2012). Social security reforms: benefit claiming, labor force participation, and long-run sustainability. American Economic Journal: Macroeconomics4(3), 96-127.
  • Leimer, D., & Lesnoy, S. (1983). Social security and private saving. Social Security Administration.
  • Lesnoy, S., & Leimer, D. (1985). Social security and private saving. Social Security Administration.
  • U.S. Congressional Budget Office (2004). Administrative costs of private accounts in social security. Congress of the United States.
  • U.S. Department of Labor (2015). FAQs About Social Security Administration (SSA) Potential Private Retirement Benefit Information Notice.
  • Van Voorhis, R. A. (2015). A Socio-Economic Analysis of the Three Paths to Social Security Reform. The Journal of Sociology & Social Welfare26(2), 8.
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