Social Security, a cornerstone of American retirement security since 1935, is facing renewed scrutiny amid concerns about its long-term solvency. When President Franklin D. Roosevelt created the program, he did so under a pay-as-you-go model. This suggests that current retirees and other beneficiaries mainly get benefits financed by the payroll tax contributions of today’s workers. As debates over possible reforms heat up, the proposal to privatize Social Security is increasingly popular in some circles.
The program’s design relies on trust funds that contain excess cash not currently needed to pay benefits or administrative expenses. The Social Security Administration invests these funds in special Treasury bonds guaranteed by the U.S. government, which earn a market rate of interest. We all know that Social Security has always stood by its obligations to its beneficiaries and has never failed to make a payment.
Yet the program is headed for a crushing crisis of solvency, thereby giving rise to cries for reform. Among the many proposals available are raising taxes on higher earners to implementing automatic benefit increases. One particularly awful idea that keeps resurfacing is the privatization of Social Security. This would mean automatically investing Americans’ retirement savings in government bonds or government shares.
Proponents argue that privatization can achieve higher returns. That’s what critics are concerned about — that it will undermine the integrity, safety, and predictability of our benefit payments. There could be no more public program than Social Security, and it violates all sense of propriety to even suggest tampering with its integrity.
President Donald Trump's past efforts to slash federal spending have further fueled the debate about Social Security's future. Many others argue that the program’s structure as currently defined is too limiting and that a larger conversation around reform is necessary.
"We really do have a failure of imagination on Social Security reform" - Andrew Biggs
Social Security’s benefit payments are not only subject to harsh re-payment rules, they’re targeted for elimination. The program’s trust funds are supposed to be used solely to pay for beneficiaries’ benefits and administrative costs. Any unspent funds are invested in low-risk special Treasury bonds.
"You give me $2.7 trillion and let me invest that, and I can turn you a lot better, greater dividend around than the Treasury bills can" - Rep. John Larson, D-Conn.
Some financial experts believe that exploring bolder solutions is necessary.
"I think what Larry Fink is saying is, 'Let's think big on it.' I think he's absolutely correct on that point" - Andrew Biggs
Privatization proponents claim that it would provide Americans with more control over their retirement savings.
"I think more Americans would be a little more hopeful today with their retirement savings than just getting that bond payment" - Larry Fink
Yet, as opponents warn, the transition from a guaranteed public benefit to market-based investments carries significant danger. They say that Social Security is an essential safety net. It should be completely insulated from the ups and downs of the stock market.
"We, I think, are in a real battle here, and it's really, in many respects, not unlike the battle that Roosevelt faced initially" - Rep. John Larson, D-Conn.
