Should Social Security Be Privatized? Pros amp Cons
Should Social Security Be Privatized? - Pros & Cons Skip to content
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Get Priority Access Since the current benefit level cannot be maintained without new revenues, political leaders are in a vise. Raising taxes is always unpopular with the electorate, while the elderly are one of the most potent voting groups in the country. Increasing revenues by raising the investment returns of the two Social Security funds without raising taxes or cutting benefits is the optimum and safest political choice for a politician seeking to return to office. Historically, the average annual return on the S&P 500 (11.26% from 1928 to 2011) has been more than double the return of the Social Security funds, which is very appealing unless you consider that, on average, stocks lose value every one of four years.
Canada’s largest single-purpose pension plan was created in 1966, covering every person between the ages of 18 and 70 who earns a salary. It is similar to the U.S. Social Security system in that revenues consist of payroll taxes – 9.9% on incomes up to a maximum of $42,100 collectively paid by employee and employer. Canada’s largest pension plan is managed by the Canada Pension Plan Investment Board, and had a portfolio of $170 billion at the end of September 2012. Investments include shares in foreign companies, as well as private equity, real estate, and infrastructure. Less than 10% of the portfolio is invested in Canadian companies. The Canada Pension Plan has had outstanding investment success, “outperforming public pensions elsewhere in the world,” according to CBC News. Many credit the fund’s prosperity to the unlimited freedom of their portfolio advisers to make investment without political pressure. CBC reported earlier this year that the fund’s advisors invest “in a dizzying array of companies – everything from Porsche, Coca-Cola, and the maker of Tootsie Rolls, to more controversial businesses such as alcohol and tobacco firms and some of the world’s biggest weapons manufacturers.” According to the trustees’ official report, the fund reported an annualized rate of return of 6.6% for the year 2012, 2.5% for the previous 5-year period, and 6.1% for the 10-year period ending the same date, reflecting the turmoil in world markets over the last half-decade. To compare, the average public (state and local government) pension plan in the United States had an annualized 2.0% return for the previous 5-year period and 5.7% for the 10-year period. The Canada Pension Plan is very similar to the United States Social Security OASDI and has suffered from the same problems – the original level of contributions paid by employers and employees with investment earnings has not been sufficient to make the promised benefits. In 2003, the contribution rate from employer and employee was raised to 9.9% of income from its initial 1.8% contribution level. Existing actuarial assumptions about the future rate of earnings on the trust fund project that the existing arrangement will be stable to the year 2075. The National Railroad Retirement Investment Trust
Created in 2001 to manage railroad retirement assets, the National Railroad Retirement Investment Trust covered 542,400 retired railroad employees, spouses, and survivors with 230,000 active employees in 2011. Slightly more than $11 billion in benefits was paid in 2011, with an average recipient receiving a greater amount than a Social Security beneficiary due to higher taxes paid by the railroad workers and their employers. At the end of 2011, the trust had more than $24 billion in asset value, which was invested in public and private equity, fixed income, and U.S. and non-U.S. real estate and commodities. The performance of the trust in its early years allowed employees and employers to reduce their contributions and build a financial cushion. However, in recent years, returns are mixed, with a loss of -0.1% in 2011, an 11.2% gain in 2010, a loss in 2009 of -0.7%, a loss of -19.07% in 2008, and a gain of 16.38% in 2007. The current level of contributions (income) is less than the level of benefits paid, with the deficit being provided by earnings on the trust assets and the trust itself.
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By Michael Lewis Date September 14, 2021FEATURED PROMOTION
In 1998, conservative think tank The Heritage Foundation reported that an average American household of two earners with a combined income of $52,000 would pay a total of $320,000 in Social Security taxes over their lifetimes (including their employers’ share), and receive about $450,000 after retiring at age 67. The Foundation suggested that the same funds invested equally in U.S. Treasury bills and equities would grow to $975,000, more than double the return under the existing Social Security program. In 2001, President George W. Bush introduced a “partial privatization” proposal, which initiated an ongoing public debate about the feasibility and wisdom of replacing a portion of the existing U.S. Treasury bonds portfolio with equity investments. Today, the question remains: Should Social Security trust funds be invested in equities?The Political Minefield Surrounding Social Security Changes
Since its inception, Social Security has been controversial. Conservatives view it as the nation’s first entitlement program and demand its reform in order to cut the national debt, while liberals and progressives assert that it (along with Medicare, Medicaid, and other federal benefit programs) is a critical element of the American Dream, and advocate higher federal income taxes on the wealthiest citizens. Today, the future of Social Security is in doubt as the proportion of those receiving benefits – the elderly – continues to grow larger, while the proportion paying for those benefits – the young – is in steady decline. Unlike private profit-sharing plans in which benefits are limited by contributions and investment earnings, Social Security, with its insurance element and cost-of-living adjustment (COLA), requires ever-increasing revenues to maintain promised benefits.You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access Since the current benefit level cannot be maintained without new revenues, political leaders are in a vise. Raising taxes is always unpopular with the electorate, while the elderly are one of the most potent voting groups in the country. Increasing revenues by raising the investment returns of the two Social Security funds without raising taxes or cutting benefits is the optimum and safest political choice for a politician seeking to return to office. Historically, the average annual return on the S&P 500 (11.26% from 1928 to 2011) has been more than double the return of the Social Security funds, which is very appealing unless you consider that, on average, stocks lose value every one of four years.
The Promised Land of High-Equity Returns
Social Security was designed to be a “pay-as-you-go” system from its inception. Revenues are collected in the form of payroll taxes, while benefits are paid out simultaneously. In the early years, revenues greatly exceeded payments, so substantial fund balances were created and invested in special U.S. Treasury bonds. As the program has matured, the difference between tax collections and payments has flip-flopped, so the trust funds have ceased to grow, being used to make up the deficit between taxes collected and benefits paid. For example, in 2011, payroll tax revenues and interest to the OASDI totaled approximately $805.1 billion, while benefit payments and administrative and miscellaneous disbursements were $736.1 billion. The surplus of $69 billion was invested by the Social Security trust funds in special treasury bonds, becoming part of the general revenues of the Federal Government. At the end of 2011, the OASDI funds were approximately $2.7 trillion. It is this fund balance that many advocate be invested in equities. At 4%, the funds earn about $108 billion annually – and the appeal of doubling those earnings by investing in equities is irresistible.Public Trust Funds With Equity Investments
Two North American examples of public trust funds with equity investment flexibility are the Canada Pension Plan and the National Railroad Retirement Investment Trust. The Canada Pension PlanCanada’s largest single-purpose pension plan was created in 1966, covering every person between the ages of 18 and 70 who earns a salary. It is similar to the U.S. Social Security system in that revenues consist of payroll taxes – 9.9% on incomes up to a maximum of $42,100 collectively paid by employee and employer. Canada’s largest pension plan is managed by the Canada Pension Plan Investment Board, and had a portfolio of $170 billion at the end of September 2012. Investments include shares in foreign companies, as well as private equity, real estate, and infrastructure. Less than 10% of the portfolio is invested in Canadian companies. The Canada Pension Plan has had outstanding investment success, “outperforming public pensions elsewhere in the world,” according to CBC News. Many credit the fund’s prosperity to the unlimited freedom of their portfolio advisers to make investment without political pressure. CBC reported earlier this year that the fund’s advisors invest “in a dizzying array of companies – everything from Porsche, Coca-Cola, and the maker of Tootsie Rolls, to more controversial businesses such as alcohol and tobacco firms and some of the world’s biggest weapons manufacturers.” According to the trustees’ official report, the fund reported an annualized rate of return of 6.6% for the year 2012, 2.5% for the previous 5-year period, and 6.1% for the 10-year period ending the same date, reflecting the turmoil in world markets over the last half-decade. To compare, the average public (state and local government) pension plan in the United States had an annualized 2.0% return for the previous 5-year period and 5.7% for the 10-year period. The Canada Pension Plan is very similar to the United States Social Security OASDI and has suffered from the same problems – the original level of contributions paid by employers and employees with investment earnings has not been sufficient to make the promised benefits. In 2003, the contribution rate from employer and employee was raised to 9.9% of income from its initial 1.8% contribution level. Existing actuarial assumptions about the future rate of earnings on the trust fund project that the existing arrangement will be stable to the year 2075. The National Railroad Retirement Investment Trust
Created in 2001 to manage railroad retirement assets, the National Railroad Retirement Investment Trust covered 542,400 retired railroad employees, spouses, and survivors with 230,000 active employees in 2011. Slightly more than $11 billion in benefits was paid in 2011, with an average recipient receiving a greater amount than a Social Security beneficiary due to higher taxes paid by the railroad workers and their employers. At the end of 2011, the trust had more than $24 billion in asset value, which was invested in public and private equity, fixed income, and U.S. and non-U.S. real estate and commodities. The performance of the trust in its early years allowed employees and employers to reduce their contributions and build a financial cushion. However, in recent years, returns are mixed, with a loss of -0.1% in 2011, an 11.2% gain in 2010, a loss in 2009 of -0.7%, a loss of -19.07% in 2008, and a gain of 16.38% in 2007. The current level of contributions (income) is less than the level of benefits paid, with the deficit being provided by earnings on the trust assets and the trust itself.