For a majority of the more than 41 million retired workers currently receiving a Social Security check each month, that income is vital for them to meet their monthly expenses. Estimates from the Center on Budget and Policy Priorities found that the mere existence of Social Security benefits has pushed the poverty rate for seniors down by 32%!
However, this heavily relied upon program isn't in the best of health. According to the Social Security Board of Trustees report from last year, the Trust could see its entire $2.8 trillion in spare cash completely exhausted by as early as 2034. The good news is that the program isn't going bankrupt, and it will be there to make benefit payments to many future generations of retirees. The bad news is that the current payout formula probably won't work for much longer if no new revenue is added to the program.
Long story short, Social Security needs some T.L.C. from Capitol Hill.
Is privatizing Social Security the answer?
Perhaps the biggest problem, and irony, is that finding a solution isn't truly the issue. More than a dozen separate solutions have been proposed by lawmakers in Washington. The crux is that political wrangling has kept either party from agreeing on any substantive changes to Social Security since 1983! After 34 years of doing very little, Social Security is a mess and in need of help.
One of the ideas that's been floated around multiple times, often by members of the Republican Party, is to consider a partial privatization of Social Security. What's meant by "privatization" is diverting a percentage of your payroll tax contributions to Social Security into some form of individual retirement account -- not to be confused with the IRAs you can open and invest in today -- that you would be able to control, to some degree. In other words, privatizing a percentage of your contribution would put more of the onus of your retirement on you, allowing the government to take a step back, if you will.
Privatizing could work in one of two ways. Either the federal government would designate an allotment of investable assets that working Americans could choose from, or the federal government could open the gates all the way. Short of letting workers pull the money out, the federal government could allow workers to invest their money however they see fit. In either scenario, most prior calls for privatization have suggested only allowing a relatively small percentage of lifetime benefits be privatized. In short, we're not talking about individuals suddenly being in control of 50%, or 100%, of their lifetime benefits.
More than a decade prior, President Trump and VP Mike Pence both favored the idea of privatizing a portion of Social Security. The same can be said of Budget Director Mick Mulvaney and Trump's Social Security advisor Tom Leppert, who have demonstrated support for privatization in the past.
The pros and cons of privatizing Social Security
You might be wondering what all of the excitement is about when it comes to privatization. The simple answer is that it reduces government involvement in supporting retired worker payments, which some lawmakers believe can help sustain Social Security. More importantly, privatizing a percentage of Social Security would give workers an opportunity to invest in higher-growth equities.
The Social Security Trust's more than $2.8 trillion in spare cash is currently invested in special-issue bonds and certificates of indebtedness. These are assets that are typically yielding between 1.375% and 5.25%. However, these bonds are interest-rate sensitive. Because the Federal Reserve has kept lending rates near historic lows for the better part of eight years, most newly issued bonds are in the 1.37% to 2% yield range. That's a pretty abysmal return.
Allowing workers to invest in mutual funds, electronic-traded funds (ETFs), or even individual stocks would allow them the opportunity to generate greater returns. After all, the stock market has returned an average of 7%, historically, when dividend reinvestment is included.
But there are two potential downsides to privatizing Social Security. To begin with, there's little guarantee that a partial privatization would resolve the program's budgetary shortfall. Thus, even apportioning, say, 5% or 10% of workers' contributions for privatization may still require Congress to find additional sources of revenue, or to cut benefits.
More importantly, a partial privatization would mean a big increase in risk for the American worker. While it's true that the stock market has outperformed nearly all assets over the long run, there are no guarantees that a worker would make money. Nor is it fair to assume that workers have a good grasp of the basic financial knowledge needed to invest their own money. If not careful, workers could lose their valuable nest eggs and really be in trouble come retirement.
Here's what the American people think
And that leaves us with, perhaps, the most important question of all: What does the public think? Though Social Security privatization surveys have been few and far between in recent years, they were abundant in the late 1990s through the mid-2000s, at least based on the data that Gallup has culled.
The prevailing theme of the Gallup-sponsored surveys is that consumers are more than willing to consider individual retirement accounts that contain a percentage of their Social Security benefits. In 1991 and 1998, 61% and 64%, respectively, of those surveyed agreed that individuals should be allowed to invest part of their Social Security savings as they see fit. Multiple surveys between 2000 and 2003 showed support of between 52% and 65%, with the opposition never closing in within nine percentage points.
When examining external polls from the likes of Pew Research, ABC News, Fox News, CNN, NBC News, and a host of other sources in 2004 and 2005, the surveys were generally more mixed. Favorability toward privatizing Social Security tended to ebb when the stock market ran into trouble, and the manner in which the question was worded had a pretty sizable impact on the responses. Gallup found that questions that included the phrases "reduce the guaranteed benefits" or "gradually reduce the amount of money that people receive as their guaranteed Social Security benefit" tended to lower support for the idea.
What this implies is that consumers are liable to allow their emotions to get the best of them, and that many respondents probably don't understand the real ramifications of what privatization means. Separate surveys have regularly shown that most Americans would get a poor or failing grade when it comes to basic financial knowledge, which is a dangerous proposition when it comes to investing a portion of their Social Security benefits.
So, where does that leave the idea of privatizing Social Security? My guess would be pretty much dead as a doornail for the time being unless Congressional Republicans could drum up serious support for such a measure and provide some degree of protection for workers with little to no financial knowledge.