Social Security privatization refers to a proposal that would switch the current U.S. Social Security system to one that allows individuals to invest a portion of their payroll taxes in private investment accounts. While the subject produces a lot of excitement, here's what experts say could go wrong.
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Individual investors would have to deal with market volatility
The stock market can produce dizzying fluctuations. While the ups and downs are as natural as the sun rising in the East, they may make less experienced investors quite nervous. For example, when a bear market arrives (another regular, natural part of the economic cycle), individual investors may get spooked and pull their money from the market, a move that can ultimately lead to financial loss.
Unpredictable income in retirement
While there are flaws in the current "pay into FICA" system, the upside is knowing how much you can expect to receive each month in Social Security benefits. Privatizing Social Security means some people will invest poorly or not know what to do when market fluctuations hit, potentially leaving them without a stable income in retirement.
An uneven playing field
Some people grow up learning about money management while others do not. Privatization may disadvantage those who have limited financial literacy and limited access to advisors who can help them understand the basics. Those who can afford to hire a financial advisor are likely to do so, giving them a significant advantage over those who cannot afford to work with a professional.
Access to resources
The wealthier a person is, the more they can afford to take risks and diversify their portfolios. Those with limited income are likely to have fewer options, a reality experts fear will lead to wider gaps in retirement security. In addition, the wealthier a person is, the easier it is to weather market losses and stick with an investment plan.
Single-parent families and caregivers
For the parent or caregiver who must take time off work to meet caregiving responsibilities, it will be more challenging to work the hours needed to accumulate the money required to build a sufficient retirement nest egg. It's natural that some of these people will reach retirement age with little savings to fall back on.
Time requirements
Solo investing requires a time commitment. For someone without a financial background, there's a huge learning curve as they navigate a complex array of investment options -- and not everyone has that time. For example, a person focused on building a business, advancing in their career, or spending all their free time caring for others may not have the time necessary to immerse themselves in investment knowledge.
Loss of a social safety net
From its inception in 1935, Social Security was meant to provide economic security for Americans, particularly retirees. The idea was to ensure all Americans have some source of retirement income. Privatization could undermine that social safety net and leave the most vulnerable populations without the support they need in retirement. Experts fear that those who aren't skilled at investing may fall into poverty in retirement without guaranteed benefits to help lift them out of it. The same is true of those who cannot afford to invest adequately or who experience unexpected financial hardship.
As attractive as some people find Social Security privatization, it's difficult to ignore the number of Americans who might fall through the cracks, ultimately entering retirement with little to no money.
