As lawmakers debate budgeting issues, the subject of Social Security privatization naturally arises. Privatization refers to letting individuals manage their retirement savings through private investment accounts rather than relying on the Social Security system to do it for them.
Proponents and opponents present equally passionate arguments regarding the merits of privatization. Knowing who supports it and who is likely to benefit most is important for a better understanding of how privatizing Social Security would affect society.
Image source: Getty Images.
Wall Street brokers and fund managers
According to the American Postal Workers Union (APWU), brokers and fund managers stand to make billions of dollars annually if Social Security is privatized. Currently, administrative costs for Social Security are low -- less than 1% of the program's budget. Based on other countries with privatized systems, APWU says investors could lose as much as $0.15 of every dollar in commissions and fees once workers are forced to shift from paying Social Security taxes to investing in the stock market.
The Economic Policy Institute says privatization uses the power of the government to force workers to place some of their earnings under the control of financial institutions, like brokerages and banks, making the finance industry the one clear winner.
However, others could also benefit, including:
High-income workers
Higher-income individuals often have access to top-notch financial advisors who can guide them through the market's ups and downs. Because they have more money, they're less likely to panic when the market dips, knowing it's just a matter of riding it out. Moreover, the more money a person has, the more they have to allocate toward diversified investments that take advantage of market opportunities as they arise. Together, these advantages can help them maximize their retirement savings.
Financially savvy investors
It's not just high-income investors who are financially savvy or have access to knowledgeable advisors. Some people, whether they're still working or retired, pour themselves into learning everything they can about money and investing. Individuals who've armed themselves with knowledge could benefit from privatization, particularly if the investment decisions they make earn more money than they ever would have claimed through Social Security benefits.
Younger workers
Simply put, the younger a person is, the more time they have to benefit from annual returns and compound interest. In addition, their portfolios have more time to recover in the event of a market downturn or bad investment. Younger workers might be open to saving for retirement differently from their parents and grandparents and be more comfortable using technology to oversee financial matters.
Workers with stable employment
One concern raised by opponents of Social Security privatization involves how much losing a job due to a layoff or illness can set back retirement savings. Undoubtedly, a person with stable employment and consistent contributions will have a leg up. Plus, if a steadily employed person's employer offers matching contributions to privatized accounts, they could end up with an even healthier portfolio.
While privatizing Social Security could significantly enhance the financial outcomes of high-income workers, financially savvy investors, younger employees, workers with stable employment, and self-employed investors, it does raise the question of what it would mean to the millions who don't fall into one of these categories.
To be sure, the topic of privatization raises more questions than answers at this point.
