Social Security

ENG 111

Social Security reform has been a political issue for years due to the threatening possibility of the system’s collapse. The possible collapse of Social Security is merely the “tip of the iceberg” and just one of the many problems of this system. The current system treats women, minorities, the poor and the traditional family unjustly (Tanner 16). “Social Security acts like a reverse Robin Hood, taking from the poor and giving to the rich” (Tanner 18). Because of Social Security’s imperfections, many people have suggested an alternative system in which workers have the freedom to choose to stay with the old system or invest their money into a private account. This private investment would be much like an IRA or 401-K (41). This would give every American an option to earn nearly three times more than normally earned under the Social Security system. Several countries have already adopted this system and have a much improved economy.

Why is Social Security so unjust for today’s workers? Social Security is a pay-as-you-go system (Tanner 14). In almost every financial situation that we deal with on a regular basis, there is the idea of an "account". For example, when you put money into a bank, it is understood to be "your money" and it goes into an account with your name on it. The same thing happens when you contribute to your 401(k) plan at work -- you have an account with your money in it, and if you change employers the money in the account is yours. You also have accounts for your credit card, mortgage, car loan, and so on. In any of these accounts, you add money to the account and take money out of it, and whomever holds the account keeps track of how much you have or you owe. The Social Security system is nothing like that. In the Social Security system, the money you pay into the system gets immediately paid back out to the people who are currently getting Social Security checks. This arrangement came into being because of the way the system started. In 1935, when President Roosevelt signed the Social Security Act into law, there were a lot of people who needed benefits (because of the Great Depression), but there was no money to pay those benefits with. The idea at the time was that people currently working would pay into the system, and their money would immediately go back out in the form of benefit checks. Each generation of retiring workers would get paid by the people currently working, and therefore the system would fund itself forever despite the fact that the system had no money to start with.

This interesting system worked great in in the past, but it is going to have a problem in the future for two reasons. First, there will be so many retired people that the working people will not be able to support them. If the population had grown at a steady rate this would not have been a hinderance, but there is no good way for the design of the Social Security System to handle a population spike like the baby boomers. Second, people have become so used to the idea of a 401(k) plan that the idea behind the Social Security system becomes difficult to accept.

A privately-invested system has been considered as an alternative to Social Security. This system would allow workers the freedom to choose to stay with the old system or invest that money in a private system consisting of stocks and bonds. Workers that choose to invest their money would have the option of creating a bond fund, stock fund, or mixed stocks and bonds fund. Each one of these three funds allows the worker to retire with a personal retirement significantly higher than that of Social Security. Over the past seventy years, stocks on the New York Stock Exchange have earned an average annual return of 7% (7). Based on this data, a person who earns $36,000 would retire with only $24,144 annually in benefits under the current system. A person that earns the same, but invests in a privatized system, would retire with $124,187 from an all-stock fund, $64,937 from a mixed fund, and $34,795 from a bond