A second myth being propagated by Democrats this election season is that Republicans want to privatize Social Security. The basis for this rumor is Rep. Paul Ryan’s Roadmap for America’s Future, although it can probably be traced back to President Bush’s attempt to reform Social Security in 2005. Neither plan involves the privatization of Social Security.
The root of the problem is that Social Security is broke. The Social Security trust fund into which Social Security (FICA) taxes are paid into is filled with federal bonds, essentially promises to repay or IOUs. Social Security taxes are not invested on the worker’s behalf by the government. Instead, current FICA revenues are used to pay current benefits.
As Baby Boomers retire in large numbers while the numbers of working Americans dwindles, the Social Security program is headed for a meltdown. In fact, this year Social Security will begin paying out more in benefits than it collects in taxes. The program is forecast to run out of money in about 2035. Clearly, doing nothing is not an option.
Under Rep. Ryan’s plan, Americans age 55 and older will not have any changes to their Social Security in any way. Younger workers (under 55) will be given the choice of remaining in the current plan or investing a portion of their FICA withholding into a private plan similar to the Thrift Savings Plans that federal employees already enjoy. The plan would also not affect people receiving survivor and disability benefits.
For those who choose to invest in the private plan, the government will guarantee their contributions in a manner similar to deposit insurance. The government will also approve investment choices. When fully phased in, contributions to the private plan will only average 5 points of the current 12.4 percent FICA tax. In other words, even if you choose the private plan, most of your money will still be going to the traditional plan. The government will also guarantee benefits at a minimum of 120% of the poverty level for the traditional plan and 150% of the poverty level for private plans. Finally, people in the private plans get ownership of their accounts. If they die prior to retiring, they can pass the money to their heirs. In the traditional plan, your Social Security “contributions” are lost except for a death benefit if you do not live to retirement age.
In summary, the Republican plan gives people choice, a right to keep their money, and most likely a better rate of return than traditional Social Security. Stock market investments almost always make money over the long run, even accounting for market crashes like the one in 2008. In contrast, Social Security pays a very low rate of return – often negative. This means that your “investment” in Social Security is probably not even keeping pace with inflation. Under Ryan’s plan, a person who chose a personal plan would likely earn a much higher rate of return and the government would guarantee his account in the event of a market crash.
The most important points to remember are:
1. No one over 55 would be affected by any changes.
2. Workers under 55 would get to choose their plan.
3. Private accounts would likely earn more, but would be guaranteed by the government at a higher level than traditional Social Security.
4. The only way to lose your Social Security money is to do nothing and let the plan go broke.