The United States Social Security faces many challenges. It is in this view that President Bush, during his last term in office, proposed the creation of Personal Retirement Accounts (PRAs). A PRA is a private account that an American worker has the option of voluntarily contributing a portion of their income to and gets benefits when they retire. It is an issue that the country still debates on to date. There are people against it, and there are others in support. The gist of this discussion is the merits and demerits of including Private Retirement Accounts in Social Security. First, the paper introduces the subject matter and then evaluates the advantages of including PRAs in Social Security. After that, it discusses the disadvantages of doing the same. The final section of the paper is the conclusion.
Social Security, Personal Retirement Accounts, benefits, insolvency, income
Social Security is the U.S. government’s largest single-funded program in the world. Since 2015, it accounts for $888 billion (24%) of federal spending in the country (Pfau, 2016). Since 2010, it pays more in benefits than it collects in taxes, with analysts hinting that it will run out of money by 2034 (Pfau, 2016). It is in this view that policymakers and leaders proposed the privatization of the current government-administered system, which allows workers to manage their retirement funds through Personal Retirement Accounts (PRAs). These accounts would act as personal investment accounts. Proponents of this action argue that it would give workers the freedom to control their retirement investments. The retirees would gain higher returns than the ones that the current system offers. They argue that it would restore the solvency of the system (Aguila, Hurd, and Rohwedder, 2014). On the other hand, opponents of the same argue that it would eliminate the benefits that workers would get in a stock market downturn (Aguila, Hurd, and Rohwedder, 2014). The reason for this is because the majority of individuals do not have the knowledge to make investment decisions that are wise. Hence, instead of addressing the solvency issue, it would make the program more insolvent than it is currently.
Merits of Including Personal Retirement Accounts in Social security
One of the advantages for the inclusion of PRAs in Social Security is avoiding the insolvency that analysts insist will occur in the program by 2034 (Pfau, 2016). Research findings by Skidmore (2008) show that the current American population is aging and there is a low birthrate. Hence, the ratio of retirees to workers is rising. Consequently, the funds available for future retirees are declining. To prevent the insolvency, PRAs should exist. The other advantage to future retirees if the PRAs exist is high returns. According to Aguila, Hurd, and Rohwedder (2014) and Pfau (2016), there is a significant difference in returns in private investments and those by public workers. Between 1984 and 2014, the average real rate of returns as in S&P 500 was 6.38% (Aguila, Hurd, and Rohwedder, 2014). Contrary to that, the same was between 2.67% and 3.91% for retirees under Social Security (Aguila, Hurd, and Rohwedder, 2014). Thus, the workers stand to gain through a high rate of returns for their investments if there is privatization of the program.
Another benefit that retirees stand to have in changing the program is the control over their retirement decisions. Skidmore (2008) provides an argument for the support of the argument, stating that in the contemporary program, Americans cannot make their decisions for how the investment of their retirement funds occurs. However, with privatization, they will have a say in the same. Opponents of the argument note that most workers do not understand the stock market and would make wrong decisions. Nonetheless, it is better for them to have the control over what happens to their money than having others do it for them. The final significant advantage is the economic growth that would improve in the country by injecting the money back to America’s financial system.
Demerits of Including Personal Retirement Accounts in Social security
There are three primary disadvantages that privatization of Social Security would bring. The first one is the worsening of the long-term financing of Social Security. Research findings by Pfau (2016) show that if stakeholders introduce private accounts, workers will continually siphon money that they need for future, leading to the worsening of the situation. The second disadvantage is the enormous amounts that retirees would need. An issue that is important to point out is the fact that the retirement funds take care of the disabled, heirs, and surviving spouses of the retirees. Hence, the income cuts to cater for all these needs are enormous. Relatively, it exposes the retirees to economic risk. In the current system, there is a spread of risk. Skidmore (2008) adds that PRAs would mainly affect the disabled, orphans, minorities, and women. The final disadvantage is the rewarding of high wage earners. One of the functions of Social Security is income protection of middle and low-income earners. However, the PRAs would lead to high returns for high-wage employees and vice versa.
There are two opposing arguments for the inclusion of Private Retirement Accounts. There is a section of the American society that supports it, and there is another that does not. The discussion presents both sides of the debate. The proponents have more points than the opponents. With privatization, retirees stand to gain more than they stand to lose. Therefore, Social Security should include Personal Retirement Accounts.
Aguila, E., Hurd, M. D., & Rohwedder, S. (2014). How Do Management Fees Affect Retirement Wealth under Mexico’s Personal Retirement Accounts System? Latin American Policy, 5(2), 331-350. doi:10.1111/lamp.12051
Pfau, W. (2016). Reforming Social Security: Issues and Challenges for Personal Retirement Accounts. SSRN Electronic Journal, 3(1), 15-19. doi:10.2139/ssrn.1519301
Skidmore, M. J. (2008). Letter: Should Liberals (or Anyone Else) Really Support Social Security “Personal Accounts”? The Economists’ Voice, 5(6), 22-53. doi:10.2202/1553-3832.1385