Privatizing Social Security is the best way to save it | Les Rubin

Congress must act, and the best way to fix Social Security is to privatize it.

That will take time. Because of the serious shortfalls of the current system, significant capital is required. It is too much to do at once.

The concept would be to move an increasing share of Social Security retirement payments into a privately owned account each year. The account would be professionally managed and invested in a large group of approved funds, subject to specific investment criteria. 

In the current system, the payment to Social Security is 12.4% of wages, split evenly between the employer and employee.  Of this, 1.8% goes into a disability fund. The remaining 10.6% goes into a government trust fund used to pay current retirees. 

Under a privatization plan, 5% of the money going to the trust fund would be diverted into private accounts the first year. That would increase to 10% in year two and keep increasing for 20 years until 100% goes into the privately owned account.  

Benefits would remain at current levels, as determined by the current formulas, and must be maintained until the system is fully converted and operational. As new people retire, they would receive the same payout as would be now paid, in part from the Social Security Trust Fund and in part from their private account. When the payout from the private account covers or exceeds the current benefits, then no more contribution would come from the government trust fund. 

Diverting funds into private accounts will leave a shortfall in the Social Security Trust Fund to pay current and future beneficiaries before they have a private account that provides an equivalent amount to what they would have gotten under the current system. This shortfall would be covered by an additional 4% fee in the trust fund, divided equally between the employee, employer and government. 

During the early years of the conversion, the Social Security Trust Fund would continue to grow, because the additional 4% fee would exceed the diversion of funds to the private account. As more is diverted in later years, the excesses will be depleted. 

When the system is fully operational, this fee would be significantly reduced but continue to supply a “government support fund” for people who do not achieve a minimum return from their private account. People who outlive their private account also could draw from this fund. 

Once fully converted and operational, all 10.6% of the payments will go into private accounts and 1.8% into the disability fund. Then the small additional fee, which is not yet determined, will go into the new “government support fund.” 

The retirement age for most employees would become irrelevant. That's because the private accounts will fund an adequate payment for most recipients before age 67. For those few who reach 67 and have not accumulated adequate funds, they could start drawing what was available from the private account, and the “government support fund” would provide the difference up to a specified minimum each year. 

Transitioning to this framework would require some temporary additional costs. But that would stop once the conversion is complete. 

The latest Trustees Report makes clear that maintaining the status quo is no longer a viable option. A gradual transition to a privately owned retirement system offers a path toward long-term solvency, greater personal ownership and the elimination of the recurring financial crises that have plagued Social Security for decades.