This paper weighs the pros and cons of privatization of Social Security. Subjects covered include the economic benefits, the impact on the market, and the the challenges and risks associated with privatization. The paper concludes with reasons for sustaining social security as it is today.
Is Privatization the Solution?
With privatization of social security, workers would be able to 'own' all or a portion of their Social Security contributions in an individual account. These funds would be invested in the financial markets, where individuals would have the chance to earn higher returns.
The Economic Benefits
The biggest beneficiary of any Social Security privatization would be the U.S. economy. Increased investment in private enterprise-whether through stocks or bonds-should create more economic opportunities and boost domestic growth. It may also contribute to greater productivity, resulting in a lower inflation rate that would help retirement savings go further. As the proportion of retirees in the U.S. grows, one of the challenges for a shrinking workforce is to produce enough goods and services for both themselves and the retired population. More investment capital in the private sector should result in the kind of productivity gains necessary to meet that challenge.
An Impact on the Market
Privatization would also have a significant impact on the financial markets, especially the stock market. Younger individuals are likely to invest most of their contributions in stocks, and the increased demand would propel stock prices higher.
But this may be a short-term effect. There's a presumption that privatization will drive up stock prices. It might initially, but longer term, equity performance will continue to be influenced by the revenues and profits earned by public companies.
In addition, at least a portion of these funds will probably be invested in bonds, money market funds, and other types of investments. In fact, greater demand for bonds, which...