Proponents of privatization see a number of benefits in increasing the size of the private system and reducing the size of the public system. For some proponents of privatization, ideological concerns are of paramount importance. They are fundamentally opposed to the public provision of pension benefits. More common are people who see significant economic benefits in the privatization of social security. They believe that workers will receive higher pensions and that the economy will grow faster under a private rather than a public pension system. Finally, some proponents of privatization believe that the United States is more likely to take the necessary steps to prepare for a growing aging population if the pension system is reformed to include a larger private role. Workers would be free to decide how their contributions are invested, at least within general limits. In some privatization plans, contributions would be collected from a single public or semi-public body and then invested in one or more of the investment funds of a limited number. For example, an employee might have the opportunity to invest in five different funds: a money market fund, a stock index fund, a real estate investment trust, a corporate bond fund, and a U.S. Treasury fund. By consolidating the investments of all covered employees into a small number of funds and centralizing contribution collection and fund management, this approach would minimize administrative costs but limit workers` investment decisions. Another strategy is to allow mutual fund companies, private banks, insurance companies and other investment firms to compete for employee contributions to hundreds or even thousands of eligible mutual funds. This strategy would give workers unprecedented freedom to invest at will, but administrative costs could be high.
Any discussion of reform should begin by acknowledging that the current pension system is already a mix of public and private schemes. The public plan is universal, but aims to protect low-wage workers. Private or employer-sponsored plans cover about half of full-time employees, but they tend to leave part-time and low-wage workers uncovered. Privatization of social security can increase workers` returns by allowing pension contributions to be invested in private assets, such as stocks, that generate a better return than the current pay-as-you-go pension system. Returns can be further increased if the government borrows on a large scale to pay off past Social Security liabilities, allowing workers to invest a higher percentage of their wages in high-yielding assets. However, exactly the same return can be achieved if the current public system is modified to allow the investment of social security reserves in private assets. Below are some important terms used to discuss the characteristics of employer-sponsored public plans. Payroll tax revenues are used to pay benefits to people who currently receive social security pensions. (This method of funding is called pay-as-you-go funding.) Any excess tax on benefit payments is invested in special U.S.
Treasuries that produce the average yield on publicly traded government bonds. In the fiscal year ending September 1996, tax revenues totalled $380 billion, while administrative and return costs amounted to $350 billion, allowing a difference of $30 billion (or 1% of taxable wages) to be invested in government bonds. In addition, interest payments totaled $361/2 billion, giving the Social Security system a total annual surplus of about $66 billion. The Social Security Actuary has calculated the return that workers can expect under the current system and the alternative schemes proposed by the Advisory Council. These calculations are useful for understanding the potential gains from privatization and how they will be realized. Figure 3 shows the expected performance of an average-wage worker among two options. An alternative assumes that workers will continue to receive social security benefits under the current benefit formula, but taxes will eventually be increased (from 2025) to ensure that OASDI trust funds are never exhausted. This strategy maintains the solvency of Social Security, but reduces the performance of young workers because they have to contribute more to receive the same amount of benefits. Figure 3 shows that under this policy, the return on investment of workers born in successive generations will continue to decline. Average-wage workers born in 2004 typically receive a return of only 1.7%. Excise duty can also be used as a user fee. The gas tax is a good example.
The amount of gasoline a driver buys usually reflects their contribution to traffic congestion and wear and tear. Taxing this purchase effectively lowers the price of using public roads. Some critics of social security, who are particularly wary of public intervention, believe that it is an unjustified infringement of personal freedom to require workers to pay a fixed percentage of their salary into a pension scheme. They believe that individual workers can make better judgments than public servants about the correct distribution of income between consumption over an employee`s career and the employee`s savings for retirement. Libertarians who hold this view reject all mandatory retirement savings plans, whether pension funds are placed in private accounts or not. Proponents of privatization, however, doubt that the funds accumulated in a public fund are actually saved. They fear that Congress will use the funds to fund growing deficits in other state accounts, such as Medicare. Without larger Social Security surpluses, Congress would be forced to correct the deficit in other programs, either by cutting spending or raising taxes.
A larger Social Security surplus makes it easier for Congress to avoid this unpleasant election. Proponents of privatization therefore see it as safer for accumulation to take place in tens of millions of private accounts, beyond the reach of an income-hungry Congress. Some privatization plans have a good chance of stimulating savings. The advisory council`s plan to cut Social Security benefits and force workers to invest 1.6 percent of their wages in new retirement accounts would reduce the federal deficit and increase workers` personal retirement savings. This would almost certainly increase national economies. The advisory council`s alternative plan to divert 5% of payroll taxes to personal accounts would increase national savings in two ways. It would reduce the Social Security benefits promised to workers who retire at the beginning of the next century. This will be achieved by raising the normal retirement and early retirement age to receive old-age benefits and by reducing disability insurance benefits. These measures increase public savings by reducing future public spending. The plan also introduces a new 1.5% payroll tax that is expected to expire in seventy-two years. The tax boosts federal revenues, another contribution to increasing public savings.
U.S. property taxes account for more than 30% of total national and local tax revenues and more than 70% of total local tax revenues. Local governments rely on property tax revenues to fund public services such as schools, roads, police and fire services, and emergency medical services. However, some privatization plans will have little impact on national savings, and others will actually reduce savings. In these circumstances, there are many reasons to prefer the existing pension system to an alternative system that includes a larger private role. The current system is very successful in reducing poverty among the elderly. A reduced public system would have fewer opportunities to provide generous pensions to low-wage workers, unless the benefit formula is more inclined to favour low-income beneficiaries. A stronger redistributive trend in the benefit formula would make it even less favourable to middle- and high-wage workers, which could undermine political support for the remaining public component of the pension system.