The Privatization of Social Security: Difference between revisions

Revision as of 17:38, 30 November 2006

In the United States, social security refers to the program for qualified people called the Federal, Old Aged, Survivors, and Disability Insurance(OASDI).
This program is funded by money from the Federal Insurance Contributions Act, which is a taxt taken from paychecks, and put into the National Treasury. Additionally, the Treasury issues T-Bills to the Social Security administration in order to cover all payments that must be made.
To receive partial benefits a person must have worked for at least 10 years and be age 62 or older. Full retirment benefits can not be received until a person is 66.
Survivors may receive parents' benefits if under 18, or handicapped.
Non-workers can also receive benefits based on disabilities faced.
The benefits received are then based on the amount of income earned in their last year of working.
If benefits begin before 66, then they decrease as person ages, being reduced each year by a certain percentage

The Social Security Act of 1935 was the precursor to the program now in place in the United States.
At the time, the program paid benefits only to the retired worker.
Many types of workers were excluded from these benefits including farmers, the self-employed, and some small businesses.
The payments to the benefactors were funded by a variation of FICA tax now in place.
As the system progressed through the years, more and more people began to gain eligibility through new laws enacted(see timeline).
As the United States reached the twenty-first century, policy makers began to notice the impending problem that the baby-boomer generation would cause as they grew older.

Because of the rising amount of baby boomers, there is expected to be a rapid depletion of the Social Security fund that was set up in order to finance the program.
Figure 1 shows the expected increase in percentage of GDP for social security. Also, from the figure, it is believed that revenue will meet costs until 2016.
By the time, the baby boomers are causing this explosion the amount of workers per beneficiaries will go down greatly as seen in figure 2.
The number of workers per beneficiary will be reduced by fifty percent, greatly reducing the amount of payroll taxes collected as revenue.
This is leading many policy makers to search for alternatives to a "pay-as-you-go" pension system.

Privatization can be classified into many ideas thus being a hard concept to define.
Term began to pick up widespread circulation in the late 1970's and early 1980's as the economic slowdown from the Carter and Ford years took place
In modern sense it is any shift of activities or functions from the state to the private sector i.e. the government transferring payment of pension funds from the Treasury to private investment companies.
Used also as a tool in reducing pressure from Government overload.
Advocates of privatization hope to divert claims from Treasury and direct them at private industry in order to relieve stress on the amount of money demanded from government sources.
Programs will cause people to blame private industry instead of government when benefits are not as high as in past.
Also a privatization of wealth which increases proportion of population that holds shares of stock.

Forcing workers to contribute to personal savings accounts
Honoring Accrued Benefits
Choosing a method to finance accrued benefits while social security transitions from a government program into a quasi-government program.

The first method is gradually phasing out government contributions to OASI accounts and then allowing workers to invest money.
The scond method is Privatization with a Flat minimum annual benefit based on a wage index.
The third method is a Progressive matching scheme in which the government matches peoples' contributions to a personal account. The match is a function of labor income and the percentage match falls steadily as income increases.

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 ===How does Privatization work?===
-*People transfew benefits from a government account into a private pension fund of their choosing in order to make more money and receive higher benefits.
 *Privatizing Social Security involves 3 elements
 #Forcing workers to contribute to personal savings accounts
 #Honoring Accrued Benefits
 #Choosing a method to finance accrued benefits while social security transitions from a government program into a quasi-government program.
+*There are multiple methods of Privatization.
+#The first method is gradually phasing out government contributions to OASI accounts and then allowing workers to invest money.
+#The scond method is Privatization with a Flat minimum annual benefit based on a wage index.
+#The third method is a Progressive matching scheme in which the government matches peoples' contributions to a personal account. The match is a function of labor income and the percentage match falls steadily as income increases.
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