Should We Privatize Social Security? The Pros and Cons

Privatizing Social Security is controversial—here's what you need to know

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Privatizing the Social Security system is a hot button topic that calls for doing away with the U.S. government's sole control of your retirement payout stream. All or a portion of your benefit amount would be set aside in an account controlled by you. This would allow you to make investment decisions that could result in better long-term performance and a higher benefit payout than what's offered by the government.

Key Takeaways

  • Generations of retired Americans have relied on Social Security to pay for their living expenses, but there's a growing concern that the program will run out of money in the future.
  • Privatizing the system could give you the freedom to invest some of the money you're entitled to, but there are pros and cons.
  • Pros include getting better returns on invested funds and a boost to the economy.
  • The return on investment still wouldn't be enough for most people to live on.
  • The costs to manage privatization would be high.


Pro: It Could Offer Better Returns

The Social Security trust invests in special-issue bonds. It can invest in public, marketable securities, but it doesn't do so. The trust invests in itself, all in government-issued debt. Returns tend to underperform the market as a result.

It's not suggested that the trust should take on the risk of being all in stocks. But you could choose to take on slightly more risk if some portion of your Social Security balance was available for personalized investment, according to those who support the plan.

They also think that more flexibility in how the money is invested would create a higher rate of return if 401(k) accounts were mandatory for all people. Even a few more points can amount to a good bit of extra income over the years or decades. You could have a list of mutual funds or ETFs to choose from with the help of a financial professional. You could choose a mix of funds that fits your risk level, just as you can with traditional 401(k)s.

Pro: It Could Boost the Economy

Supporters say that allowing people to invest their Social Security funds in private investments could give the economy a shot in the arm. It could spur growth that could aid workers who are saving for retirement. Social Security is less of an investment program than an intergenerational transfer of wealth. Those dollars could be put to better use by changing the system to something more investment focused.

A potential benefit of privatization is that it helps boost private savings. It increases the pool of capital that can be invested back into the economy.

Con: It May Not Boost Retirement Income Much

Opponents of privatization argue that the country already has retirement system controlled by its citizens. It includes 401(k)s, IRAs, and other tax-advantaged accounts. But Americans are way behind on retirement savings in spite of this. According to the Government Accountability Office (GCO), 48% of Americans age 55 and older didn't have any retirement savings in 2016. Giving them more control over their money may do very little, while risking what they already have.

The total investment value of 401(k)s continues to rise, but the median value of an account for families was about $60,000 in 2016, the most recent year for which the GCO has provided an estimate. That’s $3,000 per year before taxes if they were to live another 20 years. Add the average Social Security benefit of $794 per person as of 2021. That's not a comfortable yearly income.

Con: There Are Better Alternatives

Privatization is not as easy as simply diverting funds. Social Security has liabilities that the current system has to pay. The earnings that come in from today’s earners help to pay them. Putting any part of the trust into private accounts would be almost sure to doom the system.

The administrative costs of the fund are also very low because the Social Security trust invests in the government. Recipients aren’t paying the high fees that sometimes come with private, market-based investments. A privatized option means more costs. And cost is one of the largest sources of lost performance over time.

Social Security's role is to create safe and stable returns for the lifetime of workers and their families.

Do Americans Support Privatizing Social Security?

Polls during the Bush administration showed that Americans were fairly divided on this issue. It's hard to say how they would feel in the absence of a defined plan. What’s clear is that with 65 million Americans living on Social Security, any attempt to make big changes to the program should be approached with great caution.