Privatizing Social Security:  Not Fair to Everyone

If you ask young people today what they know about the social security program, what would they respond?  A probable response is that it is a program that they have to pay into now, but will not be able to benefit from in the future.  A fear of many people, not just the younger generation, is that the social security program that was started over 65 years ago will go bankrupt in the near future.  Many people agree that there needs to be changes in the program if it is going to survive, but they disagree how the program should be reformed.  One view is that social security should be privatized.  This paper will discuss what the social security program is, who the beneficiaries of the program are, and how various ethical theories might evaluate privatizing social security.  The paper will end with my personal opinion on why I believe privatization of the program is not fair for everyone.

When signing the social security bill into law on August 14^th, 1935, President Franklyn D. Roosevelt said, “We can never ensure 100 percent of the population against 100 percent of the hazards and vicissitudes of life.  But we have tried to frame a law, which will give some measure of protection to the average citizen and his family against the loss of a job and against poverty-ridden old age …” (Landis 9).  This statement clearly defines what the program was meant to do from the onset.  The basic structure has not changed from what the original framers had envisioned and in fact it has grown to be a comprehensive program.  Forty-four million beneficiaries are receiving benefits.  The people that are receiving these benefits include more than three million children under the age of 18 and about four million disabled workers under the age of 65 (Deets 2).  The types of beneficiaries in the social security program are outlined in the table below.

Table  SEQ Table \* ARABIC 1

As the table demonstrates, in addition to retirement benefits (62%), the program pays benefits to the dependant family members of a worker who retires or becomes disabled (11%), survivor benefits to surviving family members of a worker who dies (16%), and disability coverage is provided to those who are under age 65 and become totally disabled (11%) (Landis 10).      

The social security program was set up and has stayed a pay-as-you-go program, meaning that the workers of today are taxed to pay the benefits of the retirees of today.  Both employee and employer are taxed 6.2 % up to a $ 90,000 wage cap (Goozner 1).  For example, if you make $25,000 a year then the amount of tax taken out of your yearly income for social security will be $ 1,550.  If you are lucky enough to make three times that, $75,000 a year, then you pay $4,500 into the program.  This seems fair and ethical because people paying in more will likely draw more from the program when they retire.  If you are earning a whopping $250,000 a year, which is ten times the individual making $25,000, you will pay $5,400.  This is a mere $900 more than the individual making $75,000 and only $3,850 more that the $25,000 income.  Another way of looking at this disparity is that the individual making $ 25,000 has to pay the 6.2% on their total earnings, and the individual making $250,000 only pays 2.2% of theirs.  

Due to the large numbers of baby boomers in the workforce today, the ratio between contributing worker and retirees drawing the benefit is 3-1.  This has allowed for a sizeable surplus in the program.  A major issue facing social security is that as the baby boomers retire, there will be fewer workers in the workforce to contribute to the program.  The large numbers of baby boomers that will be retiring make the 65 and older segment of the population the fastest growing.  This is demonstrated in the chart below (Bettelheim 3).

  In their latest report, Social Security’s trustees’ project that the government will be collecting less in taxes than it needs to pay benefits starting in 2017.  From then until 2040, full benefits can be paid as promised using the surplus monies.  After that the projection is that only 74% of promised benefits will be paid out (Auster 2).  The fact that people are living longer is also putting a larger drain on social security.  Changes need to be implemented to ensure that the program not only survives but also thrives.  One option for reforming the social security program is to privatize the program.  For example, instead of putting the required tax into the program a worker would be required to put the money into the private account.  These private accounts would make investments, such as stocks and money markets. 

There are some major issues that would accompany the switch to privatization.  Specifically, the risks that face individual accounts based on changes in the stock market, the huge transition costs associated with switching the program over to a privatized system, and administrative costs to run the new system.  Other considerations are overly optimistic returns on stocks and the cost associated with purchasing equivalent life and disability coverage.  Lower income families and people with pre-existing disabilities would be the most impacted if the social security program were privatized (Hill 3). 

Various ethical theories would view these issues differently.  For example, Utilitarianism, which is an ethical theory that emphasizes that what is morally right is what brings the greatest pleasure to the greatest number of people, might not see privatization as the best route to reform.  If the program were switched, then there would be winners and losers.  The winners would be people in the high-income bracket who have higher education, more knowledge of how the market works and more money to invest will get higher returns.  The losers would be people in the lower income brackets that have less to invest and less information on smart investments.  Thinking in terms of what will bring the greatest good for the greatest number, a Utilitarian would say the program should not be switched because it serves the majority as it stands now.  The tables below demonstrate that mid and low-income families depend on social security benefits for their retirement much more that high-income families (Bettelheim 9).  Legend 1=Assets, 2= Pensions, 3=Earnings, 4=Other, 5=Social Security

Ethical Egoists, who believe that what is in their own self-interest is what is right, would probably say that privatizing social security is fine.  Their belief that one should look out for oneself and let others fend for themselves would support the idea of switching from a program that is for the good of all to a program that is best for the rich.  The larger wage earner should be able to make money in the market instead of paying a tax that will benefit the less fortunate in society.  They would say that the individual who makes the most shouldn’t have to pay more to provide for people who did not work as hard.   

Another ethical theory, established by Immanuel Kant, is known as Katianism.  This theory emphasizes that everyone should be treated with respect and dignity.  The categorical imperative (what is good for you should be good for everyone) was Kant’s basic moral principle.  A Kantian would claim that the rightness or wrongness of an act would depend on whether or not it corresponds to duty.  Is it our duty to provide for members in our society that are less fortunate or should we be able to try and maximize our own retirement funds through a private system?  For a Kantian, the question would be simple; the act that is most right is what is done without self-interest or inclination.  It is our duty to ensure that all members of society have some measure of protection against the loss of a job and against poverty-ridden old age.  Privatizing the system would not ensure that this duty is fulfilled.

There are more ethical ways to reform the social security program than privatizing the system.  Privatizing the system would not be fair to everyone.  As stated above, higher income families would benefit from privatization and lower income families would not.  Ask yourself the following two questions.  If the system were privatized would the burden of the huge transition costs and administrative costs to run the new system be equally dispersed between low and high-income families?  Would the costs to low and mid income families for purchasing equivalent life and disability coverage be equally dispersed between low and high-income families?  The answer to both these questions is no; the costs would not be equally dispersed. 

Making changes to the current social security program is the fairest way to strengthen the program.  A few examples of potential changes are a slight increase in everyone’s payroll tax and increasing the amount of revenue that is subject to social security tax (removing the wage cap).  Everyone should contribute to a fair and balanced solution to the issues facing social security.  The burden should not fall to the lower and mid income families.  Hopefully these types of fair and ethical changes will be made to the program soon.  That way in 20 years when you ask members of the younger generation what they know about the social security program, their answer will be different then if you asked the question today.  They might just respond that social security is a program that provides adequate and secure benefits to everyone.

Paula T.
Professor Walkup
Ethics
01 November 2006