The problems facing Social Security have been exaggerated by proponents of privatization. By presenting misdirected facts, the public has been presented with a dire picture of Social Security’s future for which personal investment of Social Security funds seems the only solution. Standard economic tools, however, can provide us with a more realistic picture of the current state of Social Security, its future under the current structure, and the possible effects of privatization. First, one must examine the effects of a changing population on Social Security.
Next, privatization schemes must be evaluated using the new understanding of the true state of Social Security. Intra- and inter-generational costs need be determined and compared; other costs have to be calculated. Only then can the true picture of privatization be revealed. Finally, a scheme in which a portion of the Social Security trust fund itself is privatized is contrasted with personal account plans.
The retirement of the baby boomer generation and increases in life expectancy are commonly cited as problems facing Social Security; while issues to be considered, their effects have been overstated. The popular notion that the ratio of workers to retirees will rise from 3:1 to 2:1 between now and 2035, while true, does not represent the true burden on the workers of the future. Aaron (1997) correctly points out that Social Security provides for disabled workers, deceased workers’ spouses and children, and retirees.
Coupling these people with a decline in fertility rates and more women in the workforce will cause a 6, and not a 50, percent increase in the worker-to-dependant ratio. An increase in worker productivity of 0.1 percent would nullify the 6 percent effect. 1 Social Security is not facing an immediate financial crisis. The program is fully funded for nearly thirty years (Aaron 1997). The increase in costs........
