What is so bad about privatizing Social Security?

Republican U.S. Senate candidate Sharron Angle of Nevada has created quite a stir with her candid remarks about privatizing Social Security. She has softened her stance as of late, though, stating that she wants to fix Social Security by putting a lockbox on the trust fund. Perhaps she fears that her original message may alienate voters and end up costing her votes in the election. The campaign of her opponent—incumbent Harry Reid, D-NV, and current U.S. Senate Majority Leader—certainly has used Angle’s original privatization message to its advantage by preying upon voter fears.
Before we just summarily dismiss Sharron Angle as a loon for suggesting that Social Security be privatized, though, let’s look more critically at the proposal.
Privatization of Social Security is not a new concept. You may recall that former President George W. Bush proposed establishing a private account option for younger workers to place their FICA (Social Security) withholdings into. This idea was met with scorn, of course, by the progressive left, which claims proud ownership of the program originally introduced by one of its own, former President Franklin Delano Roosevelt, in 1935.
Consequently, the Bush proposal never saw the light of day in Congress.
As things stand right now, though, I’m not confident that the money I have been paying into Social Security will be there for me in 31 years when I finally retire. The safeguard of a trust fund disappeared years ago when (1) the Social Security Administration began using that money to pay out disability insurance benefits, and (2) when lawmakers borrowed money from the account to pay for spending bills.
In other words, bureaucrats and politicians took money from our retirement savings to pay for other things that the trust fund was not intended to be used for. As far as I know, the Social Security Trust Fund has not been fully reimbursed, either. The money borrowed from it has not been paid back yet. We are still waiting for the bureaucrats and politicians to make good on IOUs that they never signed.
As such, I am skeptical that the supplemental security income I’ve paid into Social Security will even be there for me in the next three decades. For my sake, that of my spouse, and our family, I must assume that it won’t be.
Fortunately, I have a 401(k) portfolio that I’m building and paying into with each paycheck, and I set up a deferred compensation account as a safeguard against insufficient retirement funds come the day I hang it all up.
However, I shake my head in disgust when I think about how much better my retirement outlook would be had I been free to choose where my FICA withholdings were invested in. Heck, had I been able to invest all of the money withheld for FICA into a private savings account—where I could earn compounded interest over time—then I’d be coming out much farther ahead in my future retirement than I am on pace to now.
I imagine where my retirement portfolio might be today if the $100 a month or so in FICA withholdings could have been diverted into a private individual retirement account (IRA), certificate of deposit or some other high-yield interest savings account when I first started working at age 17. My account would be considerably wealthier, and my retirement portfolio substantially more robust, than it is now.
This is because FICA withholdings do not compound with interest over the years the way contributions do in private savings accounts. Under the current system, benefits are calculated based on what one has paid into the system and how long one has worked. There’s no interest factored into the Social Security check.
I’ve worked and paid into the system since age 17. I am now 36 years old. Let’s say that my average monthly FICA withholding is $100. Over 18 years, that calculates out to a little less than $22,000 paid into the system to date. Now let’s say I work another 31 years and retire at age 67. I will have paid roughly $59,000 to FICA over my employment lifetime. Of course, FICA withholdings are graduated, not flat, which means they go up as income increases. So, I’m paying more in withholdings now than I did when I was 17. Just bear that in mind when calculating what you could have been saving had your FICA withholdings been diverted into a private account earning compounded interest.
But, for the sake of argument, and because it’s easier to do the math, I’ll say that my average FICA withholding over the years has been $100 a month. Now, imagine if I could have put the $100 a month in FICA withholdings into an IRA with a five percent fixed annual percentage yield (APY). That’s five dollars in interest earned every month with each withholding, and $60 earned in interested the first year. This annual number doubles the second year when I’ve paid a total of $2,400 in withholdings, and goes up 50 percent more in the third year, and so on. The more I pay into an interest account, the larger it gets and the more in interest I earn on APY over the life of the account. In other words, with an interest savings account, you make money on the money you put into it. You never lose money.
So, after working 50 years and paying, on average, $100 a month in retirement withholding, the principal works out to be about $59,000. By the time I retire, my APY has grown to nearly $3,000 a year in interest alone. After just 25 years (my halfway point), my five percent APY would have been $1,500 a year, or $125 a month, in interest alone. This means that annual interest payments on my account would then gradually increase from $1,500 to $3,000 until my retirement, or from $125 a month to $250 a month on interest alone. Not too shabby at all.
But we can’t get that same yield from the current public FICA withholdings and Social Security retirement program. You get what you get based on a formula that considers how much you’ve paid into the system and how long you’ve worked.
My point here is that a privatized option to the current Social Security system isn’t irrational or unreasonable. It makes sense to those of us who would like to maximize our supplemental retirement income, but cannot under current law, which compels us all to pay into a system that is really cheating us out of a better retirement.