Question

How would the distribution of income change if Social Security were privatized?

Answer 1

Privatization of social security will dramatically increase compensation for people with low incomes. The change would be due in part to the higher rate of return on both stocks and bonds than payments from Social Security, but it would also remove regressive aspects of the structure of Social Security. Wealthier people tend to live longer and thus spend more years collecting social security than people with lower incomes, rendering the allocation of benefits unfair against wealthier retirees who do not depend on these benefits to compensate for their longer retirement.

In addition, transforming social security into some sort of opt-in or opt-out system of private saving and investment will lead to a more equitable distribution of stock market gains as a public wealth fund would. Under the current system of 401(k)s and other retirement savings plans, wealthy people make a large contribution to their saving accounts, and many low-and middle-income families have no stock market holdings at all.

If people are moved to private savings accounts, the share of low-income people with money in the stock market would increase dramatically, meaning that more low-income people would have stakes in a booming stock market, reducing inequality while at the same time shrinking government and stimulating private investment.

Nonetheless, any transition to a private system will clear a significant financial barrier. Social Security has accumulated trillions of dollars in payments for employees who are already retiring or who are going to retire in the near future. To order to make room for a new private scheme, politicians need to raise funds to pay for these commitments while still leaving enough cash for young workers to invest into new private accounts. It means reducing past obligations–by reducing benefits–or rising current workers ' contributions. Major new federal lending is also involved in most large-scale privatization projects. Therefore, if a balanced budget amendment is included in the constitution