How Social Security Privatization Could Impact You

Although the idea is not new, there appears to be renewed enthusiasm surrounding Social Security privatization. Privatization refers to shifting from a government-managed Social Security system to a private investment model in which individuals would manage their own retirement funds rather than count on Social Security benefits in retirement.

It may be a long shot, but...

Realistically, given the number of issues that would need to be overcome, the odds of privatizing Social Security aren't great. For example, what would happen to those Americans who enter their retirement years with little to no money because their investments went belly-up, or they failed to invest at all?

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However, supporters continue to argue that privatization will allow American workers to enjoy higher potential returns on their investment while reducing the government's burden of overseeing such a massive program.

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What it might mean for you

Currently, 6.2% of your salary goes toward Social Security taxes. For a moment, let's imagine that only a portion of the 6.2% is forwarded to Social Security, and the rest is deposited into an individual retirement account (IRA) that you control. That's what one suggested form of privatization looks like. If such a plan were to replace the current pay-as-you-go Social Security system, here's how you could be impacted.

Your portfolio could become more diversified

Even if you're contributing to a workplace retirement plan, like a 401(k) or 403(b), it may sometimes feel as though your contributions are being sucked into a black hole and that you have very little control over how they're invested. After all, employer-sponsored retirement plans normally offer a limited menu of investment options.

Proponents of Social Security privatization say putting the money back in your hands gives you the opportunity to invest in a wide range of asset classes, including stocks, bonds, real estate, and alternative investments. With so many investments from which to choose, you may end up diversifying your portfolio more aggressively and earning (or losing) more throughout the years.

You're likely to gain financial knowledge

Once 6.2% of your wages (taxed on the first $176,100 earned annually) are withdrawn from your paychecks, that money is gone. Although you're aware it goes into a pool that pays Social Security benefits to current retirees, you may not understand exactly how that's accomplished.

According to proponents, privatization would put a greater emphasis on understanding how the market works. In addition, you would need to be familiar with various investment vehicles, market trends, how to protect investments against market volatility, and retirement planning strategies.

Data from CivicScience indicates that 29% of U.S. adults consider themselves very financially literate. That means 71% of people polled admit they don't know everything they should about financial issues, like investing. Fans of Social Security privatization believe that, when forced to take a larger role in planning for retirement, you'll naturally immerse yourself in learning everything you can about investing and gain financial savvy along the way.

You could earn higher returns

Since you would be 100% in charge of your retirement investments, you could choose to invest in higher-yield assets. While these investments carry a higher risk, they also have a potential for greater returns when compared to traditional Social Security benefits. It has long been accepted that returns on Social Security contributions tend to be lower than the rate of return on stock market investments.

However, Social Security benefits are guaranteed, while market returns are not.

You may rethink your retirement age

Today, you may have a rough idea of when you plan to retire. And that may be due, in part, to how much you expect to receive in Social Security benefits. If you were to take over control of how your Social Security taxes are invested, you could find yourself changing your projected retirement date frequently, based on how the market is performing at that time.

It's yet to be seen if Social Security privatization will ever get off the ground. It could be that a hybrid version is implemented, or that Congress can shore up the current Social Security system enough to continue operating as is. The important thing is to understand what Social Security privatization would mean to you personally, to determine whether it's in your best interest, and to let your elected representatives know how you feel if privatization is ever seriously considered by lawmakers.

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