Advantages of Social Security Privatization, According to Experts

If you want to get people worked up, ask a small group of friends what they think of Social Security privatization. Privatization refers to the idea of shifting the management and funding of retirement from the government to individuals. In other words, rather than paying Social Security taxes as part of FICA, you would keep the money and invest for retirement on your own.

Experts have dramatically different opinions on privatization, with some fearing that it will lead to more people entering retirement with little to no financial resources. Those arguing in favor of privatizing the program take a completely different view. Here's how they believe the change would benefit the average American worker.

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Higher returns

Imagine that a portion of your Social Security taxes were invested in a personal account rather than used to fund current retirees' benefits. You could invest in stocks and bonds to your heart's content. In fact, you could invest in any vehicle you believe will provide a strong return.

Compounding interest

One of the beauties of investing is the way compound interest can significantly increase your retirement savings over time. As long as you begin investing early and are consistent, proponents of privatization believe you're in a position to build up more money than you could ever collect through Social Security payments.

More flexibility

Proponents believe that Americans will appreciate the ability to invest their retirement savings where they want. Rather than paying it into a program supporting current retirees, they can choose where their money will go. However, the open question becomes: What happens to the millions of current retirees when workers stop paying into the system?

Focus on personal responsibility

Read any message board, and you're likely to find plenty of people with an opinion about Social Security privatization. It's been a hot-button topic since President George W. Bush first suggested it in his 1978 Congressional race, then pushed for it again following his successful 2004 presidential campaign.

Since that time, the subject has been supported by a rotating cast of politicians, who claim it will put the responsibility for saving on individuals rather than allowing them to depend on the government to provide a safety net. While this reasoning overlooks the fact that Americans spend decades contributing to the system and Social Security has never been a public assistance program, it does appeal to the "pull yourself up by your bootstraps" crowd.

Greater financial literacy

Proponents believe that pushing Americans to invest on their own means greater financial literacy among the masses. It's also believed that it will foster a culture of savings and investment.

While this may be true for some, it's fair to imagine that wealthier Americans can afford to pay financial planners to help them make the most of their investments, while workers living paycheck to paycheck may have trouble saving the funds at all. It's likely that most people would like to save for retirement, but not everyone can afford to do so.

The good news is that plenty of people are actively involved in seeking a solution to potential Social Security shortages. It may turn out that some form of Social Security privatization -- such as a hybrid system that allows you to continue paying into the current system while setting aside some money to make your own investments -- will be the answer. Or, it may be something entirely different.

While proponents of Social Security privatization offer numerous potential advantages, it's yet to be seen if anyone will come up with a better solution.

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