Privatizing Social Security (SS) is a major waffle issue for me. On the one hand, I believe in the market and think that it would be an efficient way to bolster retirement returns.
On the other hand, I find it extremely scary giving the government power in investing capital in the free market system. There are countless ethical questions that could be raised of how stocks/funds are invested. Could the feds go after Enron knowing that retirement funds that they are responsible for could come crashing down? There are many other well documented and valid points against privatization but that is not my point here.
I have two ideas of how to privatize SS. My first idea is very simple. Have the government give a dollar for dollar refund for the first $1000 given to an IRA. This would privatize a part of SS but it would take away the government control of the investments. If a person can not afford to put in a $1000 into an IRA and wait for their income tax return, then they could set up the IRA and the feds could send the check directly to the bank or broker. There could also be a %100 tax penalty for early withdraw.
Basically this system would give free money to everyone to invest however they like and there would be very little overhead and new bureaucracy at the Fed level. This would force people to set up IRAs and then they may be more likely to contribute to them with their own funds.
Second idea was borrowed from an editorial I read in Business Week. It said we should privatize part of SS, but instead of funding it by borrowing from SS. We should fund it by raising the top income bracket back up to where it was prior to Bush's cuts. At first thought, I am naturally against raising taxes to fund programs. But since this money would go directly back into the economy through private investment, I don't see this tax hike hurting the economy.
I see the combination of taking the investing out of the government's hands, funding from outside of SS, and need based payments could potentially secure SS and also take care of our retirement needs better. In the 30 years with the privatized IRAs, retirees would not need as big a SS payment and therefore it would have less chance of bankruptcy.

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