Why Don’t They Just Create Individual Social Security Accounts?

Why not give it back?

Dear Rusty: Regarding Social Security’s financial issues, three people contributing to Social Security for every one beneficiary sounds to me like a surplus. If they had given workers their own accounts, similar to a 401k, where they could manage their own money, it would have worked out more favorably for retirees. President George W Bush suggested these changes, but it was shot down by Congress.

The average worker now pays a 6.2% Social Security tax. If the government had bumped it up to say 7%, I don’t believe that me or anyone else would have cried too hard. There are ways of correcting this before the SS reserves are depleted and, hopefully, Congress will address Social Security’s financing soon. Signed: Skeptical Senior

Dear Skeptical: Believe it or not, putting SS contributions (from payroll taxes) into separate individual accounts is not really a good idea. For information, most people get back all payroll taxes they contributed to Social Security within about 5 years of receiving SS benefits. Even with decent public market returns, some individual separate accounts would eventually run out of money, causing some to lose Social Security benefits before they die, meaning they would likely live in poverty. People are now collecting benefits (on average) for decades, and the current SS format means that even those who contribute only a small amount will collect benefits no matter how long they live. Remember, the primary purpose of the SS program is to reduce poverty in America.

FYI, President Bush’s plan had opposition in the 2005 Congress largely because of the cost to transition to that plan, and the fear that investments in the public markets subjected individual retirement savings to unacceptable risk. In any case, few have since advocated investing Social Security funds in the public financial markets because of the risks and the political backlash. And adding a small amount to the FICA/SECA payroll tax rate only somewhat mitigates the problem - it doesn’t completely solve it. I’m afraid that Social Security’s financial issues are more complex than that and can’t be fully solved by a small increase in SS payroll taxes.

You are right – Congress can (and, we are confident, will) address this, and hopefully soon. For its part, AMAC (the Association of Mature American Citizens) and the AMAC Foundation have been evaluating this issue for years and have developed a Social Security reform plan for Congress to consider (see this). And we are actively promoting our reform plan in Washington, D.C. Please know that we share your concerns about the future of Social Security and will continue to work hard to ensure the program is here for many generations.

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This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at ssadvisor@amacfoundation.org).

About AMAC

The 2.4 million member Association of Mature American Citizens [AMAC] www.amac.us is a vibrant, vital senior advocacy organization that takes its marching orders from its members. AMAC Action is a non-profit, non-partisan organization representing the membership in our nation’s capital and in local Congressional Districts throughout the country. And the AMAC Foundation (www.AmacFoundation.org) is the Association’s non-profit organization, dedicated to supporting and educating America’s Seniors. Together, we act and speak on the Association members’ behalf, protecting their interests and offering a practical insight on how to best solve the problems they face today. Live long and make a difference by joining us today at www.amac.us/join-amac.