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The Reformation Of Social Security

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The Reformation of Social Security

The purpose of this paper is to inform the reader of the purpose of Social Security and to analyze the reformation plans of President Bush. The reforms could cost an estimation of Two trillion dollars in the long run. And last, to offer my own resolution to this problem.

The original purpose of Social Security in 1935 was to subsidize people's retirement with a little extra money, not to become the sole retirement account. It was also to support those who were financially unable to support themselves because of a disability, or unfortunate incident as being widowed or burdened with medical bills. At its inception in 1935 the, "Ratio was thirty to one for workers supporting non workers, and in 1998 it was three to one" (Social Security Administration Annual report of the board of trustees, 1998) Social Security primarily was intended to be an insurance program for the American people. According to CNN, as the baby boomers generation comes upon retirement the Social security is expected to run into the red by 2012 and be exhausted by 2029.

The plan to privatize Social Security is not a new one. Senator, Barry Goldwater first came up with the proposal in the late 1930s. He said that "Social Security was on the downturn and would be bankrupt in thirty to forty years." (Barry Goldwater, Campaign book, 1936) Goldwater wanted to abolish Social Security altogether. Ronald Reagan again tried to privatize Social Security in the 1980's with no success.

The actual plan President Bush suggests is, "Younger people are able to take a portion of their social Security contributions into private accounts invested in stocks and bonds." (AP 2) The investment plan will be an option that the account holder has the choice to exercise. It is not mandatory. The present rules of investing for the Social Security trust funds are that they can only be invested in securities backed by the U.S government. This should change, if the president's plan is adopted because it will place a vast amount of money with the financial institutions and give the government the power to allocate the funds. The downside is that there has been so much corruption lately in the financial institutions that people are skeptical about giving that much money to them.

One aspect of the plan that appeared in Arthur Levitt's article [3] is, "Every dollar you take out of traditional Social Security and put into a private savings account must be paid back in full-- plus interest." Potentially there are going to be millions of investors that are trading on margin. This is a risky move when it comes to using one's Social Security. Should the debt exceed the assets, then the person will have less than the standard Social Security account.

Some experts that are familiar with the presidents' plan doubt the success of it because of the high risk. "Economists that have conflicting views with the President's plan think people will exercise to much risk in choosing which assets to own, because they know the government will compensate people's losses."(Levitt 3) The government would have to cover the losses costing the taxpayer more money to fund the program. To prevent this from being a problem the Social Security Administration should do what any financial planner would do and determine the risks and returns. Second, they should offer a list of triple A bonds and stocks that meet certain investment criteria for safety. Perhaps the returns would be lower, but it would be better than what the government offers.

As the older generations have become reliant on Social Security, the benefits support a meager living these days. In the Associated press [4] The "AARP reported that the quality of life was improving but incomes have dropped from five years ago." The White House has said that the presidents' plan would, "Protect benefits and gives future retirees a better standard of living once they have stopped working." Under the current plan the average person receives nine hundred and twenty dollars a month. This is a wage that is below the poverty line. However, it is all many senior couples get. According to Bush, "If we do nothing... that will guarantee a twenty seven percent benefit cut or a fifty percent tax increase."(AP 4) The Bush administration has long term plans of cutting benefits in order to pay for his proposals so if we make changes now we will have enough to support the baby boomer retirement.

If this is the case why is there so much opposition to the reformation plan, not only by the Democrats but Bush also has a lot of contention in his own party. The opponents of the plan all have the same complaint. Bush's plan would use massive deficits to support the privatization. Bush's economic advisors, "Grefory Mankiw and Glenn Hubbard have defended bush's idea of borrowing 200 billion a year to support the transition" (Miller 1) The presidents' advisors say it is okay to borrow, "because we are already paying for it." The theory behind this according to Miller's article is, "Bush proposes cutting the Social Security



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