Alice Morgan, Photo Illustration by Investopedia
Takeaways from the Key Takeaways
- Left-leaning politicians warn that the budget cuts to the Social Security Administration that Elon Musk's Department of Government Efficiency is making are a precursor to privatizing Social Security.
- Some presidents in the past have proposed privatizing Social Security, which could solve the program's funding problems.
- However, the transition would be difficult, with either retirees getting a cut in benefits or current workers' required contributions increasing.
Democrats and Independents have warned against cuts to the Social Security Administration’s budget. This would be a step in the direction of privatizing Social Security.
In order to meet the Department of Government Efficiency’s goal of reducing federal spending, SSA plans to avoid or reduce spending of $800 million in this fiscal year. It also plans to reduce more than 12% of their workforce. Elon Musk, a DOGE advisor, has made comments that have worried some left-leaning political figures.
“[Musk has] been on television the last couple of days talking exactly about Social Security, Medicare and Medicaid and what he intends to do—privatize it,” said Rep. John Larson (D-CT) during a committee meeting last week.
Additionally, politicians say Musk’s criticisms of the program’s older database and calling Social Security “the biggest Ponzi scheme of all time” are intended to turn the public's attitude about SSA negative.
“Why do make it appear that it’s a broken system?” The goal is to make people lose trust in the system so that you can then hand it over to Wall Street,” stated Sen. Bernie Sanders, I-VT in an interview on CNN.
What does this mean for beneficiaries?
As the main trust fund for Social Security is expected to expire in 2033 and benefits would reduce by 17%, some have seen privatization as the program's savior. Both former Presidents Bill Clinton & George W. Bush proposed privatization, but the efforts were abandoned.
If Bush had been successful, Americans would have had four times the amount of retirement money, based on the return of the S&P 500 Index over time, said BlackRock CEO Larry Fink at a BlackRock retirement summit on Wednesday, as reported by CNBC.
Fink stated, “The Social Security plan we have doesn’t grow along with the economy.”
Social Security today is funded through payroll taxes. These taxes are pooled in a trust fund that pays benefits to retirees currently and invests in U.S. Treasury bonds. Social Security benefit amounts are determined by a formula that takes a person's average earnings and the age at which they retire.
Comparatively speaking, privatized Social Security transfers the management of funds to the private sector with the possibility of partial government funding and guarantees. It would eliminate payroll taxes and replace them with individual contributions for private account, which could then be invested in higher-earning, but higher-risk investments.
It may be hard to transfer to a personal plan. Payroll taxes will need to be diverted to private accounts. Current retirees would then have no funding. This means retirees' benefits might have to be cut, or current workers would have to pay into both their private accounts and payroll taxes until the transition is complete.
According to a survey conducted by SeniorLiving.org among those 60 years and older, only 11% of respondents were in favor privatizing Social Security.
