A way to explain the issues surrounding privatizing Social Security is related to your house.  If you decide to pay off your mortgage early by increasing your monthly payments, then you would drain money from your checking account in the near future.  But this would save money in the long run, because you would have to pay less interest.  If you decide to improve your house to increase its sales value, then you would drain money from your checking accounting now.  But you would be better off in the long run, because you would be able to sell your house for more.  

An issue with private accounts is they drain the system now.  But the system could be better off financially in the long run.  Let’s say that the government allowed someone in their 40’s to privatize their Social Security.  The deal would be that you forfeit all future Social Security benefits.  But you and your employer are required to put 13.4% of your salary into a private account you can’t touch until you retire.  If you put 13.4% of your salary into your private account and not in Social Security, then you would be draining money from the Social Security system now.  But because you forfeit all future Social Security benefits, the Social Security system would be better off financially in the long run.  The more than $17 trillion of unfunded Social Security liability would be reduced in an amount larger than the current drain on the system.   By not putting money into the Social Security system you reduce the money that can be used to pay for current Social Security benefits and other government programs.  The way the system works now is the Social Security taxes in excess of the current benefits are spent on other government programs.  By privatizing Social Security, you would reduce this excess amount, so the government would have to raise taxes, cut spending or borrow more.  But as illustrated above, you could improve the long term financial sustainability of the system.  

Privatization could make the government more transparent, because it would remove the smoke and mirrors of the Social Security scheme.  Privatization would reduce the amount of excess Social Security.  Some call this the annual Social Security surplus.  The government takes this money out of people’s paycheck for “Social Security”.  This is the first distortion in the Social Security scheme.  The “Social Security” money is put into the government’s checking accounting.  The checking account is used not to pay just current Social Security benefits, but to pay all government spending.  The government calls money taken out of people’s paychecks a “Social Security” deduction to obscure the fact that it is just like any other tax.  

The second  Social Security scheme distortion is that your Social Security deduction is put into the Social Security trust fund.  THERE IS NO SOCIAL SECURITY TRUST FUND.  The trust fund exist only as a part of the Social Security scheme.  Here are some quotes from the government:
 
From Treasury:“In the Federal budget, the term ‘trust fund’ means only that the law requires a particular fund be accounted for separately, used only for a specified purpose, and designated as a trust fund.”
  
From OMB:“These (trust fund) balances are available to finance future benefit payments and other trust fund expenditures, but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. The holdings of the trust funds are not assets of the Government as a whole that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury.”   “The Social Security trust funds, for instance, do not consist of separate accounts or asset accumulations for individual taxpayers, nor do they indicate what is ‘owed’ to anyone.”   

From CBO: “In the public debate, ‘solvency’ means keeping the trust funds from exhausting their balances.  Federal trust funds, however, are merely accounting mechanisms established to link receipts that the government collects or assigns to specific uses with the expenditures of those resources; the balances of the funds are not assets of the government.   And there is no relationship between the balances in a trust fund and its future obligations.   In other words, the government will face claims whether or not the fund has sufficient balances, and it will need to acquire actual resources from the economy to meet those obligations when they come due.”  

The third distortion is, according to the government, people are not owed any Social Security or Medicare benefits beyond the checks that our currently written.  This is the government’s position, which has been stated repeatedly by governmental officials, including the chief actuary of Social Security, and confirmed by the Federal Accounting Standards Advisory Board.  There is evidence in this in the amount of liabilities on the federal government balance sheet and the Treasury $13 trillion debt amount.  These amounts do not include any liability for Social Security or Medicare benefits.  

Please note:  This explanation is not an opinion of whether Social Security should be privatized or not.  If the Institute took a position on any budget issues, then people may believe that the numbers aren’t produce to give the public a true financial picture.  They might believe that the numbers are derived to promote our position.   Sheila Weinberg, founder & CEO, Institute for Truth in Accounting