GOP Presidential candidates are calling a lot of attention to the social security problem, but privatization has been a topic of discussion in the United States for many years. Social security privatization would essentially turn social security into a private investment account for each potential retiree, and there’s a very real possibility that such a system could become the norm in the U.S. But will it work for the self-employed?
Private Social Security
A privatized social security system is extremely attractive to those who believe government should be less involved with retirement and the day-to-day lives of its citizens; it’s just not so attractive to the generations of people who will have to fund the transition. If social security is dramatically changed in this fashion, the transition period will last for many decades, in which those paying into the Social Security system will be taxed twice in order to fund both programs.
Social Security is currently funded by taxes, largely the payroll tax. To be precise, every worker in the United States who earns enough to pay taxes gives 12.4% of their earnings to the government for Social Security. Professionals who work for a traditional employer do not have to pay the entire tax themselves, as half (6.2%) is furnished by the employer. The self-employed must pay the entire 12.4% themselves -- and this, in addition to income taxes. Social Security taxes are part of the self-employment taxes that all independently employed professionals must pay.
Professionals will have the option of contributing far less to their own retirement (or far more) under a private system, and instead of paying into a general fund they will be saving for themselves and themselves alone. A privatized system would use investment strategies in order to provide revenue for working professionals. In other words, the future would depend upon the stock market.
And Americans know how capricious the stock market can be. Returns may not be what was expected, stocks may be overvalued, crashes may happen -- there are a lot of things that can go wrong with investments (just ask a few million Americans who found out about it firsthand in the past 10 years). For each individual retirement account, there are (and will be, under a privatized system) wins and losses…winners and losers. Nobody wants to be the loser in the big game of retirement.
Left Out of the Social Security Loop
Privatized social security poses a realistic threat to the self-employed, who could be passed over or left out of the system. Many moderate- and low-income Americans aren’t familiar with maintaining investment accounts because they don’t have extra money to invest. They may forget to save or fail to save enough…so does that mean they will spend some of the most vulnerable years of their lives penniless?
More than half of all American workers aren’t covered by employer-sponsored pension plans; men are twice more likely than women to receive income from private pensions. Many self-employed professionals don’t have pensions and no foreseeable option of receiving one. Those who have no employer and no government to provide for their future must do so on their own…in a bad economy, when unemployment is high and college costs way too much money.
Private social security? Many self-employed workers are just happy to find work for today. It’s almost impossible to think about saving for tomorrow.
KC Morgan - KC Morgan has been the featured writer in Self-Employment since 2006, using personal experience to create guides to being self-employed.
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