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The privatization of social security has become a priority area for many countries in developed and developing countries, in large part due to the inefficiencies that have so far been experienced in pay-as-you-go pension plans (Nishiyama and Smetters 1677-1678). In the United States, the issue of privatizing social security has been discussed in many forums even as the government moves its aging population toward 401(k)-style retirement plans (Hastings 13).
This paper uses “The Retirement Gamble” film and other scholarly articles to not only discuss the pros and cons of privatizing social security, but also to reflect on some of the pertinent issues raised in the documentary.
Pros of Privatizing Social Security
Research has found that privatizing social security is beneficial as it not only deliver price competition and efficiency due to the free market approach, but also guarantees substantial retirement wealth to individuals by allowing them greater control over their investment decisions (Hastings 13). From the film, it is clear that Americans no longer have any control over their investment decisions as their retirement funds are often managed by financial controllers who are more concerned with satisfying the best interests at the expense of the investor. Additionally, the film demonstrates that existing retirement plans such as the 401(k) are yet to give employees control over their own retirement.
Research is also consistent that privatizing social security has the capacity to enhance labor supply incentives by minimizing the effective tax rate on labor supply, lower costs, increase national wages and savings, as well as aid in the development of mature financial markets (Nishiyama and Smetters 1678; Santamaria 38). Lastly, privatizing social security reduces government’s role in managing retirement funds and enhances equitability by removing barriers such as mandatory retirement age (Williamson 34-35).
Cons of Privatizing Social Security
Available literature demonstrates that privatizing social security could trigger the detrimental effect of reducing risk sharing as the private market will not have the capacity to deal with issues arising from progressive benefit formula shares wage shocks and annuity protection (Nishiyama and Smetters 1678). However, the film demonstrates that all risks are placed on employees and hence the argument of risk sharing is just a mirage.
It has also been argued that “the ability to elect in and out of the privatized system can cause adverse selection, which will increase costs” (Ferenczy 35). Other disadvantages of a privatized social security system include lack of client-focused education and awareness on how to make wise investment decisions, high administrative costs, elevated potential for errors, uncertainties of the market environment, and the requirement for more capital outlays to efficiently run a privatized system (Dunham 41; Ferenczy 35).
The film raises pertinent issues on how existing financial systems safeguard the retirement savings of Americans and the dynamics that come into play to ensure that most Americans do not have sufficient money to spend upon retiring even after many years of saving their money with 401(k) and other similar retirement plans. The documentary, in my opinion, lays the blame on how retirement plans are managed in the country. As illustrated in the movie, many Americans are not only clueless about making investment decisions, but are also kept in dark by their financial advisors with regard to the number of fees they are required to pay.
An important argument made in the movie is that the money put into 401(k) and other similar retirement plans does not increase in value relative to current market trends due to the many fees charged by the fund managers. Overall, the film provides useful insights on why Americans should use index funds to invest their money over the long-term and also why they should employ the services of a fiduciary, rather than fund or insurance providers. A major learning point is that companies and agencies that purport to assist clients make wise investment decisions do not have the investors’ best interests at heart.
Dunham, Richards S. “Privatizing Social Security despite the Slump, Support is Solid.” BusinessWeek 27.3745 (2001): 41-41. Business Source Premier. Web.
Ferenczy, Ilene H. “Privatizing Social Security: The Answers to Retirement Woes or Enron to the Nth Power.” Journal of Pension Benefits: Issues in Administration 12.1 (2004): 33-38. Business Source Premier. Web.
Hastings, Justine. “Privatizing Social Security: Lessons from Mexico.” NBER Reporter 8.4 (2014): 13-14. Business Source Premier. Web.
Nishiyama, Shinichi and Kent Smetters. “Does Social Security Privatization Produce Efficiency Gains?” Quarterly Journal of Economics 122.4 (2007): 1677-1719. Business Source Premier. Web.
Santamaria, Marco. “Privatizing Social Security: The Chilean Case.” Columbia Journal of World Business 27.1 (2000): 38-51. Business Source Premier. Web.
Williamson, John B. “What’s next for Social Security? Partial Privatization?” Generations 26.2 (2002): 34-39. MasterFILE Premier. Web.