Abstract
The U.S. Social Security system is in need of reform. Its trustees forecast that, absent changes, contributions will fall below benefits in 2012, and the system's trust fund will be exhausted in 2030. Many have discussed achieving system solvency by raising taxes and cutting benefits, but recently a more fundamental reform has been proposed, namely, privatization of some or all aspects of Social Security. This article identifies key economic issues that must be addressed in the debate over a privatized system in the U.S. It is useful to recall the economic rationale for the current Social Security system before analyzing whether the public or private sector can better achieve its underlying economic goals. Six features of the current system are salient. First, it provides forced saving, or income that cannot be spent prior to retirement. Second, it provides insurance against earnings loss, disability, and longevity. Third, it redistributes income from high to low lifetime earners. Fourth, it is mainly an unfunded, or pay-as-you-go, system. Fifth, it is controlled and administered by the government. Sixth, it is a defined-benefit plan. Privatization could take many forms. An extreme version would end all government involvement in the provision of retirement income. Economists take as given that some forced saving is appropriate and focus on reforms that involve a shift to a mandatory defined-contribution individual plan with contribution levels set by the government.