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Ruling Out Private Investment Accounts, How Do We Eliminate the Future Shortfall?

As was mentioned previously, Social Security needs to find the equivalent of 2.02 percent of wages—in the form of new revenue or benefit changes — in order to correct the shortfall.

As was mentioned previously, Social Security needs to find the equivalent of 2.02 percent of wages—in the form of new revenue or benefit changes — in order to correct the shortfall. Luckily, Social Security is designed for flexibility—it can adjust to changing circumstances. In the early 1980s, for example, when high unemployment (less money coming in) and high inflation (bigger COLAs going out) put the system in imminent danger, a whole series of corrections were made that have kept it solvent ever since.

Everybody paid a price — employers, workers and beneficiaries — but nobody paid too dearly. Beneficiaries had their COLAs delayed for six months; employers and employees paid a little more in payroll taxes; a portion of benefits paid to higher-income beneficiaries became — for the first time — subject to federal income taxation. AFSCME believes that the problems facing the system after 2040 can also be corrected by the right mix of revenue-raising measures and benefit alterations. But destroying the system through privatization is simply not a viable option.

One possibility under discussion combines some of the aspects of privatization with the strengths of the current Social Security system. Called “alternative investment,” these plans take a portion of the Trust Fund reserve (about 40 percent in one plan) and invest it in stocks instead of government bonds, just as public employee pension plans do.

This could potentially increase returns to the Trust Fund, enabling the reserves to continue covering benefits well beyond 2040. Unlike private accounts, however, the government — not the individual worker — would bear all the risk of a market downturn. And there would be no need to dismantle the current system. Social Security’s fundamental benefit structure would remain as it is today.