Business Ethics Fortnight "More Fun than Decent People Think Should Be Legal"

New York University (1)

Team Members: Carrie Rowe, Roman Katz, Karin Brummell

Advisor:

Topic/Audience: Privatization of Social Security

Executive Summary

The first step towards a solution is recognizing the problem: social security is facing severe threats. Although the social security trust currently has a surplus, the retiring baby boomers and aging population will push social security into a deficit by 2018.
President Bush has proposed a two-fold plan to strengthen social security. First, he has proposed decreasing benefits by one-third to prevent social security from filing bankruptcy. The second part of his plan is to privatize social security. Privatizing social security will allow individuals to manage their own social security fund which can be invested in equity index funds, in addition to just treasury bonds. Equity markets have historically outperformed returns in the bond market. President Bush hopes that individuals will benefit from these higher returns in the equity market to make up for the benefit cuts.
We are against the President’s plan to strengthen social security. Retirement income consists of three main sources: pensions, private savings, and social security. Most individuals have their pension and private savings already invested in assets riskier than treasury bonds. By decreasing benefits and privatizing social security, the third main source of retirement income will also become a risky asset. Another concern is financial literacy. Privatizing social security will transfer the risk and liability to the individual. The majority of America lacks the financial knowledge to fully understand their optimal level of risk. Allowing individuals to be responsible for their social security fund when they lack financial literacy is an ethical dilemma.
The President’s plan is well-intentioned in its objective to strengthen social security. However, the net effect is that it takes a secure source of retirement income and makes it risky. We do not think the potential for higher returns justifies this risk.