december: *However, consider, a young lower-middle-class working couple with children (e.g. Mrs. December and myself in 1968). Their SS assessment is a significant burden on their family’s lives. It would be in their best interest to postpone saving for retirement, but “one-size-fits-all” SS won’t let them do this. *
Emphasis added. The questions I posed in an earlier post which kind of got lost in the increased-GNP shuffle are relevant here, I think: “So are you saying that without SS, in 1966 you would simply have used more of your money on your current expenses and relied on an unspecified future increase in wealth to take care of your retirement planning? Would that plan have turned out very well if you had been god-forbid injured or otherwise incapacitated before you achieved your increase in wealth? Do you recommend such a retirement investment strategy for most people who feel burdened by their payroll taxes, in particular for those in lower-paying professions who are not likely to see such an increase in wealth over their working lifetimes? This idea that SS taxes are a dreadful burden on the working poor that the absence of SS would somehow genuinely remove, instead of just shifting it to another kind of burden for retirement planning, seems pretty chimerical.” Moreover, a privatization plan that mandates putting the payroll tax into a combination of SS funds and private retirement accounts does not allow people to “postpone saving for retirement” any more than the current system does.
Not true. There’s no increase in cost or in risk to SS administration.
Um, the conversion costs are there. They may be a one-time deal, but you cannot simultaneously pay current beneficiaries at the expected levels and also start diverting some current payments into individual accounts without getting money from somewhere to cover the costs. Business Week (May 30) noted that Bush will probably need tax dollars to cover the costs of the shift. Moreover, at least half of the members of Bush’s own Social Security commission recommended SS benefits cuts as a way of funding the transition. These are significant costs, and you can’t just pretend they won’t be there.
*Those who voluntarily opt for investment will have chosen to increase their risk. They will have additional administrative cost, but it is very likely that investment gains over time will more than offset the administrative cost. *
“Very likely” is not a very convincing prediction. As economist Henry Aaron pointed out, “Under the much-vaunted Chilean privatized pension system, such [administrative] costs have averaged 20 percent of fund incomes, about the same as for U.S. life insurance companies.” That ain’t cheap, and I don’t think it’s really “very likely” either that SS private fund administration costs will be substantially less or that the investment gains will reliably cover them. And if they don’t—especially in the early years of the system when we haven’t achieved any “investment gains” to speak of—how will we cover the costs? And when some investors are unlucky or unwise in their investments (which is statistically inevitable) and lose a substantial portion of their retirement savings, resulting in strong political pressure to provide a “benefit bailout” of some kind, how will we cover those costs?
Furthermore, as the Los Angeles Times (June 16) commented in an interview with an investment specialist at Vanguard, it will be tough for investment firms to establish large numbers of very small individual accounts, because they don’t pay enough in gains to cover their own administrative costs separately. So the only financially workable plan for small privatized accounts will probably be to create a small number of “pooled accounts” which are invested and administered together. Bing, there goes most of your vaunted “increase in freedom and choice” for all but the wealthy investors.
*Kimstu, what really bugs me is that we have any number of government programs that were enacted with enormous financial uncertainty and large adminsistrative costs […]
I bet you enthusiastically supported every one of these programs. Yet, you strongly oppose partial privatization of SS, with bogus justifications.*
The justifications are not bogus. I am perfectly willing to listen to any new arguments in favor of partial privatization which offer truly convincing reasons to think that it really will substantially increase returns without substantially increasing costs and risks. But the arguments you’ve put forth so far have been shot down time and time again by many respected economists from all parts of the political spectrum. Partial privatization is a good deal for investment specialists and for a minority of investors. It’s not a good deal overall.
You say you’re worried about risk, but medicare had (and has) much greater financial risk. You say you’re worried about administrative costs, but these are negliglible in comparison to medicare, Head Start, etc.
What on earth does that have to do with it? You talk as though because I’m willing to accept high levels of cost or risk in order to obtain the advantages of a program such as Medicare or workers’ compensation, I’m obliged to accept increased levels of cost or risk for the sake of SS privatization. No way. The chief difference is that a program like Medicare provides solid benefits—e.g., health care for the elderly—which make the costs and risks worthwhile. Privatizing Social Security, on the other hand, according to all the available evidence, will have as its chief benefit a financial boost for investment professionals and for a minority of investors, especially affluent ones. Nowhere near worth it, IMHO.
Furthermore the additional admin costs wouldn’t be borne by the government, but only by those who chose to do so.
Sez you. I want to hear a large consensus of respected economists say so before I’ll buy it. At present, what they all seem to be saying instead is “we’ll need new taxes or we’ll need to cut benefits in order to fund this.”
What’s your real reason for opposing voluntary partial privatization of SS? The only thing I can think of is that you like programs which strengthen the government and dislike programs which promote individual choice.
Well, that suggestion is no nastier than the comments I made about ideology etc. in my rather intemperate rant a few posts back (xeno took me out to the woodshed in email and I promised to do better, so I’ll start by apologizing for that :)). However, it’s not accurate. I’ve got nothing against promoting individual choice, as I noted above. But if I’m going to make sacrifices of existing advantages like the guaranteed benefits level and low administrative costs that we currently have under SS, for the sake of “promoting individual choice”, I want to make sure that the gains in freedom are really substantial and worthwhile.
As I said in my last post, the “freedom” to make your own stock picks with an extra 2% of your salary—a freedom that, as I noted above, would have to be severely limited anyway for people with small accounts—is not enough of an increase in meaningful freedom to make the tradeoff worth it. Not every way of “promoting individual choice” is a worthwhile way. Heck, it would “promote individual choice” to abolish traffic laws and building codes, too—we could all have whatever kind of houses we liked best and drive however we wanted without Big Nanny Government telling us what to do. But it would end up being more dangerous and inconvenient for everybody, so instead we all give up a little “individual choice” for the sake of increased safety for all. IMHO, there’s nothing wrong with that, and you don’t have to “dislike promoting individual choice” in order to be in favor of it.
