Private Sector Solutions Part I: Social Security

Great Debates
1

As I’ve discussed ad nauseum (probably literally for some of you), I think the only legitimate activities of government are to do those things that have a more-or-less equal benefit on all citizens–so, military, police, roads, etc. Everything else that the government does is not a legitimate government activity and should therefore instead be done, if at all, by the private sector.

This thead is not to debate my theory of government.

Instead, I thought it would be interesting to brainstorm about private sector solutions for things the government currently does. As “Part I” implies, I may start threads on other topics. I chose social security first because I think it’s probably one of the easiest–better to get the ball rolling.

So–private sector social security. Let’s discuss different ideas for how it could work. I’ll follow up with my own ideas in another post.

2

I’ll be interested to read your ideas about how you could make this work. The issues with the private sector implementing this are (as I see it):

  1. Social Security only works as a mandate. In other words, you can’t be able to opt out or the math falls apart. Now, if you’re open to a government-mandate that you have to join the plan, then having a private-sector firm handle it doesn’t necessarily pose any huge problem. There would have to be strict risk-controls in place.
  2. Portability. Again, having the private sector handle the fund isn’t an issue, but you have to have portability between jobs or again, the system breaks down. I see issues with having multiple choices in fund since, again, Social Security is dependent on the theory of large numbers to even things out. What do you do when one fund’s pool all ends up being old?
  3. Why introduce a profit motive? All it does is increase the cost to the participants.

It seems to me that anything other than a mandated, portable plan will simply end up being another flavor of pension, retirement, or deferred comp plan and we already have lots of those…

3

The two key differences I see between social security and a standard investment account available at any broker are (1) steady, periodic, and continuous contributions for a number of years followed ny (2) steady, periodic, and continuous distributions over a number of years. (Folks, this is why we are starting with social security–it’s not rocket science).

So, lots of different companies and charities could start investment programs meant to mimic social security. An investor would open the account by agreeing to have a certain amount deducted from their paycheck each month. The agreement could provide that the deduction will increase over time based on salary increases. A reporting system for the payroll deductions could be set up to facilitate notifying an employer that an employee has chosen to participate in a social security investment program.

The company or charity could hold each investor’s assets in trust for the investor. Therefore, the assets in the trust would not be subject to the claims of the company’s or charity’s creditors.

The assets could be invested in different manners chosen by the investor. I would think that a popular option would be a portfolio that slowly changes from heavy on equities (exchange-traded index funds would be good) to heavy on debt over the life of the investor.

The account would switch from contribution mode to distribution mode at the time(s) specified in the agreement (ie, upon age 65, upon the disab ility of the investor, etc).

If a charity wanted to provide social security to an individual, then they could open one of these accounts for the individual when they are young and make contributions that would otherwise be made for the individual. The charity could also only come in on the back end and seed the avvount with enough money to provide the desirted level of distributions. Also, I could see different charitable groups setting up these accounts on behalf of classes of individuals, like all residents of Olney, I’ll, or all black males in Wasilla (or whatever).

I’ve presented lots of options above for how each agreement could be structured, but I would think that market practice would coalesce into 3 or 4 main types of social security accounts, with maybe another few types of common exceptions.

Here’s an idea to encourage folks that otherwise may not think about opening one of these accounts to do so–the lottery! A company or charity that administers these types of accounts could buy one ticket in each lottery held in the US and distribute any winnings among all account holders in proportion to their contributions. It would be interesting to see the effect on participation and investment performance.

Alright, please share your ideas or critique mine or whatever.

4

Remember when the stock market lost so much of its value and a huge chunk of the investing money went into housing?

Now picture if more money had been available to keep the bubble going for a few years more thanks to more money being available to investors.

What do you think the reaction would had been if the entire social security fund had been in the hands of individuals and the market?

Any ideas to bring the private sector into this need to consider strong mechanisms to deal with the propensity the free market has of ignoring or attempting to minimize the cost of safety nets.

5

Haven’t you just described a 401(K)?

6

Nope. No mandate. That’s the whole idea. This is not a situation where force is justified.

The solution I proposed has no portability issues.

Nope, it decreases costs because it allows participants to choose the right mix of costs and services. That choice isn’t available when the government provides it.

I guess I wasn’t too clear about this in my proposal. I am envisioning each participant agreeing to bind themselves to contribute an amount each period (subject to exceptions in the agreement). The other things you outlined are either tied to an employer or employment in general or the participant can later choose to stop contributing.

Not all of the invested amounts would be in the stock market–some would probably be in each asset class imaginable (even oddball stuff like the lottery, as I discussed).

No. A 401(k) is tied to employment, and only the employee and employer can make contributions, and there are limits to how much can be contributed and when amounts can be removed, to name just a few differences off the top.

7

The goal of a corporation is to make money for the investors of said corporation, not provide for the welfare of it’s employees. A business can promise all sorts of financial services, then take some or all of the services away in a New York minute just to make the investors happy. Have you got a plan to stop this very real problem?

8

What if I as a law abiding non driver don’t think that my taxes should go to pay for Rand Rover’s police protection, courts, and roads? Gramted, this is not directly on target, but he’s producing an abstract definition of “benefits all citizens equally” – and as a lawyer and presumably a car driver with substantially more assets, he derives significantly more benefit than I do from the above.

The point I’m raising, in other words, is that his approach is just as subject to criticism as the ones he criticizes.

9

That is what I said already, a good chuck would still had ended in the stock market and housing; as the last bubble showed, it would be naive to expect that investors would ignore the profits that were gained while the weapons of financial mass destruction were being armed.

10

This is true and a good thing. But why did you say “employees”? I’m assuming the corporations you are talking about are those that would act as administrators of these plans, but the investors would be its customers, not its employees

Well, if the administrators don’t fulfill their end of the agreement, they would be in breach of the agreement, and the investor could enforce the remedies available to it (such as suing for a return of fees and other damages).

11

Okay, it still sounds to me like all you’re doing is tweaking the retirement system and expecting it to take the place of Social Security. I thought one of the reasons that we have SS is that people discovered that retirement plans weren’t cutting it.

One issue is that many (maybe even most) people don’t think that way during the early parts of their career (which is obviously the best time to put money away since that money has the most time to appreciate). Further, the problems of dumping that much money into private-sector investing are real. A major downturn (like the one we just had) would have impacts stretching out for a decade or more. People who had the bad luck to hit retirement age during the down cycle and people who need to shift to more conservative investments during the down cycle (as they approach retirement) would all feel the effects out of proportion to others in different places.

And if there isn’t any money left, what do you do then?

12

I don’t think t matters what any one citizen thinks their taxes should go for. I’m only interested in what the legitimate activites of government are. The court system and roads are legitimate activities of government in my opinion because they provide a more-or-less equal benefit to everyone, and trying to provide those things without the government would run smack into the collective action problem (i.e., if I paid for roads and you didn’t have to, you could easily be a “free rider” (quite literally) on my roads).

Maeglin has done a good job of drilling the collective action problem into my head lately. I think I am defining government as essentially “that which must exist to overcome the collective action problem.”

OK. The fact that more money would be invested overall is a good thing, I would think. I suppose there are isolated scenarios where more money in the system would have a short-term negative effect, but I don’t see this as an indictment of the whole idea.

13

Well, I don’t really care about the reasons that we have SS. It is not a legitimate state activity and therefore shouldn’t exist.

Yes, people don’t always do what is best for them. I don’t think this is a reason for the government to force them (and/or others) to do what the government thinks is best for them.

I’ll think about this some more in light of your and Gigobuster’s questions.

I’m not sure what you mean.

14

But that still ignores the **other **big elephant in the room, it would be most likely then that the administration costs (and bureaucracy) would increase, not be reduced. (The first elephant being ignored and still not properly dealt with, was the one that assumes that investors would do the right thing)

http://www.socsec.org/publications.asp?pubid=503

15

You mentioned suing as redress if the fund administrator’s mishandle the money, but what if the mishandling leaves nothing worth suing for?

16

And then, of course, there are minor details like hiring a lawyer. Who is going to want to be paid. But, of course, the reason you are suing is because your money is gone. I can see how that might present a problem.

17

This is nothing more substantial than political philosophy, which may as well be metaphysics for all that it matters. You are free to witness for your political faith, of course, so long as you don’t pretend its anything more than that. Point of fact, you are free to do so anyway, but I believe you expect to be taken seriously.

And the reason SS exists is that previous to its inception, workers who got too old to be useful were simply shucked off to lives of penury and want. The bad news was that it was a miserable and unhealthy way to live, the good news is that they didn’t live for very long.

In a government of the people, by the people, and for the people…the elusive goal our radical experiment is in search of…the well-being of the people is not only a legitimate concern of the government, it may well be the only legitimate concern of the government.

That your political philosophy is exceptional to the point of eccentricity cannot have escaped your notice. But thank you for sharing.

Most certainly. (See above, purpose of government…) If one refuses to vaccinate one’s children, the government should assure their well-being (and ours) by forcing the issue. If one cannot resist the temptation to drive drunk, steps should be taken to force them not to. Both of these are examples of people not doing what is best for them (and others!) and being legitimately forced to comply.

So, clearly, there is no underlying philosophical principle that prevents us from helping people, even such people who are neither smart enough or wise enough to help themselves. Clearly, it would be best to educate and inform the people so that these situations may be kept to a minimum, and would be another reason to make education freely available and, to some degree, compulsory.

So, given that the well-being of the people is a legitimate function of government, you are compelled to special pleading, that somehow SS is the exception, that there is something egregious about providing for the welfare of the retired work force.

And what might that be?

18

Is it “not a legitimate state activity” because you say it isn’t…or is there something in our laws that makes it so.

Seems to me it directly flows from the founding father’s decision that our government should “promote the general welfare.”

Social Security is a safety net program doing exactly that.

Arguing that it is not a legitimate state activity seems like a massive stretch.

19

Yes. In the real world, any form of privatized replacement for SS is going to result in millions of people who have nothing. They’ll be cheated out of their savings, one way or another; or simply be the victims of bad luck. Two of the things that the government offers that private industry can’t is mediocrity and the lack of a profit motive. And yes; mediocrity is a virtue when the point isn’t to have the job done excellently, but to make sure that it gets done everywhere, for everyone. Competition in private industry tends to produce islands of excellence in a sea of shoddiness and outright fraud; government is good at providing a functional service everywhere.

In other words, you want to make sure that virtually no one ends up starving to death in a gutter? That’s the kind of job governments are good at. Not the private sector. Trying to have the private sector do the job is like trying to use a hammer for a screwdriver, when you already have a hammer but refuse to use it because of an ideological conviction that Hammers Are Bad.

20

Personal funds and the like are a red herring: Social Security should kick in when personal funding has run out. In part, it’s a safety net for when things have gone wholly wrong. Social Security needs to be funded by government. But that doesn’t mean that it has to be run by the government. I would be interested in seeing subcontracting solutions.