Question about Bush SS reform

How does allowing younger workers to invest part of their money in private accounts help with the coming crisis the administration has been talking about? If the system will be under funded when the baby boomers start retiring, how does taking money out of the system by allowing younger workers to invest in private funds help with this problem? Why doesn’t it just make it worse?

From the analyses I’ve seen, the attempts to “privatize” Social Security will make the situation worse, by adding on another couple-few trillion $ in debt for the transition costs. They will also produce higher overhead costs and less financial security than the current system.

A very interesting recent article by Norma Cohen discusses the British government’s attempts a couple decades ago to privatize their national pension system in ways similar to the ones the Administration is currently proposing. Ironically, the UK reforms were highly unsuccessful and British leaders at present are saying that the system needs to return to a model more like that of US Social Security!

How has Britain’s privatization scheme worked out? Well, today, they’re looking enviably upon Social Security.

A more general (and more partisan) analysis of the proposed Social Security modifications as “a phony solution to a phony problem” is provided by economist Dean Baker in this article:

From a macroeconomic perspective, the biggest way this can make up for the shortfall it creates is by creating economic growth with the influx of capital it will provide. Then, hopefully we can tax that growth to pay for the SS shortfall.

Sure, people argue that if you let people invest privately it will grow better than with the Gov’t. But I suspect that after SS is privatized to the fullest extent, the actual yield you will get won’t be as high as people are promising because all the capital influx will reduce the yield considerably. Sure, you will get maybe a percentage or so advantage with a well-rounded portfolio but your risks are also increased.

The biggest effects I would predict from SS privatization would be:

– Massive boon(doggle) for securities companies, as I doubt they would charge as little for government-controlled accounts as they charge for accounts with more freedom of choice. Especially if the number of companies you can choose from is limited by regulation, which seems par for the course for Bush.
– Slight increase in economic expansion due to better funded capital markets.
– More tales of people retiring penniless because their investments performed poorly. Now, whatever arguments you can make about moral risk and their right to go to hell in whatever way they want to, SS was founded to prevent penniless retirement as much as a practical matter as moral. If we let them go broke someone will have to do something, unless we let them starve.

And to me, social security to me seems more efficient than providing through other government programs and charity, both of which have more overhead and oversight (economically wasteful) than SS.

– And finally – the biggie – reducing government’s role in SS will increase the power of the anti-SS lobby, who never liked the program to begin with. Once SS becomes less entrenched, it will be easier to just eliminate the program altogether.

A privatized social security system was first tried in Chile in the early 1980s. There were about a dozen funds that were licensed by the government to take social security money, and they had to provide certain minimums (including survivors’ income and disability insurance) and meet certain standards of solvency. Of course, investments could only be made within the country and hence the paln injected a great deal of capital into a stagnant economy.

It was considered very successful until the mid-1990s, when investment returns went negative (IIRC) and then suddenly it wasn’t such a wonderful idea any more. It’s recovered now, but one problem with an investment system is that the general populace don’t understand that returns can be negative. Remember that the general population don’t save much, except in small bank accounts.

In the last six or seven years, the system has been copied by Hungary, Poland, Mexico and a few others.

One thing to remember is the transition. Chile put their new system in place under a military dictatorship, and so the transition was handled by the government just decreeing more taxes. Hungary and Poland and Mexico basically had no effective system in place, so there was no particular transition problem.

Oversimplification that will make the problem clear: For the US, under our current system each generation pays for the current generation of retirees. Under a savings system, each generation pays for itself. There is no way to transition from one to the other without one generation being screwed – either by getting nothing, or by paying for two generations.

It’s corporate welfare trapeze act with a flimsy net stretched underneath it should some poor slob need to cash in his chits during a market “slump” of the sort we saw during the tech-bubble-burst-o-rama. About the only people who have a viable stake in this lunacy are the fund managers, who will make a killing off of it, at least in the short term.

The idea is that private accounts, invested in the stock market, will provide a higher rate of return. Thus, it will become possible to reduce the amount of money paid out by the Social Security system without driving people into bankruptcy. In theory it could work, although it would require short-term borrowing in the near future to make up for the fact that money used to buy stocks in people’s private accounts can’t be used to pay those who are currently retired.

The price of privatizing the system will be high, but the price of doing nothing might be higher. I mikght be willing to support of privatization scheme, but first the Bush team needs to provide specifics.

ITR champion: *The idea is that private accounts, invested in the stock market, will provide a higher rate of return. *

Which in itself is not unreasonable (at least for some investments, although as Ludovic and CKDH point out, lots of investments will inevitably do worse than average). But it glosses over at least two points:

  1. The costs of maintaining the private accounts will be higher, thus reducing their net return.

  2. As the Dean Baker article that I cited above points out, this assumption is a bait-and-switch. If stocks are forecast to provide acceptably high rates of return on future investments, that assumes that overall growth rates will remain strong in the future. But the whole premise behind the concept of a looming Social Security financial crisis is the assumption that growth won’t remain strong in the future (namely, “that economic growth over the 75-year planning period will be less than half as fast as over the last 75 years”).

Make up yer minds, folks—if economic growth is going to tank in future decades, then putting some SS funds into the stock market won’t provide an adequate solution. On the other hand, if economic growth isn’t going to tank, then SS will not face a severe funding crisis in the first place.

Couple of things about this. If investment in the stock market is such a splendid idea, and I’m not saying it isn’t (simply because a scheme is cooked up by greedy ruling class devilspawn is not necessarily proof of anything) why not simply invest en masse, one big fund. Such a plan might unreasonably limit the brokerage fees perhaps, unfairly impacting the schemes obvious advantages as a Brokers Full Employment Act. But what advantage is offered by “individual” accounts?

Do we seriously expect that every worker in the program will be magicly endowed with investment wisdom and probity? Why would we think such a thing, why would we presume such competence? How many people are smart enough to make intelligent investments? I am and you are, of course, but how many people do you know who are as smart as you and I?

(I briefly worked at a place that sold stocks and stuff. They were always on the phone with very intelligent people - doctors, lawyers, architects, professional people - who were constantly looking to weasel out of investment decisions that had gone suddenly South. Being smart, they knew that they wouldn’t have done anything stupid, ergo they could not have lost any money…)

So it won’t be like that, of course, that would be stupid. Most people will not attempt to make such decisions. They will invest their “accounts” in something very much like mutual funds. Why, of course, now that you mention it, there already are quite an array of such funds! I don’t suppose its entirely unlikely that these monies will find their way into their hands. After all, who better to shepherd these funds than those institutions whose honesty and probity is the stuff of legend?

Even if I weren’t so skeptical of the motives of the authors of this scheme, this alone would give me pause. Is there some looming crisis in the mutual fund industry that threatens the well-being of the Republic?

Another question or two, the answers to which my explain a lot.

If the scheme to let employees put some of their social security withholding in a private investment is there a similar contribution by the employer, or does the employer just not make an employer social security contribution in an amount equal to the private investment. If so, what is the effect of all this on the self employment tax?

If the scheme goes through who keep track of the employee’s investment? Surely there will be some mechanism to check up and find out if the employee’s private investment is legit and not just a trip to the Black Jack tables.

Well, that’s why its important that these things be handled by reliable firms with a reputation for probity and integrity. Established firms, with long-standing reputations for scrupulous honesty.

Its almost like a droll parody of a Socialist Worker Party tract, about working class money being confiscated and given to Wall Street. Except for the fact that they’re perfectly serious about all this.

I can’t pretend to understand economics. But this idea is so breathtakingly stupid even I get it.

Even you understand the concept of ‘voluntary’, don’t you?

You mean like when they guy yells “Please, sir, can I have another!?”

Yeah, you can “volunteer” to either toss your money at the Wall Street roulette wheel, or watch your benefits shrivel up because other, more gullible folks bought into the scheme and there’s less to go around now.

(And please, none of the White House talking points about how there won’t be a cutback in benefits. These are the same boobs who told us Saddam was dead-certain to have WMDs, remember?)

Of course, a massive influx of money will make stock prices rise, increasing value. Which I suppose is pretty good for the working class shmuck buying his pension security, he needs the value to increase. But is obviously an even better thing for the guy who already owns stock: his wealth increases as if by magic, and he doesn’t have to swab out the grease bilges at McDonalds for $6.35 an hour to get it!

GeeDubya loves rich folks like Jesus loves poor folks.

Oh, and of course the guy who owns a lot of stock gets his increase in wealth at once, while working schmuck waits forty years.

The basic concept is called cancelling social security and forcing workers to invest in group funds. One way of looking at it is like this: Certain classes of individuals would be investing the money anyway, so it is basically a huge tax cut for them.

The less you make, the less your returns are - so the rich invest more money and get larger returns, while the poor invest pennies and get pennies back.

One plus/minus is that the money doesn’t go into the “black hole” of general social security funds upon death; investments can be passed down to a relative. Once again, the rich benefic much more from this.

And of course, there is the instability of the stock market and the ethics of where workers’ money goes. The conept of “security” seems to be lost on the privatization crowd, and I suspect they don’t much like “social” either.

So the question is - in a full changeover, do you force workers to invest x% of their income into basically a group fund, do you force them to put x% into a savings/bonds account that matures over time, or do you force them to put x% into a general fund to pay for everyone’s retirement (and other social security programs which would seem to be getting the axe under privatization). Oh, and in that general fund, make sure you make a rule preventing the government from “borrowing” from it.

C Dexter Haven summed up the basic fault very nicely. One generation is going to be left holding the bag.

Before we embark on changing the plan at Bush’s request, it would behoove us to ascertain Bush’s motivation. Think he’s aiming to fix a crisis that will ensure the financial independence of future generations? I don’t- the crisis is phony, despite the propaganda from the Bush White House. Remember who Bush really works for: the wealthy and corporate America. Dumping all this money into the stock market is going to be a windfall for securities firms. It also may alter the basic supply/demand balance of the stock market. All that money has to go somewhere, driving up demand to buy stock and therefore inflating stock prices. Those currently with large investments in the market can expect to make out handsomely. This is, I believe, his true motivation and the true goal.

Right now, the Social Security system is not broken. However, taking the money source away will break it. It is a classic example of forcing something to fail, and then saying “I told you so”. If privatization goes through, there is no guarantee. The stock market is little more than gambling. You are betting the stock will go up, and you can cash in and sell it to some sucker before it tanks. You might be a winner, but you might lose everything. For every winner you need a lot of losers. Toss in the occasional stock scandal and stockbroker churning, and you open up a real can of worms.

And who will “take care of” the folks who guess wrong on their voluntary choices that go negative? Will there be “welfare” for them? Will there be enough bridges for them to live under?