# Question about Bush SS reform **URL:** \ **Category:** Great Debates\ **Created:** [January 15, 2005, 11:09pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924 "2005-01-15T23:09:32Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Kel\_Varnsen\_Latex\_Division](https://avatars.discourse-cdn.com/v4/letter/k/aeb1de/32.png) [@Kel\_Varnsen\_Latex\_Division](https://boards.straightdope.com/u/Kel_Varnsen_Latex_Division)\ **Post date:** [January 15, 2005, 11:09pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/1 "2005-01-15T23:09:32Z")
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? ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [January 15, 2005, 11:30pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/2 "2005-01-15T23:30:09Z")
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.](http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=8997) > [@](#): > > For all the fanfare that surrounds the Bush administration’s efforts to present a bold new idea on pension reform, the truth is that it is not new at all. In fact, the proposal looks suspiciously like the plan set in train during Thatcher’s ?rst term in 1979 and which has since led Britain to the brink of a crisis. Since then, the nation’s basic pension, which is paid for out of tax receipts, has shrunk dramatically. The United Kingdom has the stingiest state pension program of any G8 nation, and there is growing consensus – even among British conservatives – that reform is needed. And ironically enough, considering that America is on the verge of copying Britain’s mistake, most experts seek reform in the direction of a more generous, and simpler, basic state pension – one similar in design, in other words, to America’s Social Security program. […] > > Britain’s experiment with substituting private savings accounts for a portion of state bene?ts has been a failure. A shorthand explanation for what has gone wrong is that the costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn. On average, fees and charges can reduce pension lump sums by up to 30 percent on retirement. The nation’s savings industry, which sells those private accounts, has already acknowledged this. Which brings us to irony No. 2: Just as the United States prepares to funnel untold billions to its private sector for the management of private accounts, back in 2002, many U.K. insurance companies, mindful of tough new rules against giving bad advice, began to write to their customers urging them to consider abandoning their private savings and returning to the state pension system – something hundreds of thousands of Britons have done already. […] > > Pension policy threatens to become a key issue in the British elections in May. To be fair, the United Kingdom is hardly alone in facing a pension crisis. With sharp increases in life expectancy among the elderly and plunging fertility rates, every nation in the world will face similar challenges. […] > But whatever the solution to that challenge, there is little disagreement within the United Kingdom that the path chosen by successive governments over the past 25 years is not the right one. […] > > And so, at the exact moment that America contemplates replicating this disaster, many in Britain – some conservatives included – are looking more and more kindly on American Social Security as a model for reform. The National Association of Pension Funds, a group of employers who sponsor the nation’s largest schemes, is urging government not to expect the private sector to shoulder the burden of keeping the nation’s elderly from poverty. Chief executive Christine Farnish notes that it’s “actually cheaper for the state to carry the risk,” adding that in looking for a system that offers the best combination of modest guaranteed retirement bene?ts delivered at low cost, the U.S. Social Security program seems the best model. “It doesn’t have to make a pro?t, and it delivers ef?ciencies of scale that most companies would die for,” she says. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [January 15, 2005, 11:41pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/3 "2005-01-15T23:41:32Z")
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](http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=9000): > [@](#): > > First, Social Security does not face any crisis in the normal meaning of the term. Second, private accounts would not give workers a more secure retirement; they reduce security. And third, the basic logic of the story is faulty; it is impossible to both reduce government spending on Social Security and increase bene?ts, unless the plan somehow increases growth. And no economist seriously contends that putting Social Security money in the stock market will increase growth. > > Starting with the crisis story, the ?rst place to look is the Social Security trustees’ projections, the standard basis for analysis of the program. The most recent projections show that the program, with no changes whatsoever, can pay all bene?ts through the year 2042. Even after 2042, Social Security would always be able to pay a higher bene?t (adjusted for in?ation) than what current retirees receive, although the payment would only be about 73 percent of scheduled bene?ts. […] > > The nonpartisan Congressional Budget Of?ce (CBO) did its own analysis of the program last summer. Using only slightly more optimistic assumptions, the CBO found that the program, with no changes at all, could pay all bene?ts through the year 2052 and more than 80 percent of scheduled bene?ts in subsequent years. > > On the face of it, the fact that Social Security may face a shortfall in just under 40 years (according to the trustees’ report) or 50 years (according to the CBO) hardly sounds like a crisis. After all, the program faced projected shortfalls in the 1950s, ’60s, ’70s, and ’80s. Each of these shortfalls was dealt with – usually with modest tax increases, and in the case of the ’80s shortfall, a phased increase in the retirement age beginning in 2003. […] > > After telling people that Social Security poses the risk of economic disaster, the privatizers promise that individual accounts would provide everyone with a secure retirement. The basic argument is that high returns in the stock market would allow workers to get more money from their Social Security taxes than what they can get through the current system. > > There is a simple and obvious problem with this logic. When they project rates of return in the stock market, the privatizers routinely assume that the returns in the future will be equal to the returns in the past, 6.5 percent to 7 percent above the rate of in?ation. But the whole basis for projecting a Social Security shortfall is the assumption that the future will have far slower growth than in the past. […] > > President Bush’s plan would also lead to transition costs that could be as high as $200 billion a year (almost 2 percent of the GDP) for more than 30 years. The transition problem stems from the fact that workers would begin placing their money in private accounts immediately, leading to large losses of revenue to the government. However, the commission’s plan proposes phasing in cuts to new retirees, beginning ?ve years after the plan takes effect. These cuts would not get large enough to offset the lost revenue (and resulting interest burden) for more than three decades, which would lead to a substantial de?cit increase in the intervening years. ---
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [January 16, 2005, 12:34am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/4 "2005-01-16T00:34:31Z")
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. ---
**Author:** ![C\_K\_Dexter\_Haven](https://avatars.discourse-cdn.com/v4/letter/c/b2d939/32.png) [@C\_K\_Dexter\_Haven](https://boards.straightdope.com/u/C_K_Dexter_Haven)\ **Post date:** [January 16, 2005, 1:12am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/5 "2005-01-16T01:12:15Z")
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. ---
**Author:** ![Loopydude](https://avatars.discourse-cdn.com/v4/letter/l/e56c9b/32.png) [@Loopydude](https://boards.straightdope.com/u/Loopydude)\ **Post date:** [January 16, 2005, 1:47am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/6 "2005-01-16T01:47:16Z")
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. ---
**Author:** ![ITR\_champion](https://avatars.discourse-cdn.com/v4/letter/i/c67d28/32.png) [@ITR\_champion](https://boards.straightdope.com/u/ITR_champion)\ **Post date:** [January 16, 2005, 2:12am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/7 "2005-01-16T02:12:33Z")
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. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [January 16, 2005, 2:35am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/8 "2005-01-16T02:35:12Z")
**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. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [January 16, 2005, 3:58am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/9 "2005-01-16T03:58:19Z")
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? ---
**Author:** ![Spavined\_Gelding](https://avatars.discourse-cdn.com/v4/letter/s/958977/32.png) [@Spavined\_Gelding](https://boards.straightdope.com/u/Spavined_Gelding)\ **Post date:** [January 16, 2005, 5:43am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/10 "2005-01-16T05:43:44Z")
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. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [January 16, 2005, 6:16am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/11 "2005-01-16T06:16:17Z")
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. ---
**Author:** ![Brutus](https://avatars.discourse-cdn.com/v4/letter/b/91b2a8/32.png) [@Brutus](https://boards.straightdope.com/u/Brutus)\ **Post date:** [January 16, 2005, 6:59am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/12 "2005-01-16T06:59:49Z")
> [@elucidator](#): > > 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… Even you understand the concept of ‘voluntary’, don’t you? ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [January 16, 2005, 7:03am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/13 "2005-01-16T07:03:16Z")
You mean like when they guy yells “Please, sir, can I have another!?” ---
**Author:** ![rjung](https://avatars.discourse-cdn.com/v4/letter/r/45deac/32.png) [@rjung](https://boards.straightdope.com/u/rjung)\ **Post date:** [January 16, 2005, 7:09am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/14 "2005-01-16T07:09:07Z")
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?) ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [January 16, 2005, 7:32am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/15 "2005-01-16T07:32:17Z")
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. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [January 16, 2005, 7:34am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/16 "2005-01-16T07:34:07Z")
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. ---
**Author:** ![Demorian](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/demorian/32/7273_2.png) [@Demorian](https://boards.straightdope.com/u/Demorian)\ **Post date:** [January 16, 2005, 8:21am UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/17 "2005-01-16T08:21:09Z")
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. ---
**Author:** ![BobLibDem](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/boblibdem/32/3149_2.png) [@BobLibDem](https://boards.straightdope.com/u/BobLibDem)\ **Post date:** [January 16, 2005, 1:44pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/18 "2005-01-16T13:44:14Z")
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. ---
**Author:** ![SteveG1](https://avatars.discourse-cdn.com/v4/letter/s/bb73d2/32.png) [@SteveG1](https://boards.straightdope.com/u/SteveG1)\ **Post date:** [January 16, 2005, 4:06pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/19 "2005-01-16T16:06:09Z")
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. ---
**Author:** ![Ignatz](https://avatars.discourse-cdn.com/v4/letter/i/3be4f8/32.png) [@Ignatz](https://boards.straightdope.com/u/Ignatz)\ **Post date:** [January 16, 2005, 4:17pm UTC](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924/20 "2005-01-16T16:17:39Z")
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? [Next page](https://boards.straightdope.com/t/question-about-bush-ss-reform/284924.md?page=2)