The recession and social security.

Given the credit crunch, what would have happened to social security if Pres. Bush had succeeded in privatising it?

The effects are meant to be measured over a long period of time, and short-term losses are to be expected.

(I know this is best suited for Great Debates).

Basically, like the stock market investments most have via 401ks, you don’t measure it day-to-day inasmuch as you focus on the long-term trend. Theoretically, you would need to have enough on hand to absorb losses.

Over the long-haul, it grows.


So probably not much of an effect on the accounts/benefits end this time around (wrt the recession) since the market bottomed out in early 2009. I think the funding side of it would have been somewhat in chaos, given all the other things that were going on.

The time to ask this is 25 years from now, and the folks to ask then are the ones who are the 20-somethings now.

My personal prediction is that we’ll be close to national financial collapse by then, and that the younsters paying my current SS bills will be a little annoyed that they are not going to get a return on their SS “investment.”

The answer to your question if asked today is “essentially nothing short-term, but a nice buying opportunity for those with (privatized) funds to invest in for the long term.” We’ve managed to borrow our way out of a crisis–at least temporarily–and the borrowing power of the Federal government is much higher than the borrowing power of an individual. The government can meet its current SS obligations with borrowed money, and as mentioned above, there hasn’t been time for would-be privatized funds to have accumulated and/or collapsed. The reverse is true; the general down-turn in investments would provide a better entry opportunity for people buying now to prepare for retirement in 35 years.

The standard line is that the stock markets achieves returns of 8% a year over the very long term, very long in this case being the history of the NYSE.

As all prospectuses are required to say, past performance is no indicator of future performance. The stock market has returned 0% over the last ten years. (Before considering dividends, but also without taking fees into account.)

The rise of the market over the last century reflected the incredible rise in productivity of the U.S., mostly from manufacturing and a good deal of it due to the collapse of all serious competition for a period after WWII.

The U.S. is now a service economy rather than a manufacturing economy. The rest of the world has caught up with the U.S. so we cannot assume dominance in any category, let alone all of them as we did once.

That would seem to indicate that the gains of the past can’t be replicated in the future. I personally wouldn’t bet on 8% returns for any lengthy time period.

Of course, nobody in 1900 predicted the financial future of the next 110 years. China could sink into decades-long revolution. New technologies could revitalize productivity. Laser fusion could provide cheap electricity without metering.

How do policy-makers decide which future to bet on? They always look at the past and are heavily influenced by the present. (The present gives presents, in the form of contributions, support, lobbying, and threats.) Nobody can possibly say whether privatizing social security will actually be a better future 50 years from now. Yet policy going out 50 years must be made regardless.

All I can say is that the arguments made in the privatization debate appeared to me to rely heavily on past successes without any cognizance of likely future failures. So I’m glad that privatization failed. I simply don’t know whether that judgment is right or wrong today, and I may not know in my lifetime.

Government is hard. No private industry has to plan for unborn generations. They can concentrate on short-term rewards whatever happens to the larger world. Government cannot. That’s somehow always forgotten by the privatizing enthusiasts and the libertarians and the anarchists and the others.

I was in the financial industry, and I’ll tell you what was said inside the financial industry about the whole privatize Social Security ploy:

People’s social security accounts would do about the same and maybe a bit worse under the privatization plan. The whole reason was not to give individuals more choices, but to allow investment managers to charge for managing the trillions of dollars in the Social Security trust fund. Can you imagine the commission you could make? Do you know how many mistresses and summer homes you could buy with that money?

When I mentioned to a fund manager about the possibility of people not having the money they need to retire in their Social Security account, he simply replied “Don’t worry, the government will bale them out.”