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December 12, 2004
Social Security reform for dummies

Behind the discussions about the future of Social Security, the situation of the Trust Fund, the requirement for personal retirement accounts and other such financial instruments, you have some basic reality-based facts that are sometimes forgotten.

Below (the fold) is a simplified description of the social security problems that we face and how not to solve them – in non-financial terms.

Imagine the USA as a big family; with no interaction with the outside world (we’ll get to that part later): you have 1 senior citizen, 4 working age people, and 1 kid.

The working age citizens provide all the goods and services needed by everybody:
– 1 provides the basic stuff – food, housing, etc ; let’s call him/her the construction sector
– 1 takes care of Senior and Junior; let’s call him/her the nurse/teacher
– 2 crank out TVs for everybody’s leisure and entertainement; let’s call them the TV guys and let’s say that they produce 3 TVs each (one per person)

The first important thing to note in this model is that at all times, this group is self-sustaining: all the work needed at any time is done at that moment by someone within the group, and all work done is consumed by someone.
The other important thing to note is that 4 people work to provide for the needs of 6 people. In effect, one third of their work is taken from them at any time to provide for the needs of the non-workers, i.e. Junior and Senior.

In the real world, the same thing happens on a larger scale, and these transfers can take 3 main forms:
– intra-family transfers: you feed your kids, pay for their education, your parents live with you, etc…
– government: you pay taxes and the government either spends it (schools) or redistributes it (social security)
– financial instruments: people can save, or spend their savings (via bonds and shares). Saving means that you store your work for future use. In practice, bonds and shares are a “tax” on your current work: a portion of your work is used to pay off debt or to pay dividends to shareholders. This is still you working and someone else (Senior, usually) enjoying the fruits of that work. “Dividends” sound better, but they still are really a tax on your work.

In any case, whatever form the transfers take, they should not hide that basic fact: 4 people work and 6 people live off that work.

Now take our family 50 years from now. It is now composed of 7 people: 2 seniors, 4 working age people, and 1 kid. 4 people working, 3 not, but all still with needs.
What happens now?
The construction guy still does that. With a little bit of effort, he is still able to make all that’s needed for 7 people instead of 6
1 and a half workers are now needed to take care of junior and the 2 seniors (there is little room for productivity improvements there) which leaves:
1 and a half workers to crank out TVs. If there has been no improvement, that’s only 4.5 TVs for 7 people. In order to have 1 TV per person, you would need each worker to be able to make 4.66 TVs instead of 3. Over 50 years, that does not sound impossible.

So, if you forget about productivity improvements, this is why you have the cries about social security crisis: either you have fewer TVs, or you find a better way to make more, or you will take less good care of seniors and junior. What should be done?

– the simplest (and pretty realistic) solution is to say that TV production has made such progress that 1,5 workers crank out as much (or more) stuff than 2 guys used to, so there are enough TVs for everybody and there is NO crisis. A larger portion of work goes into caring for the dependents (42% now instead of 33%), but that only reflects changing needs;

– if productivity increases are not enough, you can either take less good care of the dependents (only 1 worker to take care of the 3) and keep on cranking out TVs as you used to (2 workers), or you can decide to take care of your family and reduce your consumption of TVs. A slight variation is to say that you save up one TV today, mothball it and use it in 2050. in that case, you have 5 TVs for 6 people now and 5.5 for 7 in 2050 which might after all be sufficient in both cases.

To get back to the social security debate, the first item is hoping the growth will be strong enough to solve the funding requirements of social security, while the second item amounts to solving the problem by either reducing SS payouts or increasing payroll taxes.

It does not change the fact that 4 people are working to fulfill the needs of 7 people. If you expect to give only one third of your work for the non-workers, they will live less well, relatively. If you give 42%, they will live as they expected to, but you will be relatively worse off. This is the unavoidable reality of an aging population – if less people work, either they are taken care of by those that do, who then have less for themselves, or they are not taken care of (or any combination in between, of course)

Now bring in the outside world into our little model. There are two easy ways the outside world can help improve the situation:

– one is immigration. Bring in one more person of working age into the community, and presto, you can crank out again as many TVs in 2050 as you used to without any increase in productivity AND take care of everybody (including the newbie);

– the other is inter-temporal trade through international investment. You give today one of your TVs to foreigners (you have 5 for 6 people) in exchange for 1.5 TVs in 2050. With no increase in productivity, you can take care ofthe dependents as you’d like (1.5 workers) and with your own production (1.5 workers making 4.5 TVs) you end up with 6 TVs for 7 people, close to what you would get now. You make a small reduction in your living standards now to improve your lot later.
As other countries are at earlier stages of development (and have faster growing population), it makes sense to think that they will be able to crank out 1.5 TVs in the future and give them to you as a fair price for having given them 1 TV a while before. in a more realistic sense, you don’t actually give TVs today – you take time to go to other countries to build factories there or to teach them to do it, and get a portion of future production for you as a payment

To keep on consuming as much as you want in the future, you either need to get more workers in the future, or you must save now and invest in a place with more workers. (Getting productivity increase would basically mean that you need to invest in new, smarter ways to build TVs yourself, which means spending some effort now to do that, which will reduce you current TV production in the expectation of increasing your future one – it’s still saving to invest).

As you can see, there are two issues: one is the size of the pie, and the other is the sharing of the pie. The size of the pie depends on productivity growth, which in turn, depends on investment, which in turn depends on saving. Saving means working now and storing up that work for future use. Mothballing a TV is the dumb kind of savings; producing fewer TVs but taking the time to invent new, better ways to make TVs (or teaching others to do it for you) is the smart kind of savings.

The claims of the SS privatisers is that they will make the pie grow faster by unleashing market forces that will be able to make those smart investments. But is this true?
First of all, note that private accounts do not provide additional savings if they come instead of the existing public saving so they will not provide MORE investment. Will it be smarter? Smart will come from the people making investment decisions. If you accept the hypothesis that private investments are smarter than government investments, then you should reduce government spending, not reduce government funding.

As I wrote last week about the falling dollar, the current problem of the USA is that they consume too much and rely on foreign lending for their investments. If the solution is to save more now (especially to invest in other countries in order to have the returns when needed, in a few decades’ time), this government is worsening the problem rather than helping to solve it, by spending like a drunk sailor and increasing the country’s external debt at a time when it should be accumulating foreign assets for future needs.

To get back to our “family” – half the TVs are already being provided by the outside world, and the only reason they are doing it is because the 2 two US “TV workers” are busy – one making guns and shooting them off at or near others, and the other writing IOUs as fast as his hands can do so. Is this sustainable?

(Foreigners might actually welcome SS privatisation, because it will mean that the TV workers will target their guns at their Seniors to get them to work a bit more instead of at them…)

Posted by on December 12, 2004 at 09:26 UTC | Permalink
Comments

I do not have the time to write such posts this week, but then I keep on waking up at 6am on Sunday mornings and uselessly churning thoughts, so I thought I might as well put it in writing…
Not sure I want to make an habit of that, but anyway, it’s also up over at Kos and I count on you guys! (Sunday morning seems to be a good time to grab some easy visibility…)

Posted by: Jérôme | Dec 12 2004 9:38 utc | 1

Thanks Jérôme for takling the Social Security theme.
The so called “social security crises” in my view isn´t one. SoSec in the US has quite some time until it gets problematic. The general problem is to higher spending in the overall budget then revenue coming in through taxes.
Privatising SoSec is no way to solve the problem. It only pushes the risk to the single person instead of the “insurance community” of all people. Inbetween it will make a lot of money for financial companies.
The real problem is lack of revenue for the state versus expenses. Brad DeLongs graphic is the simple explanation.

Posted by: b | Dec 12 2004 9:53 utc | 2

yep, b. There have been many good articles and posts on SS by Krugman (his last 2 NYT columns: Borrow, Speculate and Hope and Inventing a crisis are must reads), Brad De Long and Kevin Drum which all point to the non-existence of a Social Security crisis, but to the real existence of a budget crisis and the bait-and-switch the Bushies are trying to pull.
I hope as many people as possible get to understand this before it is too late.

Posted by: Jérôme | Dec 12 2004 10:08 utc | 3

Borrow, Speculate and Hope

Posted by: Jérôme | Dec 12 2004 10:31 utc | 4

After watching these mobsters loot first the US treasury and then Iraq I can’t help but think that they really want that Social Security money as well. All that cash just sitting there….you can almost see them salivating.
Someone brought up the prospect before of the US gummint simply letting the Social Security program die. They would borrow all the money out to pay for other schemes,then just throw up their hands and say that the program was insolvent and the best bet would be to close it down as a failed liberal experiment. They have already prepped the public to accept this. I say this because nearly everyone I talk to says they have no hope of collecting SS and are resigned to the fact…..doesn’t seem to bother them much at all.
You have to remember we are stuck in reality but they are not.

Posted by: dan of steele | Dec 12 2004 10:38 utc | 5

All that cash just sitting there….you can almost see them salivating.
There is no cash sitting there. Whatever SocSec takes in through income tax and doesn´t need to give out to current SocSec receivers is “invested” in special Government bonds. More explicitely: it is dumped into the General Budget and the SocSec administration does get a paper with the three letters IOU.
The US government actually goes into debt here, but on paper this doesn´t count as debt. (Clintons surplus never actually was a real surplus).
The moment SocSec will need to to get money for their IOUs, i.e. when the receipes will become smaller than the payouts, the US government will have to cough up the money through either increasing taxes, cutting some general budget items or by going further into debt with savers somewhere.
Private SocSec accounts will not tackle this problem, it even makes it worse because some Trillion is needed for the change of the system while the gain is a “potential” but very risky higher return in the stock market.

Posted by: b | Dec 12 2004 11:45 utc | 6

If they use the launch of privatization of SS to stop all COLA payments, won’t that add a huge amount of money to the plus side of the ledger and help decrease the budget deficit? Is this what they are looking for?

Posted by: mm | Dec 12 2004 14:13 utc | 7

SS crisis is a funny thing. I mean, if you look at the workers/non-workers ratio, that is, the 20-60/70 people vs all the others (60/70 because retirement age varies in Western countries), you’ll see that the very late 20th century was the historical peak of working; you never had that many people working, producing goods and therefore enriching the state through various taxes, since basically mankind exists, or at least since the agricultural revolution 10.000+ years ago. Basically, the ratio was far worse after WWII, because even if you had few seniors, you had a lot of kids, notably the baby boom. If society managed to survive with far fewer workers, comparatively, and managed to actually improve and become richer, then the issue isn’t that you’ll have less workers in a few decades. The real issue with seniors is the increasingly insane cost of healthcare, which is basically the main thing that makes caring for elders more expensive than caring for toddlers. The SS isn’t a problem at all, imho. The problem is dealing with HMOs and Big Pharma, and trouble will hit Medicare or Medicaid well before SS has any problem.
Of course, all that doesn’t take into account the fact that I fully expect major demographic changes during this century, and not linked to aging population, but rather to massive epidemics that will hit as hard industrialised world and 3rd world, and scarcity of resources leading to wars and famines, which may hit 3rd wodl harder but may have serious effects as well on Western nations. Basically, an asian flu pandemics (even a lesser form than feared which would barely be worse than the Spanish flu) can seriously changed the demographic structure of Japan, EU or US, and all the talk about SS crisis will be moot.

Posted by: Clueless Joe | Dec 12 2004 15:34 utc | 8

b,
I tried hard to find some information on SS and even went to their website. It is difficult for me to make sense of all that and I looked around for others to synthesize it for me. What I have found points to a fairly healthy SS program and hints at almost a trillion dollars laying about there.
I have read that the Congress is not supposed to use SS Trust monies for other purposes and there may even be a law for that (if there isn’t there should be) but that they are allowed to “borrow” against the fund. Others here and elsewhere suspect that the present group of thieves will simply not pay back what they have “borrowed”
The fact that so many people willingly walk onto the killing floor wrt giving up on SS and allowing the fat cats to steal it all is very disturbing to me. After reading the study that Pat posted about how most people do not make informed decisions but rather act on “gut” feelings, my despair grows even more.

Posted by: dan of steele | Dec 12 2004 18:29 utc | 9

Dan, the congress have been stealing SS for years. Johnson is the asshole that made the “combined budget” that included SS revenues to mask the defecit from Vietnam spending.
Congress saw SS and drowled. They really drowled when Ragass (Reagan) started a SS commission in the early 80s. Greenspeak was on that commission. It came up with the conclusion that to save SS, SS taxes had to be raise (which they were) and retirement ages must creep up. The problem is congress used all that extra money (blew it) and masked the deficit, because of tax cuts, by using the excess money. Now Greenspeak has balls eneough to call for SS benefits cuts and even higher retirement age. What a F—.
In other words, the lower 80% of the US population have been funding government through excess SS while Jack Welsh and GE got a tax cut.
This is class warfare in reverse. The lower 80% are currently lossing.
If SS is a pay as you go system, then SS taxes should be adjusted up and down to pay recipients. Also, The cap on earning taxed for SS should be taken off.

Posted by: jdp | Dec 13 2004 4:04 utc | 10

sorry about the spelling and typos.

Posted by: jdp | Dec 13 2004 4:07 utc | 11

Oh, look, I found a warm wriggly little puppy. 2002 art. in Harper’s by Tom Frank (of What’s the Matter w/Kansas fame).
“Just as enticing are privatization’s potential effects on the labor force. With Social Security’s guaranteed benefits, workers are able to look forward to a time of leisure, to a time of complete freedom from the boss. Under privatization, all guarantees are off. Your retirement is tied solely to the size of your portfolio, which in turn is tied to your willingness to work-longer hours, and on the boss’s terms. The new economics of retirement will thus pay dividends in increased workforce discipline and will also force millions to continue working well into their retirement years, enlarging the labor force and helping to keep wages down. “The response to higher-risk retirement income is more labor force participation,” economist Teresa Ghilarducci of the University of Notre Dame explains. “Women are already working, we’re going to run out of immigrants, children are out of the question, so we have only one pool of labor remaining, and that’s retirees.”
“The idea that the poor should have leisure has always been shocking to the rich,” Bertrand Russell wrote in 1932, and the idea clearly still shocks many. “That’s the argument I’m hearing from Washington,” Ghilarducci continues. “’What does the working class want with retirement? They ought to work.’” ”
…After Picking Up Yr. Jaw Continue Reading Art. here

Posted by: jj | Dec 13 2004 7:00 utc | 12

There is a lot of people on this board who are against privatization, and they give many resaons for it, but they all confuse me.
I am still trying to figure this whole thing out myself, but so far Privatization looks like a great thing. I understand there will be administration and set-up costs which will probably result in higher taxes somewhere down the road but frankly, in my opinion, that is worth it to be able to set up the system in this new, private, way. I am more than willing to cough up extra taxes to pay for the set up so that future generations will be able to have a Private SS system.
Can someone who is against privitization of SS please explain to me how it would be a bad thing if I have access to my own SS money & can invest it as I please?
(And please don’t use bad investing as an excuse… I plan to be very conservative and I don’t see that as being a problem)
I would like to understand the other side of the argument, but so far, I don’t! thanks!

Posted by: Eric Nardo | Apr 21 2005 18:28 utc | 13

Can someone who is against privitization of SS please explain to me how it would be a bad thing if I have access to my own SS money & can invest it as I please?
You could loose it and die dirt poor.

Posted by: b | Apr 21 2005 18:32 utc | 14

@nardo, ther experience of Argentina is instructive. rosy expectations about privatisation were not borne out in fact.

Posted by: DeAnander | Apr 21 2005 18:36 utc | 15

Can someone who is against privitization of SS please explain to me how it would be a bad thing if I have access to my own SS money & can invest it as I please?
guaranteed return on investment; you know, like Haliburton.
No, wait. I forgot. All those treasury bonds are just “IOUs.”

Posted by: slothrop | Apr 21 2005 18:53 utc | 16

Nardo
Privatization is cool cuz the federal government will bail out losers–like they bailed out chrysler and the hunt bros.

Posted by: slothrop | Apr 21 2005 18:55 utc | 17

nardo – if you are, to use your own description, still confused enough to not grasp the scam, i suggest reading this article – The $4.7 Trillion Pyramid by umkc econ professor michael hudson.

Posted by: b real | Apr 21 2005 19:10 utc | 18

Nardo
It matters nothing you believe you can responsibly “invest.” Nothing whatsoever assures such success. Just another daydream of the ideology of “personal responsibility.”
“Privatization,” I think as alabama put it pretty well, is a scheme to transfer wealth to wall street. In the larger scheme of things, privatization opens up a vast resource of ostensible savings to speculation. Now, right off the top of my head, this is bad because in no sense will the circulation of more capital mitigate the problems of the “business cycle” (overaccumulation, inflation, recession).
What did Keynes say about turning the economy into a casino…?

Posted by: slothrop | Apr 21 2005 19:21 utc | 19

Thank you all for your replies, but they seem to be variations on the same theme.
Let me reiterate:
If I were to get a check from the Government, take that money, open a private Roth IRA account, invest that money in VERY conservative, safe investments (NOT Enron type things), and after 35 years or so, see a big fat return on that investment due to compounded interest, where is the bad thing in all of that?
Things people have been saying were along the lines of “what if the entire system collapses?”, etc. OK, assuming the entire system does not collapse and assuming that the Roth IRA I will start with the money taken from my SS account will turn out to be as successful as most people I know have had with their Roth IRA’s… then where is the bad thing in that?
Thanks again!

Posted by: Eric Nardo | Apr 21 2005 21:38 utc | 20

Also, what some of you seem to be overlooking is that if the system WERE privatized, you all would certainly have the choice to leave your money alone & not do anything with it, if you were so afraid of losing it thru investing.
I have no problem with that. If I chose to invest it my way, fine. If I am taking a risk, so be it, it’s my life & my money. If you want to play it safe, that’s fine too.
There should not be a “one size fits all”
Right?

Posted by: Eric Nardo | Apr 21 2005 21:44 utc | 21

SS is not a government plan because you personally need economic security. It is a government plan because the many need economic security and we citizens value both the society and the individuals enough to provide for this. The point of SS is that NONE should sink, that no human being should be condemned to absolute bitter poverty. The need you are asking SS to meet is not what it was/is designed for.
May I be direct? You are dealing with social matters as if they were only about you.

Posted by: citizen | Apr 21 2005 21:59 utc | 22

okay, so you either discard or are confused on what the term “social” means. welfare programs were set up in the first half of the 20th century to stabilize the workforce, prodding labor ot work more diligently, primarily for the benefit of the employer, but also w/ the interests of the employee in mind. if one is to disregard both of these and funnel the money into the pockets of the coffers of a certain priviliged segment of society on an entirely pure risk basis, there is no incentive for the majority to not declare open season on the cons. for one, desperate people take desparate actions. anyway, bush isn’t really planning on doing this, which is why he’s never actually outlined any specifics. it’s just a conman ruse.

Posted by: b real | Apr 21 2005 22:00 utc | 23

I have been reading all your replies and thinking about them and I think I understand the other side now.
The way SS is now, we earn about 2 percent anual rate of return, which, quite frankly sucks, but it is also very very safe. And no one can argue the benefit of being safe.
However, what I would like to see is a system where we ALL have the CHOICE to invest privately or not. As it is now, I would like to do that with my SS money and yet I do not have that opportunity. To the people who, if given the choice would leave their money with the safe 2 percent-returning treasury Bonds, I say fine.
Yes, you are all valid in your claims that such a system COULD open up a Pandora’s box of economic “bad stuff”… but mind you, that is not for sure. I would like the system to be such that if you want to NOT have a private account you certainly can do so, and if I want TO have a private account I can do so, too. If I turn out broke as a result, fine. Its my life. On the other hand, if I end up with a couple million and the “play it safe” person is living on $1000/month when he turns 68, well, so be that too.
So now I say….what’s wrong with that? It’s CHOICE.

Posted by: Eric Nardo | Apr 21 2005 22:01 utc | 24

Eric,
SS is not designed to provide the best return to everybody, it is designed to provide a minimum revenue to everybody.
Imagine that, despite investing safely, you are hit by a car, spend a year in hospital, and after that are not able to work anymore. What money will you put in your retirement account? And what will you get when you are older?
Or imagine that one year the stock market crashes by 40%. All the peole that retire that year and had money in blue chips have their pensions suddenly massively reduced. Do you think this would have no political consequences, and the politicians will tell them “tough luck”? It’s likely they will be helped by the government, them being obviously unlucky, and where will the money for that come from?
Social Security is a safety net, not an optimised return. You can always save additionally on the side.

Posted by: Jérôme | Apr 21 2005 22:27 utc | 25

if I want TO have a private account I can do so, too. If I turn out broke as a result, fine.
So who will pay for your healthcare if you turn out broke? If you turn 68 with diabetis and heartproblems and completly broke because the markets went just the other way – with no money to pay for any medical care then you will still vote for the freedom to invest into a private account that guarantees that there is no solidarity left?
Either you are in the system or you are out – thats your demand. Think about being out when you need it because your judgement on investing was maybe a bit wrong and the millions didn´t come in.

Posted by: b | Apr 21 2005 22:33 utc | 26

My 2 cents: Work hard and save. Play with your savings and if you win, you have both and if you lose, you have something.

Posted by: beq | Apr 21 2005 22:36 utc | 27

Well, I suppose if in the future, if we find a 68 y.o. Eric Nardo living in a cardboard box under a bridge, we can take comfort that it is his life, his choice. Why should anyone else give a shit.

Posted by: DM | Apr 21 2005 22:38 utc | 28

Good point, beq. Eric still does get to choose, doesn’t he?

Posted by: citizen | Apr 21 2005 22:39 utc | 29

I am so thankful that all of you are looking out for me. You have all gave me “what ifs” about what possibly could happen to me in my life in the next 30 or 40 years and you all have erred on the possibility of something totally horrible happeing to me.
While I do not like to think negatively, I appreciate the fact that you all are keeping an eye on me, and, I guess, everyone else. So, thanks.

Posted by: Eric Nardo | Apr 21 2005 22:43 utc | 30

I think the real point is that — failing complete socio-economic collapse — if the private accounts are trashed by a stockmarket crash, the government will bail them out (just like the S and L scandal). So the real risk is not being assumed by the individual. It is being assumed by the government — “privatise the profits and socialise the risks.”
What’s really happening is that the individual is being drawn into a high-risk investment, where lots of fat brokerage fees are being skimmed off by the financial industry; but neither the industry nor the individual assumes the risk of failure. The scheme — like the airlines — is “too big to fail” and will be massively bailed out if it does. So the financial industry gets its rake-off regardless.
From a British labour site:

A new sort of pension scheme has developed in the USA and Britain, especially, since the 1970s and ’80s — the “personal pension”, where a worker pays into a pension fund and draws a pension from it on retirement without the employer playing a role. The new “stakeholder pensions” in Britain are like “personal pensions”, though an employer has a small role in administering them.
The trend for people to live longer has put a strain on pension schemes, since at the same time a long-term reduction in birth rates, and a lengthening of the time people spend in school and college, will tend to reduce the size of the working population relative to the population as a whole. The best guess is that, by 2030, 30% of Britain’s population will be over 60 years old, while in 1990 it was only 20%.
But the bosses who are pressing for public and collective pension provision to be cut are the same people who have been pushing lots of workers over 50 into unwanted early retirement. And the drive to privatise pension provision is not a way to cut costs. Private pension schemes take out about a third of the proceeds in charges, fees, and other rake-offs for the finance industry, while public provision is much cheaper.
Privatising pensions increases inequality among pensioners.
In 1994 the World Bank published a report summarising the new capitalist consensus — governments should roll back public pension provision, and move towards compelling everyone to pay into a private pension scheme. More “choice” — and more fuel for high finance, and more rake-offs for the financiers.
Compulsory private pensions had been introduced in Chile under the military dictatorship. Margaret Thatcher’s government pushed private pensions heavily — the courts later found that 1.6 million people had been “mis-sold” private pensions which were worse value than what they already had — and considered making them compulsory.

Joseph Stiglitz chimes in:

The anticipated increase in the fiscal deficit is striking. The central plan discussed by Bush’s council of economic advisers would – according to the council’s own estimates – increase America’s fiscal deficit by $2 trillion over the next decade. Advocates of privatisation claim to believe in markets, but they are proposing budget gimmickry that would move those losses off the books, as if markets could be easily fooled.
America and the world should remember: Argentina’s privatisation of its pension system was at the centre of its recent fiscal woes. Had Argentina not privatised, its budget would have been roughly in balance. The US is starting on its privatisation venture with a fiscal deficit of 4% of GDP.
Privatisation advocates insist, however, that investments in stocks would yield sufficiently higher returns to give individuals the same retirement income as before, with the surplus used to fill the gap. But if markets are working well, then returns will be higher only because risk is higher. There is still no free lunch in economics.
With higher risk, there is a chance that, 40 years from now, many individuals will find themselves with less than they need to retire. But if one really thinks that free lunches exist, there is still no reason to privatise: the government could get the additional returns by investing in the stock market itself. Indeed, President Clinton proposed doing just that.
With increased transaction costs, worsening solvency for the system, increased budget deficits and decreasing benefits and security for retirees, why the drive for privatisation? One reason is the interest financial markets have in grabbing a piece of all those transaction costs.

[whole Stiglitz op/ed worth a read as usual]

Posted by: DeAnander | Apr 21 2005 23:04 utc | 31

Eric,
I think the general point is that horrible things will happen to some people (though it probably will not be you). If social security is to be socially responsible there has to be a minimum level, and those above the minimum has to pay for it. Otherwise there is no point in SS at all is there? Why should the government force you to save if not to ensure that you are not broke at 68? If you want private accounts and everybody takes there own chances, why should the government be in the mix at all? Anyone can save in bonds or stocks if they want to and can afford to.
Aye, here is the rub. For if SS is privatized it could just as well be abolished in terms of security for the participants.

Posted by: A swedish kind of death | Apr 21 2005 23:09 utc | 32

Or the government takes the risks and you pay twice for the risk-taking, first to the stock-brokers and then to the government. Instead of just once to the government.

Posted by: A swedish kind of death | Apr 21 2005 23:12 utc | 33

well, the way I envisioned it was that I DO appreciate the fact that the govt is taking a certain percentage from my paycheck to force me to dave for retirment, and it would be nice if I had the choice to get a better return on that investment. But now that I think about it… if we gave everyone that choice, and we had a bunch of people get burned as a result, what would happen to them? and what would happen to ME, if I was one of the burn victims? If we were to privatize SS we would need to include some kind of “slush fund” for people like that.
One thing I will say about privatizing… i do like the fact that it will create a system where the money a person gets when he retires is the same money he has been putting in over the years. The thing that scares me about the current system is that it depends on today’s workers paying into the money that today’s retirees collect. Thats a great system when there are more workers than retirees, but what should ever happen if the opposite were true? (As it seems to be heading…)
I get the fact that investing in Wall Street could bring disaster, and the current investing brings very very small returns… but why can’t we have the best of both worlds? Have individual accounts that still invest in the 2percent-a-year Treasury Bonds?
If anything, we need to make it so that the money a person puts in is directly available to that SAME PERSON when he retires. Or figure out a way to get around the times when there will be more people on the retiring end than on the paying end.

Posted by: Eric Nardo | Apr 21 2005 23:24 utc | 34

Eric- to use your Roth IRA example… my children were given some money by a relative and I put it in Roth IRAs for them to earn money toward their future college expenses.
I chose conservative investments because I’m not a stock market maven. Well, the entire time I held those Roth IRAs, they lost money. In addition, the broker took a fee payment on those…so the money, in a conservative investment instrument, with things as they were going…and still are, btw…meant I was losing money on the PRINCIPLE.
I took the money out of the Roth IRAs, stopped paying the broker fees, and parked it in a dull form of savings with a guaranteed return and no fees. I’ve earned back their lost principle and more.
If someone has the saavy to invest in the market and wants to watch it constantly and play the system, then paying into social security does not stop someone from putting aside some money to gamble in the market.
However, for those who are not stock market mavens, who don’t want to watch it constantly, constantly check costs of fees with one broker vs another on one investment instrument vs another…such a scenario is not good…and it’s not just you I’m talking about…it’s people who are, say, social workers, who already get paid very little for doing an important job…you know, people who aren’t simply about making money…people who want to use their time to help others.
From what I understand, in order for the market to work so well for privatization, the social security fund would have no problems that are supposedly the reason for the change at all.
However, if the real reason is that some people don’t want to have their earnings pay into a community fund for the elderly and the infirm, then fuck them because they’re bastards.
Anyone who makes an upper middle class salary in this country doesn’t have to even pay social security past a certain point in wages…and so, again, people who want to invest could just act as though that portion of their salary was a “private account.”
And, no the concept of social security is about community and not letting the elderly eat cat food while the fat cats eat their govt pork that a-ok with them and their pals.
The decent thing to do would be to remove the cap so that boomers would be paying into the fund with their larger salaries to offset their retirements. In addition, social security should be need based.
Is it really so hard for you to imagine that contributing to a community pot that may benefit you if you have unforeseen problems is so bad if, in the end, you are highly successful and, luckily, do not need the help at all?
Such selfishness is incomprehensible to me, considering the level of wealth in this country compared to the levels of poverty here, when I can look at other democracies that seem to think it’s a good thing to love your neighbor as yourself and provide a basic level of human rights/dignity for all citizens of a nation.
but that’s just me.

Posted by: fauxreal | Apr 22 2005 0:19 utc | 35

@ fauxreal: atta girl.

Posted by: beq | Apr 22 2005 0:34 utc | 36

SSI, in addition to providing retirement income, also provides payments for to those who become disabled and to survivors (spouses, minor children) of those who die prior to retirement. Mr. Nardo has not explicitly mentioned these issues, so it is very likely that he is unaware of them. The value of these kinds of “insurance” raises the return that the individual gets on what the individual has paid into the system.
But the main point is that the relatively modest social security payments are GUARANTEED as a FLOOR below which no person in society is allowed to fall. If Mr. Nardo fails to understand why this matters, then there is little hope it can be explained to him.
As the Firesign Theatre put it, “In the next life you’re on your own.” Mr. Nardo wants it to be THIS life. And then there’s the Gospel song, “ever’body talkin’ ’bout heaven ain’t goin’ there” – this might also apply to the prosperous golden years, financed by our OWN money, that each of us would like to imagine awaits us.
But it’s like jazz – if we need to keep talking about it, chances are we aren’t going to explain it anyway.

Posted by: Marcus Twainus | Apr 22 2005 1:05 utc | 37

This seems to be a very complex situation.
On the one hand, SS is like an IRA in that you save and get a small return on your investment (albeit VERY small) when you retire.
On the other hand, it’s not REALLY like an IRA because it is a little like a “community chest” as one person put it, in that you sometimes don’t get your money back that you put in and this is done on purpose as sort of a “nice gesture” for those less fortunate and perhaps that person might be YOU someday.
Then there is the cap at $90,000 which some say we should remove, but let’s look at that. Say I am a self-employed small business owner. I have 3 employess and I mad $90,000 in taxable income. I have to pay 16.4% towards social security which is just over $15,000, which is a lot to a guy who has a lot on his mind with his own business.
Say I made $3million in taxable income from real estate investing. Should I have to pay $492,000 into the “community chest”? What if I took that $492,000 instead and invested it in a small company that was able to hire 2 people due to my investment? Which is the “better” way of taking care of “society”: by creating jobs? or by helping those less fortunate retirees?
I could go on & on, but the point is the system exists now as a way in which one thing balances out the other & it all works.
That is… unless things “collapse” as some predict in 30 years.
In trying to understand the other side I have learned that this is a very touchy subject with very deep, emotional opinions on both sides. This is all fine & good & I am not saying either opinion is good or bad…. I’m just saying what if the system does indeed collapse?
Well, that question is moot because we do not know what will happen even if we do absolutely nothing.
So… what is the answer? As much as I may want change it will not happen unless there is a concensus, and if there is none, no change will happen. And if by no change the system collapses…so be it.
If the system stays strong like others are suggesting, well, that’s cool too.

Posted by: Eric Nardo | Apr 22 2005 1:27 utc | 38

To Marcus Twainus-
according to my W2 form from last year, I paid:
8.2% to SS (this year as a self employed person I will pay 16.4%)
1.2% to Disability Insurance
and 1.5% towards Medicare
I realize that Disability & Medicare are completely “community chest” type things where I only see that money if I should ever need it, as opposed to SS where I get my check when I retire if I don’t die first.
I have no problem with Disability Insurance or paying into Medicare.
I did not mention them because I had no beef with those policies.

Posted by: Eric Nardo | Apr 22 2005 1:33 utc | 39

In trying to understand the other side I have learned that this is a very touchy subject with very deep, emotional opinions on both sides.
No. There are obvious, very objective, reasons why “privatization” is a ripoff. The social distribution of the costs of delivering disability and retirement benefits is a proven success. I agree the criticism made by the left connecting SS to the problem of the legitimation of economic exploitation (worsens political passivity of workers, externalizes capitalist operating costs, etc.) But, privatization would result in another huge transfer of wealth to the capitalist class, explained well by b real’s link and elsewhere.
Really, Nardo, you are a very amiable troll, thank you. But, thus far, you have only weakly supported the obsessively emotional devotion to the ideology of consumer “choice”–an ideology which to my knowledge has never demonstrated a history of practice eventuating in a tide that rises all boats.

Posted by: slothrop | Apr 22 2005 2:02 utc | 40

raises

Posted by: slothrop | Apr 22 2005 2:03 utc | 41

On paper, privatization works:
1. “choice” sounds nice
2. if someone is saavy in the ways of investing they can get a better return and why not? good for them
3. if someone wants things to stay exactly the way they are, they can and nothing changes, so what’s the problem?
The problem is that the “community chest” aspect goes away and I guess we do need that.
However, the fact does indeed remain that if and when there are more retirees than payees we will have a problem.
Some people say this will happen, some say it won’t. We seem to have a stale-mate at the present moment.
This is what I have learned today.

Posted by: Eric Nardo | Apr 22 2005 2:15 utc | 42

No. The burden now for you is to demonstrate a national privatization system which works. “on paper” is inadequate.
there is no reason, regardless whether retirees exceed workers, the system cannot remain funded forever. forever.

Posted by: slothrop | Apr 22 2005 2:21 utc | 43

the only way to argue SS insolvency is to throw in medicaid/medicare. health care costs are unsustainable: the real problem. Yet, because of demand elasticity, health care cannot be efficiently allocated by markets. even pete peterson knows this. the socialization of health care is the only way to ration care abnd reduce costs.

Posted by: slothrop | Apr 22 2005 2:28 utc | 44

If someone could figure out a system of SS where it would be privatized, where it would take care of all of the things it currently takes care of, AND it will work you bet I’ll support it.
But it’s going to be tougher than I thought, and unless I’m getting paid, I’ll let someone else try to figure that out!
I’m sure if such a system could exist someone will think of it.

Posted by: Eric Nardo | Apr 22 2005 2:33 utc | 45

After reading De- excellent articles, informative yet even comprehendable by the largely financially illiterate, I have a question for the far more literate at the bar.
Since the scheme will cause such a huge increase in the deficit – and for that reason alone seems like 50% ideology & 50% farce – is it possible that Wall Street Banking Houses are right now a huge Ponzi scheme & are in danger of collapse unless they can suck in ~$2 trillion more in foreign capital?? Could that be driving it in part? (I’m not being rhetorical – I would really really appreciate an answer.)
I can’t imagine that foreigners will invest that kind of money in this country now.The only other way I can make sense of this obvious madness is that elites have to destroy Social Security before they merge xUS w/Mexico (& ultimately rest of Latin America as counterweight to EU) – never forgetting that S.S. is both real & a metaphor – both money & a social philosophy that says that the govt. has a responsibility to promote & protect the welfare of it’s citizens. (I would argue that is the major war going on right now domestically. And it’s that that separates us from Third World Nations.)

Posted by: jj | Apr 22 2005 3:04 utc | 46

Nardo, do you happen to own any securities? Any insurance? A bit of both, perhaps? Are you also inclined to confuse the one with the other? I mean, would you be inclined to take the money that you (or others) have invested in your health insurance, and spend it all at the casino? I’m not myself so inclined, because I’m not smart enough, quick enough, or tenacious enough to bet against the house without losing. Gifted gamblers come out ahead (they’re very good at counting cards, and they pick their opponents wisely). Much as I admire them, I’d never play poker at their tables.

Posted by: alabama | Apr 22 2005 3:13 utc | 47

I don’t appreciate investing being compared to Casino Gambling.
I have been to Vegas many times & I usually lose.
I have invested money wisely over the years and have mostly made money.
I don’t know how to be a professional gambler, but I do know how to invest.
If you are not inclined to Investing or gambling, that’s totally fine. Everyone is entitled to their own thing, but I think we can all agree that there is an unfair connotation to Casino gambling that in my experience has not been the same as investing. At all.

Posted by: Eric Nardo | Apr 22 2005 3:28 utc | 48

Fair enough, Nardo–the key point here is that you’ve invested money wisely over the years and have mostly made money. That’s for the equities side of my point. But what about the insurance? Do you own any (car, health, homeowner’s) insurance, and if so, why? Shouldn’t you, rather, invest it wisely and make money?

Posted by: alabama | Apr 22 2005 5:27 utc | 49

Yes, I get your point. Before I got into this discussion I was looking at my SS money & saying to myself “What a waste! A Lousy 2 percent! Let me get at that so I can make some REAL money!!”
Now I see SS as more of an “insurance” and also somewhat of a charity to society, which I suppose is necessary in the sense that if it wasn’t there who knows what might happen.

Posted by: Eric Nardo | Apr 22 2005 22:11 utc | 50

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