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Wednesday, December 08, 2004

 

Social Security Privatization: no free lunch http://www.washingtonmonthly.com/archives/individual/2004_12/005280.php

posted by Aziz P. at Wednesday, December 08, 2004 permalink View blog reactions
Kevin Drum admirably snd succinctly illustrates the paradox at the heart of so-called social security "privatization" proposals. The key point is that Social Security will run out of money in the trust fund by 2042 if GDP growth is assumed to be 1.8% or less. But privatization schemes require robust stock market growth (5% or more) for them to provide benefits. So the key question for pro-privatization advocates is:


Are there any plausible scenarios in which long-term real GDP growth is less than 2% but long-term real returns (capital gains plus dividends) on stock portfolios are well over 5%?


The answer is unlikely to be yes. Harry Reid put it bluntly on Meet the Press this sunday - the point of Privatization schemes is not to save Social Security, but to undermine it, with the goal of destroying it outright.

Social Security is not in any internal danger (unlike Medicare, which of course was expanded irresponsibly under President Bush's aegis last term).


Discussion

Aziz, I must disagree with this analysis. I admit upfront that I do not have the data in front of me to back this up, but it is my understanding of the situation.

Social Security gets a return of under 2% a year over a person's lifetime. That rate can be beat easily in the stockmarket even if you only give investors a few safe options (like my Thrift Savings Plan at work). The question is not whether we can get a higher return (that is almost granted by all sides), but whether the attendant risk is worth the higher return. Conservatives have argued that adding a little risk that is managed by the owner's of the money is a good thing as it requires stewardship by owners and not by bureaucrats. Liberals argue that we shouldn't add any risk to the program.

The overall financial situations is eventually untenable just as any pyramid scheme is. Transitioning the unacknowledged obligations of government (the money it owes my parents and my generation) into an acknowledged obligation is long overdue. This $2 trillion debt is real since no Congress is going to renege on the senior citizens who depend on their social security checks. Thus, moving toward a system where each person tracks part of their own contribution over time and invests it seems to be a good one in principle. Furthermore, the higher return will help plug some of the $2 trillion hole we are already in.

It is an innovative market-driven solution to a New Deal-era big government problem. Like school vouchers, individual health accounts, and welfare reform, social security partial privitization is a conservative response to a liberal program. This synergy is a good one for the country that both Clinton and Bush have generally followed.

I would push for a bigger scaling back of government interference in my finances (just give me the 12% instead of putting into this false lock box), but I am content with the idea that the program is being looked at through economic lenses as opposed to just political ones.

 

Paul Krugman says that the "Social Security is going broke" argument is a hoax or is the anti-social program advocates method of "Inventing a Crisis" http://www.nytimes.com/2004/12/07/opinion/07krugman.html?oref=login&oref=login&oref=login&oref=login&hp

"Privatizing Social Security - replacing the current system, in whole or in part, with personal investment accounts - won't do anything to strengthen the system's finances. If anything, it will make things worse. Nonetheless, the politics of privatization depend crucially on convincing the public that the system is in imminent danger of collapse, that we must destroy Social Security in order to save it...

The grain of truth in claims of a Social Security crisis is that this tax increase wasn't quite big enough. Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Still, there is a long-run financing problem.

But it's a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year...

...very little about the privatizers' position is honest. They come to bury Social Security, not to save it. They aren't sincerely concerned about the possibility that the system will someday fail; they're disturbed by the system's historic success.

For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people's lives better and more secure. And that's why the right wants to destroy it. "


The Privatizers of Social Security are inventing this crisis to further their goal of destroying Social Security. Privatizing social security only helps Wall Street, not Main Street. There are other more just ways of helping secure Social Security, like 1) removed the salary ceiling cap so that wealthy people like Bill Gates pays into it every business day of the year, not just the first business day, 2) make our Congress Reps and Senators pay into it. They reap benefits from Social Security but don't pay into it. And 3) we may have to raise the rat by a fraction to keep it afloat or we find more ways to get more people to pay into it.

 

Adam, I'm glad for your disagreement, and I understand the perspective you are coming from. Here's why I disagree.

(apologies for typos in advance, my fingers are just cramped today...)

As you yourself noted after talking about rate of return, the issue is not whether we can make more money but rather about risk.

Now, let's make sure we are on the same page with regard to what Social Security is. SS is NOT a bank account into which you deposit YOUR money for YOUR use after retirement. SS is a social contract whereby the workforce of *today* help fund the retirees of *today*. In exchange, the workers of today, when they become the retirees of tomorrow, will be helped by the workers of tomorrow.

I have a deep reverence for this concept because it resonates with my religious conviction that we as a community have a duty to make sure that our elders are secure after a lifetime of work. They are our responsibility, because our success is built upon their labors. This is their sunset, we shall provide them comfort as they finally take their deserved respite.

The conservative argument that increased risk is acceptable in exchange for more control over the disbursement and investment of the funds rests I believe on the assumption that SS is a savings account for your money rather than a real-time fund. Its not your money. Its the retirees' money, and they deserve it. Its about Security, their security, which must be kept absolutely stable because they of all people are simply not able to afford any risk.

If the stock market crashes, it will mean immediate hardship for the present day retirees. It is not like you or I owning mutual funds that go bearish for a few years. We can outwait the recession and our stocks will rise again; retirees however are bound to the present by simply virtue of their seniority.

The reason we cannot add any risk to the program is because the retiurees' benefits must be *Secure*. For teh same reason you wouldn't want FDIC insurance of your bank account money to cede an iota of stability, nor shoudl we play even teh slightest games with SS benefits.

Further, the issue of control is I think a red herring. The Social Security trust fund is not managed by a fceless and incompetent bureacrat. It is effeciently and professionally managed by experts within the financial sector. There is no benefit and arguably great harm to fracturing control of the SS investments.

I wont get into the issue of dismantling SS agendas etc because its somewhat offtopic in the context of your response. You're making a principled conservative case for privatization, and in good faith.

Let me add though that there are indeed reforms I am willing to see. I do think that we should add means testing to disbursement. I also do think that the trust fund money should, if not already, use stock investments as part of the portfolio (but not privatized!). But theres really very little else that needs tuning.

I am against raising the retirement age (because though the mean lifetimes have increased, the brunt of a lifetime of labor has not eased) and against cutting benefits (because the cost of maintaining basic dignity-preserving quality of life continually rises.

 

Aziz, thank you for the thoughtful response. First, my understanding of communal responsibility is that it must be voluntary for it to truly bind a community. When government forces us to pay for others it often causes friction (think government funded abortions) rather than communal bliss. I believe in tithing 10 percent of my income to community groups and I'm a big advocate of civil society organizations that are being crowded out by government programs.

Second, right now SS is as you say the young paying the poor with the promise of a continual cycle. The main argument behind partial privitization (and why I support it) is to convert it to a hybrid (80% old system, 20% your own account). This is why there is the transition cost which I refered to as the unacknowledged obligations we already have. If we make this switch the 80% that stays in the old system will continue to pay retirees. We would have to replace that 20% somehow (transition cost). In the long run it is a wash since my generation (youth) will only receive the 80% plus their own account. This allow the stability of the 80% with an additional personal account of 20%. I would be all for a fully privitized SS, but the hybrid version allows for stability while adding a little risk and increased returns.

No one I know is advocated cuts to current retirees as that would be political suicide. The question is how to head off the coming crunch before it is an emergency (which is in less than a decade in Europe and probably 20-30 years here depending on our economy).

Let's hear what the details of the administration's proposal is before denouncing or embracing it. I think you will probably find that it will not fundamentally alter the system, but rather tinker with it to keep it solvent longer.

Finally, to the other poster, please find a less conspiratorial souce than Mr. Krugman to make your points. I'm not referencing Rush or Coulter to make my points and whatever their faults, they haven't pushed conspiracy theories the way Mr. Krugman has. There are good reasons to oppose privitization, but ignoring the coming fiscal crunch is not one of them.

 

To DoverSpa: Paul Krugman a conspiracy theorist? Surely, you are joking?

Paul Krugman is professor of Economics and International Affairs at Princeton University. He began writing op eds for the New York Times in 1999 but became a champion of progressives opposed to the neo-con's fraudulent policies, domestic and foreign, after George Bush became president. Krugman was sounding the alarm long before Howard Dean began his Presidential campaign. Oh, and Krugman actually unofficially endorsed Howard Dean.

FYI, from the NY Times site, "Mr. Krugman received his B.A. from Yale University in 1974 and his Ph.D. from MIT in 1977. He has taught at Yale, MIT and Stanford. At MIT he became the Ford International Professor of Economics.

Mr. Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. His professional reputation rests largely on work in international trade and finance; he is one of the founders of the "new trade theory," a major rethinking of the theory of international trade..."

You can read more at http://www.nytimes.com/ref/opinion/KRUGMAN-BIO.html

Krugman is a very competent economist and a strong critic of the Bush Administration's fraudulent policies. Krugman is a modern day Thomas Paine. I suggest you read more of his colemns, past and present. It sounds like you haven't read him much.

 

Aziz wrote "I am against raising the retirement age (because though the mean lifetimes have increased, the brunt of a lifetime of labor has not eased) and against cutting benefits (because the cost of maintaining basic dignity-preserving quality of life continually rises."

I agree in principle with what Aziz has said. But I take issue with the idea that either 1) we don't really have a problem (which is the crux of Krugman's argument in his latest article) or 2) we don't need to need any reforms that will "hurt" or be politically difficult. (see Aziz' quote above)

Whether it's 2042 or 2051, the fact is that SS really does have a long term solvency problem. (I will retire around 2040, so this issue is very personal for me) I believe that Democrats should confront that fact openly and honeslty, and that arguments against privatization shouldn't rely too heavily on denial.

mend it, don't end it.

 

I know who Krugman is, I'm an aspiring Economist myself and my great uncle was at MIT with him. As an economist, he was a pretty sharp guy with some interesting work. As a columnist, he has peddled conspiracy theories about the reasons the U.S. went to war and the motivations behind almost every administration policy, most notably the tax cuts.

I don't wish to delve back into his annals to find the exact articles, but you seem to be a regular reader so I shouldn't have to. If you want to be against this war or this tax cut, there are logical arguments to be made. But if your argument is No Blood for Oil then we aren't debating the same thing. If you think taxes were raised on the middle class, then you're probably not a member of it or you filled out your forms incorrectly.

Like many people who switch careers, Mr. Krugman was a much better economist (even as a leftist economist) than he is a political commentator. He has no inside information about the administration, rather he has a cynical viewpoint that behind every policy is some sinister fat cat desire to stick it to some group of Americans. This leads him to find conspiracies instead of the simple, obvious, and almost always correct motivations of the administration. The war was about national security. You can argue that it shouldn't have happened, but if you think the war was begun because of big companies, Halliburton, or oil then you're peddling conspiracies without any evidence. That's why Krugman does. He doesn't provide evidence, but rather rhetoric. That's why seeing the debate between him and O'Reilly was so enjoyable. They were perfect foils as both are full of words and not much substance.

 

I think that Paul Krugman's reputation is tangential to the issue at hand. Arguing from Krugman's authority was a mistake, but so is dismissing the arguments that Krugman did make.

The economic arguments about SS's insolvency are not grounded in conspiracy theries but on straightforward principles. Let's restrict the debate to those rather than get sidetracked into a flamewar.

While I personally do not share Adam's opinion of Krugman, neither do I think that it is a sufficient debating position to say "Krugman says so".

 

What I would like to get to Lou Dobbs, (whom I very much respect), is that it isn't in any way a fix of Social Security, it is the removal. It is just a replacement that certain forces have wanted for at least since Reagan. Not a good thing I am afraid for the little man.

 

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Nation-Building was founded by Aziz Poonawalla in August 2002 under the name Dean Nation. Dean Nation was the very first weblog devoted to a presidential candidate, Howard Dean, and became the vanguard of the Dean netroot phenomenon, raising over $40,000 for the Dean campaign, pioneering the use of Meetup, and enjoying the attention of the campaign itself, with Joe Trippi a regular reader (and sometime commentor). Howard Dean himself even left a comment once. Dean Nation was a group weblog effort and counts among its alumni many of the progressive blogsphere's leading talent including Jerome Armstrong, Matthew Yglesias, and Ezra Klein. After the election in 2004, the blog refocused onto the theme of "purple politics", formally changing its name to Nation-Building in June 2006. The primary focus of the blog is on articulating purple-state policy at home and pragmatic liberal interventionism abroad.