Saturday, December 11, 2004

Brooks on Privatizing Social Security

Perhaps as an attempt to challenge Paul Krugman, who actually does have an understanding of economics, Babbling Brooks decided to take on Social Security privatization.
Before we get lost in the policy details, let's be clear about what this Social Security reform debate is really about. It's about the market. People who instinctively trust the markets support the Bush reform ideas, and people who are suspicious oppose them.
Um... some of us had thought that this debate was supposed to, somewhere along the lines, involve actual facts, but apparently Brooks is perfectly satisfied to support or oppose major public policy changes based upon the reflexive jerking of his knee - and assumes everybody else is, as well.

Brooks, of course, doesn't mention even one of the legitimate concerns about Social Security privatization....

1. Some people will lose out, big time. Investing in the markets is a "zero sum game" - for everybody who makes a dollar, somebody else loses a dollar.

2. Nobody is going to manage these accounts 'for free'. To further diminish returns, particulary for small investers (who most workers forced into this program would certainly be), the management companies which handle the "private" accounts would extract fees for their services. And just as the interest on a small savings account can be more than consumed by bank fees, the profits on a small investment account can be more than consumed by the management company's fees. We're talking billions of dollars in fees here - and some skeptics among us believe that the short-term windfall to investment companies and corporate executives (who will compensate themselves handsomely for "raising the value of their company's stock" as new monies pour into the market, even though they didn't actually do a thing) are what is really driving the Bush Administration's desire for "reform". (Paul Krugman has noted the inevitability of fees.)

3. Some people who invest successfully will want to borrow "their money". Just as now, people may make an early withdrawal from an IRA or borrow against a retirement account or whole life insurance policy, some people will want to make a purchase and will see no reason why the government shouldn't let them borrow "their money" to do so. Assuming the government permits this, many of those people will not have the money available when they retire.

4. Those who lose will want to be bailed out. Retirees who play the system by the rules but whose "private" accounts prove inadequate to provide any real support during retirement will complain that it is "not fair", and demand a subsidy beyond whatever is left of Social Security. This is likely to inspire retirees whose accounts did "just fine, thank you very much" to demand the same payment, complaining that it's "not fair" that somebody else should get a subsidy for bad investment decisions. Since retirees vote in serious numbers, which is part of the reason they have Social Security and Medicare, a "bail out" would likely follow... which could in aggregate be more costly than having skipped over "privatization" to begin with.

5. Who says we'll even cut benefits? The Bush Administration is promising a benefits cut thirty or forty years from now, to counterbalance present "savings". It may well be that... the cuts are never implemented. Which would mean that we get a much larger deficit in the short-term, with no long-term payoff.

6. As Paul Krugman points out, projections of high, sustained growth in stock market value probably are not realistic.

7. It would be easy to adjust the tax rate, for example by increasing the cap on payroll taxes for Social Security contributions, to "fix" the Social Security budget for at least a century. And even the "bankruptcy" projected for about forty years from now has Social Security able to meet 80% of its financial obligations - a type of "bankruptcy" most seriously indebted people would happily exchange for their bona fide financial plight.

I'm not at all against investment in the market, nor in government support for retirement investment - to the maximum extent possible I take full advantage of my ability to save through IRA's. And despite the market's woes over the past few years, I continue to do so. So obviously I'm not one of Brooks' mythic people who opposes this faux "reform" because I am "instinctively" suspicious of the market. It is because I am sufficiently knowledgeable of the market, and of pork barrel politics, government budgeting and long-term financial projections, to be inherently skeptical of this type of "privatization".

If the Bush Administration wants more working people to invest in the market, create a sweeter deal for the working poor to invest or save through regular and Roth IRA's, while working to maintain Social Security as a safety net for retirement. As previously noted, an adjustment to payroll taxes (applying them to higher income brackets while maintaining present rates) is an easy fix. If you don't want to "save" Social Security by raising taxes, implement a meaningful reform, such as by moving away from the nonsensical suggestion that it is a savings program and acknowledging it as a social welfare program with proceeds that should be distributed on a means-tested basis. Oh... but either one of those reforms would mean either raising taxes on the rich right now, or reducing their (unneeded) Social Security benefits in the future. So why would the Bush Administration choose such an option, when it can instead put the fiscal thumbscrews to the working classes.


  1. I like most of your critiques, but I don't understand the first one. It makes sense that some people will make bad investments, but why is it a zero sum game? If that's the case, how does the market grow as a whole?

  2. It's pretty simple. The market grows because people put money into it. But every time somebody gains on their investment, other people lose an equivalent amount.

    Take three investors, each of whom puts $50 into a pool. The pool has $150 dollars. If a fourth investor joins, the pool grows to $200. That's the overall growth you observe.

    But if somebody's investment grows to $100, the overall pool doesn't grow as a result - and the combined investment of the remaining three investors shrinks to $100. A zero sum game.

  3. In theory though, stocks represent ownership of some assets. So when one considers such things as dividend payments, the stock game because less of a zero-sum game than it would otherwise be.

    Unfortunately, when ignorant people are in the market, they are easily taken advantage of. And come on, unless you are some kind of Wall Street insider you can't really expect to compete. Yeah yeah, we all know that insider trading is illegal but I think most folks realize that a lot of it goes on so you end up with a lot of people making money essentially because they have information that the rest of us don't have.

    As soon as Social Security is privatized, thus forcing people into the market, there becomes a whole new potential for abuse.

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