Scott,
I have grave doubts about the wisdom of privatizing Social Security. Some of these doubts are based on economic facts, some on political facts and perceptions.
Wall St adores the idea of privatizing Social Security...oh boy! a new tsunami of liquidity to maintain the faltering bull market, just think of the fees and commissions. The stock market is at the end of a long bull run, and it remains highly overvalued by any historical measure. But only at such a stage could you possibly get political support for investing Social Security funds in the market; that's just based on observation of our political debate -- it's economically almost illiterate.
Historically, liquidity that has poured into stocks at such a stage in the markets has had a tendency to vanish. BTW, have you ever read Alan Abelson on the subject of privatizing Social Security? He writes a weekly column in Barron's and he's been quite scathing on the subject. I do assure you that he is no kind of a liberal.
The political objection I have to privatizing Social Security is that it is being sold on the basis of a lie. The premise on offer is, we have been forced to invest our Social Security money in low-return investments and we must save the system by investing in higher return investments. Here is what President Bush had to say about it:
"This spring I will form a presidential commission to reform Social Security. The commission will make its recommendations by next fall. Reform should be based on these principles: It must preserve the benefits of all current retirees and those nearing retirement. It must return Social Security to sound financial footing. And it must offer personal savings accounts to younger workers who want them.
Social Security now offers workers a return of less than 2 percent on the money they pay into the system. To save the system, we must increase that by allowing younger workers to make safe, sound investments at a higher rate of return.
Ownership, access to wealth, and independence should not be the privilege of a few. They are the hope of every American ... and we must make them the foundation of Social Security."
Now this premise is a lie on several fronts:
1. None of us has invested anything in Social Security. The system is pay-as-you-go. The surplus is being used to retire the national debt, and the government will need to repay the Treasury IOUs when it's time to dip into the surplus.
2. Any money diverted into privatized accounts must be replaced so that current beneficiaries can continue to be paid. We can't just change our Social Security account money into different investments. No mention of these costs.
3. The privatized accounts being proposed sound like IRAs with mandatory savings. That's fine IF you understand the nature of IRAs -- that their investments are not guaranteed, nor is the payout on those investments. You can't outlive your Social Security benefits but you can outlive your IRAs. And as a bunch of people who bought the Nasdaq at 5000 have recently learned, investments go down as well as up.
If you just talk about "saving the system with higher returns", who can object to that? Sounds like magic. We don't allow the private sector to sell mutual funds without sending a prospectus -- we shouldn't allow the Federal Government to do so either -- and that includes building political support for the actual program proposed, not fairy dust and magic. The proposals must talk about risk/reward ration, and say how much the defined benefit will decline for those electing the privatized program.
And yes, I do regard 2% as the thin edge of the wedge. It will take many years to see how the program shakes out; if the privatization program passes, the percentage will be raised long before that happens. |
