The currently floated change includes borrowing lots of money to replace the funds lost when people are allowed to invest in their own private accounts. I assume that the government borrows money by selling bonds. The question is this: if the government thinks that people can do better with their social security money (in their private accounts) by investing it in the market, why would anyone buy the government bonds? Shouldn’t the same logic (do better in the market) apply to them?
US Government Bonds have less risk than other debt obligations and less stock. They should be one part of everyone’s portfolio. Of course, less risk also goes with lower expected and historic rate of return than stocks and other debt obligations. Therefore, they should not be the totality of the portfolio of anyone that is under 65 or not already known to be suffering from a fatal illness.
But, even the very low rate of return from US government debt is a few times greater than the expected rate of return on the funds that are taken from you by Social Security taxes. Moreover, you stop getting social security when you die, which means that you can die without getting a penny out of all the money that was taken from you in Social Security taxes. Your heirs get to inherit what you put into a private account.
Most of our bonds are held by foreigners, not by U.S. citizens.
Aside from financing the conversion, which could be done if we weren’t so busy converting the world to “freedom”, the real downside is when those investing in private accounts lose all their money in the stock market and become wards of the state. We will still have to bail them out in such a case. Also, does anyone here actually think that the janitor at Mickey Dees is going to invest and if he did is there even a remote possibility that he wouldn’t get taken to the cleaners with the fees and downturns in the markets?
Absent some public money managers, such as you have with pension funds, private accounts sound like a good way to cost the treasury a few extra trillion bucks down the road in recovery costs. But, the spendthrift neo-cons will not miss a chance to enlarge government at every turn and drive us into even more debt.
I realize that socialism is the bugaboo of the right wing, but until they want to start privatizing the financing of the military, I’d suggest they keep their mitts off social security.
However, an even worse proposal is the one being floated to index s.s. colas to real wage rates rather than inflation. Since real wages are falling, this approach would save the government millions of dollars but would leave a lot of old people out in the cold. If this is compassionate conservatism, please sign me up for the RED ARMY. 
j/k
-Robert
Risk. - volatility. www.investopedia.com
Basically the US government perhaps going to be doing a massive risk arbitrage transaction where funds are effectively shifted from low-risk (volatility) bonds into higher volatility market based securities in the hopes that the equities will provide higher returns - the major problem is that the Bush administration’s reckless spending may well make government bond yields rise drastically, with borrowing for private accounts only making this situation worse - making the stock market perform poorly and bonds a better investment. Even if the Americans could control their government finances the real issue with private accounts that we’ve seen in the UK and other counties is that on the order of 20% of the net value of the private accounts is going to be eaten up by administration costs - compared to less than 1% with the current American system.
Also, the role of social security is to act as a risk limiter for people who either live to long and exhaust their private accounts or who due to bad luck/bad investment choices retire at a period when they have no equity in their accounts.
That said, hedge funds should make out like bandits and make me a richer man, so I shouldn’t be compaining - although that is going to happen at the expense of the American public. Oh well.
Uhhhh…Krugman (from NY Times): The Free Lunch Bunch
**By PAUL KRUGMAN **
Published: January 21, 2005
 
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1. Op-Ed Columnist: Dancing the War Away 2. Op-Ed Columnist: The Free Lunch Bunch 3. Op-Ed Columnist: Don’t Know Much About Algebra 4. State of the Art: New Ways to Manage Your Photos 5. Conservatives Pick Soft Target: A Cartoon Sponge Go to Complete List
id they believe they would be welcomed as liberators? Administration plans to privatize Social Security have clearly run into unexpected opposition. Even Republicans are balking; Representative Bill Thomas says that the initial Bush plan will soon be a “dead horse.”
That may be overstating it, but for privatizers the worst is yet to come. If people are rightly skeptical about claims that Social Security faces an imminent crisis, just wait until they start looking closely at the supposed solution.
President Bush is like a financial adviser who tells you that at the rate you’re going, you won’t be able to afford retirement - but that you shouldn’t do anything mundane like trying to save more. Instead, you should take out a huge loan, put the money in a mutual fund run by his friends (with management fees to be determined later) and place your faith in capital gains.
That, once you cut through all the fine phrases about an “ownership society,” is how the Bush privatization plan works. Payroll taxes would be diverted into private accounts, forcing the government to borrow to replace the lost revenue. The government would make up for this borrowing by reducing future benefits; yet workers would supposedly end up better off, in spite of reduced benefits, through the returns on their accounts.
The whole scheme ignores the most basic principle of economics: there is no free lunch.
There are several ways to explain why this particular lunch isn’t free, but the clearest comes from Michael Kinsley, editorial and opinion editor of The Los Angeles Times. He points out that the math of Bush-style privatization works only if you assume both that stocks are a much better investment than government bonds and that somebody out there in the private sector will nonetheless sell those private accounts lots of stocks while buying lots of government bonds.
So privatizers are in effect asserting that politicians are smart - they know that stocks are a much better investment than bonds - while private investors are stupid, and will swap their valuable stocks for much less valuable government bonds. Isn’t such an assertion very peculiar coming from people who claim to trust markets?
When I ask privatizers that question, I get two responses.
One is that the diversion of revenue into private accounts doesn’t have to lead to government borrowing, that the money can come from, um, someplace else. Of course, many schemes look good if you assume that they will be subsidized with large sums shipped in from an undisclosed location.
Alternatively, they point out that stocks on average were a very good investment over the last several decades. But remember the disclaimer that mutual funds are obliged to include in their ads: “past performance is no guarantee of future results.”
Fifty years ago most people, remembering 1929, were afraid of the stock market. As a result, those who did buy stocks got to buy them cheap: on average, the value of a company’s stock was only about 13 times that company’s profits. Because stocks were cheap, they yielded high returns in dividends and capital gains.
But high returns always get competed away, once people know about them: stocks are no longer cheap. Today, the value of a typical company’s stock is more than 20 times its profits. The more you pay for an asset, the lower the rate of return you can expect to earn. That’s why even Jeremy Siegel, whose “Stocks for the Long Run” is often cited by those who favor stocks over bonds, has conceded that “returns on stocks over bonds won’t be as large as in the past.”
But a very high return on stocks over bonds is essential in privatization schemes; otherwise private accounts created with borrowed money won’t earn enough to compensate for their risks. And if we take into account realistic estimates of the fees that mutual funds will charge - remember, in Britain those fees reduce workers’ nest eggs by 20 to 30 percent - privatization turns into a lose-lose proposition.
Sometimes I do find myself puzzled: why don’t privatizers understand that their schemes rest on the peculiar belief that there is a giant free lunch there for the taking? But then I remember what Upton Sinclair wrote: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
Bwuahahahaha!
Oh, God, that is so fucking funny, sad, and true.
I’ve got to keep reading your posts.
-Robert
And “Loosing” is what you’d do. That’s what scares me Tibbsy. Also, wouldn’t you have to have some money to invest? :),
Long before we get to 75% I’ll be retired in Mallorca.
-Robert
Hey, I never said it was my interesting thought. I’d have quoted Krugman, but then all the people who think the NYTimes is a pinko rag would’ve been all over me like scum on a pond. I just wanted to see if anyone had any counter arguments. Guess not.
This is a really great editorial, except for a few omissions. Why did he leave out the part about his pension as a Princeton professor being invested in equities via the company that manages most College pension funds? The name escapes me at the moment.
Why did he leave out the part about his colleague down the hall, my old Econ 101 professor Bert Malkiel (sp?), thinks it is a great idea?
Why did he leave out the part about how very successful and popular the Federal employee version of a privatized pension fund is among government employees? The management costs, supplied via bid, are miniscule.
Why did he leave out the part of the private investments being optional?
Is his real concern senior citizens? Or is it really that the thought of a society whose citizens have a piece of the rock with their name on it instead of the government’s name scares the hell out him?
Maybe Krugman will tell the whole truth in his editorials some day soon, instead of half truths. Don’t hold your breath.
Tibbsy, you are one of the most creative guys on this forum, which is probably exactly why you shouldn’t be managing your own money. I may be wrong, and I’m not knocking you, but if I had to guess, I’d guess you’re one of the people we need to protect. For your libertarian soul, I’m sure that doesn’t sit well, and I’m just guessing based upon a few things that have happened here.
I wish you the best because we need people like you who are so far out of the box they can’t find cardboard.
Hugs and stuff :),
-Robert
Thanks for following my advice Robert. Thanks for continuing to tell people they are stupid, that you know much better than they, that you will help take care of them, and that they can’t do anything themselves. Keep reminding them how much wiser you are, and much better equipped to make decisions for them. Keep telling them that they shouldn’t trust themselves to make complex economic decisions that are outside of their understanding. Keep telling them that saying yes or no to investing part of their retirement in a mutual fund is more than they can handle since they are basically incompetent.
Oh, and keep wondering why so many stupid people keep voting opposite to the way you suggest.
For myself, I would be inclined to trust Tibbs. I would certainly not be inclined to piss him off, as our Special Forces veteran would have no trouble gutting me like a fish in three seconds flat were he so inclined. I think maybe Tibbs can take care of himself.
This is a really great editorial, except for a few omissions. Why did he leave out the part about his pension as a Princeton professor being invested in equities via the company that manages most College pension funds? The name escapes me at the moment.
What does this have to do with the argument against privatization? Nice attempt at deflection. His point, in this & other editorials is NOT that partial privatization is a bad thing, but that while the concept may be sound in theory, the #s just aren’t adding up (and this is using the current admin’s #s----everyone else’s are far, far more pessimistic, and I tend to believe them given how our current admin has been wrong on pretty much every fiscal projection they’ve put forth). Privatization works, but only if it is managed properly–the great fear (and a very real fear of all the fund managers I deal with) is that as soon as any given program is put into place (by congress, not the best money managers in the world), the restrictions/safeguards will begin to be chipped away at all so that the fees/costs associated with the plan will be raised so that private entities can make greater profits, at the average citizen’s expense. If the plan was restricted to organizations such as Cal-Pers managing the funds, and not the Wachovia or Fidelities of the world, than most economists & politicians would probably be behind it. But that is not what the security industry wants, which is why they are lobbying so hard to let their members have a shot at the money. The UK comparison is spot on, and I would compare the current plan/theory/ideal vs what happened with the prescription bill: as soon as congress gets ahold of something, we are screwed.
**Why did he leave out the part about his colleague down the hall, my old Econ 101 professor Bert Malkiel (sp?), thinks it is a great idea? **
Another deflection and you really need to familiarize yourself with Malkiel’s work before you start dropping him in as your expert witness. Malkiel believes that the markets are remarkedly efficient, however, and I quote, “a blindfolded chimpanzee throwing darts at the stock pages could select stocks as well as the experts”. Krugman agrees with him on the markets, and further points out that the administration of Social Security is scarily efficient & cheap compared to the administration of all but publicly managed pension funds such as those that you mentioned above. Again, the problem isn’t with the theory or ideal, it is with the execution: the existing political system will corrupt it unless you take the incentive of a financial windfall out of the arena so that there is no opportunity to screw it up.
Why did he leave out the part about how very successful and popular the Federal employee version of a privatized pension fund is among government employees? The management costs, supplied via bid, are miniscule.
What part of this are you not getting—look at how the current admin handled the prescription drug plan–no bids, a complete windfall for the pharmaceutical industry, and on the back of the taxpayers? This is a conservative plus? This is how conservatives manage our (taxpayer’s) money? What makes you believe that their privatization plan would be any different? This is the major problem people have against it–the execution–not the plan itself.
**Why did he leave out the part of the private investments being optional? **
Deflection again; you’ve really learned well from Rove & crew. Don’t get lost in the details–concentrate on the main problem everyone has with the program: the implementation, not the concept.
**Is his real concern senior citizens? **Or is it really that the thought of a society whose citizens have a piece of the rock with their name on it instead of the government’s name scares the hell out him?
Why is it that “everyman-for-himself” seems to be at the basis of everyone of your arguments? You are part of a society; you directly & indirectly benefit from the health of that society. Your “I’m out for myself” routine is incredibly tiresome. Let me pose some questions to you: do you believe that you have any responsibility for the health & well-being of other members of society? From what I have read from your posts, you don’t. If this is what you believe popular conservatism is about, you’ve just done a great job of moving me further to the left. The recurring argument you, Tibbs & Kahuna put out there that “we can manage our own money better than the gov’t” is so short sited. Sure, YOU probably can. But what if you can’t? Do you believe that there should be any sort of safety net out there or is it truly every man for himself? Why are conservatives so rabidly against Social Security (or any “entitlements” for that matter)? Do you feel absolutely no responsiblity to your fellow citizen?
I had an interesting discussion last night with a global fund manager: his take on the next ten years was this: Economically (statistically speaking), the U.S. is going to keep moving ahead. However fiscally, the poor to upper-middle class is going to suffer. The top 1% are going to reap the rewards of globalization. The economic divide between the haves and the have-nots is going to schism even more. We’ve seen the eroding of the lower-middle class over the past five years–it is only going to get worse as 2nd world countries develop the technologies to compete on a world-wide basis, while their SOL increases despite wages about 1/10th of ours. In a way, financially, we may look very much like a third-world country in ten years time: poor, a desperate middle class, and the very, very wealthy. However, because of our infrastructure, the average persons SOL will remain very high (comparatively to 2nd & 3rd world countries), and there will always remain within the US the opportunity for someone to rise from poor to the wealthy class (by hook or by crook). Personally, I’m a lot less comfortable with this scenario than the semi-socialistic states of most European countries + Australia, where the poor make up a much smaller % of the population (and the society as a whole is healthier), as do the wealthy.
Maybe Krugman will tell the whole truth in his editorials some day soon, instead of half truths. Don’t hold your breath.
Please, please, please give me a synopsis (your own or somebody else’s) that explains how this is going to work & how we are going to fund it as is. Nobody in the current adminstration has been capable of doing this. The truth, that nobody is facing (though Krugman has touched on it) is that the average Joe is going to have to face this: you are most likely going to have to pay more in, and you are going to get less out. Privatization may be a possible band-aid or partial remedy (it is not a cure-all), however unless the execution is handled by anyone other than the elected corporate interests in Washington, the way it is currently laid out is a lose-lose proposition. No politician will tell the truth on this (there was a great discussion on this last week on Meet the Press btw) and will prefer to pass the buck down to the next generation.
Oh, and your “keep wondering why so many stupid people keep voting opposite to the way you suggest” argument is right out of Hannity’s mouth. Read “Whats the Matter with Kansas” sometime for an interesting perspective on why (self-proclaimed conservatives mostly) keep voting against their own economic self-interests. I don’t think you are stupid Art, but I do think you are blind to pretty much anything but your own self-interests…and the same could be said for the current admin as well.
Krugman and the Democratic Party are against Privatization in any form. The reason is that they believe that long term it will create more Republican voters.
As an example, blacks in this country get screwed as a group on Social Security because of their shorter life span. What would happen to the monolithic black vote years from now as millions receive a check from the privitized portion of the SS program? They would never get these checks if the Democrats had their way. So please explain to me why Democratic and Black leaders are not leading the way to support the program. While you are at it, explain to me why you support the structure of the Social Security program that creates this inequity.
If privitization works if it is managed properly, why don’t you support the concept? There are terrific models out there, the government program being the outstanding example. Giving everyone the same options as government employees, or Princeton professors for that matter, and you would have the foundation of an outstanding program.
Your statement that people’s object is to the management of the plan, not its concept is absurd. Krugman and company will lay down on the tracks to stop any form of private accounts whatever.
I do agree that the Medicare “reform” is a complete and total disaster. There is nothing conservative about it, except some token health Savings Accounts which will probably never work and may never happen. It is a completely big government, liberal plan. That reward for a lifetime of trying to elect conservatives is enough to make me sick. What I don’t understand is why you don’t support it. This is government “taking care” of its citizens, which is usually up your alley.
I won’t dignify your condescending rant about cold hearted conservatives. Conservatism is compassionate. You won’t buy that because you think most people are basically incompetent and need to be cared for. Conservatives believe people have enormous talents that can be unleashed through intelligent policies, and that the worst thing you can do for them is to “take care” of them. Take a look at the unparalleled success of Welfare Reform that Clinton signed the third time around. I heard the same rant about that proposal. The same people are ranting about SS reform now. They are at least consistent, even if it is consistently wrong. We won’t agree on this, so I will move on.
The answer for Social Security is fairly simple. Getting there may prove impossible without another election or two. The most important thing is to raise and hopefully index the retirement age. Two workers per retiree is unmanageable and will never happen. Set up some form of optional personal accounts for a portion of the fund. Hopefully change the benefit indexing formula to an inflation based indexing from the current wage based indexing. If the price of support from a few Democrats is to raise the wage ceiling of SS taxes, so be it. If you do all that, you can finance the shortfall with debt.
I would not support a plan that just creates personal accounts. They would help the fund around the edges, but not enough to solve the substantial problems. You really need most or all of these approaches.
Of course, the great part about Bush’s proposal is that they want to reduce social security benefits by changing the way they are calculated. They want to make it so that the amount of money you will receive will be determined by inflation rates and not changes in wages. Social security is currently pegged to wages, and they rise much faster than inflation. If this change gets made, it will mean that we will all receive less money. Depending on when you retire, you can expect to get a 25-50% haircut on your benefits.
The administration’s rebuttal to this point is that you will recoup this money by investing the privatized money in the market. But that argument depends on the market rising. And it means that we no longer have guaranteed benefits. They are dependent on the ups and downs of the market.
Of course, like everything else, logic won’t prevail here. The public will get hoodwinked and the vast majority of folks will get shortchanged. But what’s new.
I agree with the plan to change indexing. It would make a large step toward improving the solvency of the plan. I disagree that it is a cut. A reduction in the rate of growth of a program is not a cut.
I don’t actually think this is part of Bush’s plan, but if not, I hope it gets added to the mix.
Of course, this approach is very similar to raising the retirement age in that it decreases projected expenditures. Given the choice, I am more in favor of raising the retirement age significantly.
At the end of the day, current projected benefits are not sustainable without a prohibitive and economically destructive level of taxation on my children. At some point, something has to change. The sooner, the better.
"Why did he leave out the part of the private investments being optional?
Deflection again; you’ve really learned well from Rove & crew. Don’t get lost in the details–concentrate on the main problem everyone has with the program: the implementation, not the concept."
I don’t see this as a deflection at all. And why you answered it with a non sequitur seems dishonest. The key to the whole thing is that no one will do anything with your money you don’t want to. If you’d like to go with the same defined benefit social security has always offered - go ahead. Want to invest your money in us government bonds - safest investment there is - go ahead. I’m a gov’t employee rght now and participate in he tsp that most folks want to model social security after. I can invest the whole thing in fully guaranteed government bonds, literally guaranteed by the government not to lose money they call it the g fund. Or I can invest it in the stock market.
I haven’t yet seen how his is somehow worse than having social security as a pyramid scheme. If you or I ran a pyramid scheme we would be thrown in jail, it’s a serious offense.
Socialism at its finest. Thank you for looking after me since I am too stupid. Thats the problem with you elitsts on the left. You have all the answers. You are going to take care of all of us. We are too stupid to make your own decisions and manage our own $$. Maybe the plan as laid out is not perfect. How many first editions are? I do know that this plan has been tried and is successful already in Chile. Today in Chile workers pay 10% of their pretax earnings into their own retirement plans. They can elect to pay an additional 10% in pretax earnings if they wish. The companies who manage these funds are prohibited by law from engaging in any other type of business. The sole business purpose of these companies is to take these privately owned retirement accounts and grow them. If they die before the retirement age the money goes to their families. If Chileans live to retirement age they have three options:
- Purchase a family annuity from a life insurance company.
- Leave their funds in a personal account and make monthly withdrawals adjusted to match their life expectancy.
- Any combination of 1 and 2.
The government steps in to guarantee a “minimum pension” for people who have worked at least 20 years and who’s benefits don’t meet the minimum monthly amount required by the Chilean law.
In Chile 95% of workers participate in the private plan. In America 100% of workers don’t have that option, and the AARP is doing everything it can to make sure they never do. The one part I think to emphasize is “optional” participation. I just don’t get why the government has any right to make my decisions regarding my $$.
Before you flame me as a far right kook. I did vote for president Bush but I think his spending is out of control and hope he tightens the purse string next term. This is just one thing I am passionate about having the “choice” to make my decisions.
One more thing that may be OT but related in terms of freedoms. How come the left feels a woman has a right to anabortion and can do what she wants with her body but can’t make the choice on how she plans for her future?
You need to ask Robert about this. Only government employees and attorneys are wise enough to make a complex decision like choosing investments as in the federal Thrift Savings Plan. The rest of us are too stupid and need to be taken care of – by them of course.
Then again, we are all too stupid to understand this, so maybe you shouldn’t ask. Just pay and trust those wiser than yourself.
We would not be forced to reduce social security benefits if we weren’t systematically replacing Clinton’s budget surplus with a mounting deficit. Bankrupting social security and forcing cuts in benefits is a product of choice, not necessity, and that is too bad.
Personally, I don’t like being forced to pay into the social security system throughout my career and then having the government change the terms of my benefits midstream. When you think of it, the government is basically making everyone take a salary cut and the net effect is the same as paying more taxes.
In the end, the calculus comes down to this. Under Bush, is the money you gain through tax cuts greater than the money you lose through losses in social security benefits? My guess is that if you’re wealthy, the answer is obviously yes. If you’re the average joe, probably not.
This probably won’t be a healthy change for your average American. But, then again, the average American voted for this administration, so they get what they voted for.
I have to make a couple of observations. The deficit is not mounting, it is falling. Unfortunately this is only temporary. Medicare/Medicaid/SS benefits will overwhelm the deficit reductions in just a few years.
Second, if you are expecting a 10% increase, and you only get a 5% increase. You have not gotten a cut. You have gotten a raise.
As you step through it though, maybe playing with indexing is not such a great idea. The expense of the program needs to be reduced. The best way is an increased retirement age. It should be fun to see how this all sorts out.
As per Dick Morris, in 1997 and 1998 there was a plan on the table to fix all these programs with a compromise everyone could live with. The Democrats made the cold blooded decision that they didn’t want the problem fixed, they wanted the issue instead. I fear nothing has changed, but I thought the same of welfare reform. It got signed the third time around and has been a spectacular success.
If it weren’t for Monica, maybe all this would have gotten done and Clinton’s legacy would be something other than a zipper.