Social security, and the proposed changes
I understand some of the pros and cons on privatization of social security. The way we organize it now, it is a very safe way of providing that our older folks not end up impoverished, but it’s very inefficient in rate of return. That’s pretty much how investments go: low risk investments offer less return on your capital but are safer, while higher risk investment offer more potential return but also a great chance of loss. Another advantage of the current system is that it has very low overhead costs, which a privatized system won’t be able to match, but the higher costs are presumed to be offset by higher returns.
I personally don’t think the current system needs much more than a few tweaks (extending the income levels that pay into the system could immediately solve any potential insolvency problems, for example). That’s because my primary concern is seeing that the most vulnerable members of our country don’t suffer in poverty through their sunset years.
But my more libertarian friends believe that people should have a chance to do better than the system allows, by taking on more risk. That’s part of what drives the Republicans, I guess, or at least some of them. The other part is that their friends in the financial industry stand to make out big on those investment fees and overhead costs which will be generated by the new privatized accounts. That’s my impression, anyway.
Whichever side of the libertarian argument you fall on, it’s hard to credit this administration with the competence or integrity to implement a privatized system in any sort of useful way. They’re already planning to count the cost of the changeover off the books so that the deficit will not show another big jump. That’s their lack of integrity showing. They know it’s not politically feasible to borrow yet more money, so they’re going to wave their hands and pretend they haven’t. An honest response, if they really believe this change will earn more money in the long run, would be to explain to the country why they believe that, and convince us they are right. But that would require a respect for the citizens of this nation which this administration doesn’t have.
Lack of competence shows in pretty much everything they’ve done, from their tax cuts and the accompanying iceberg of deficits, to the unfunded federal mandate of “No Child Left Behind” which is their entire education policy, to the invasion and continuing occupation of Iraq. Frankly, Bush has never run a successful business in his life, and I believe his administration is going to leave this country in terrible shape by the time he’s done. In particular I suspect if his changes to Social Security are implemented, we’re not only going to face further deficits and a weaker country, but that our elderly will end up in more perilous circumstances because of it.
To learn more about the Social Security issue and the proposed changes, read this page from the Center for Economic and Policy Research.
I have an idea about how privatization of Social Security might work:
A worker could have an account (“ISSA”) like an IRA– choose his own brokerage (or other financial institution(s)) at which to hold it, choose whichever investment vehicle(s) (except certain high-risk ones) he wanted, and pay the brokerage fees for making the investment transactions in the account. However, the brokerage would merely be holding the funds for the Social Security Administration of the government. The worker would retire and start collecting Social Security, and take distributions, just like from his IRA. The government would still continue to calculate the amount to which the worker would be entitled every month, and the SSA (through the brokerage) would pay it out. There could be special rules for a worker who bankrupted his ISSA, like by buying all stocks that went bankrupt– there would be some formula whereby his Social Security check would be reduced proportional to his losses.
The proposal to offer the OPTION to new entrants into the workforce to establish a “partially privatized” account is a “no-brainer”! The mutual fund industry would just establish a new series of “minimally-managed” funds offering a few choices like: 100% Dow Jones stocks; 70% Dow Jones/30% 30-year T-bonds; or 30% T-bonds; 70% Dow Jones stocks. Administration expenses should be no more than 2%, and a person who so elects to establish such an account would come out FAR BETTER on his 4% investment than what the entire 12.4% SSA tax would now provide him with upon retirement.
There has NEVER been a 35-year period between 1872 and 2000 at the end of which, the annualized returns did NOT exceed those promised by SSA. Over ANY 35-year period in this timeframe, the average annual return from a portfolio of Dow Jones shares was 6.4%.
“Tweaking” will NOT make SSA actuarially sound, instead it will merely extend out into the future the point at which annual needs will exceed annual inflow of the SSA tax.