Taking A Crack

Mike Kinsley has put out a bleg via Sully:

My contention: Social Security privatization is not just unlikely to succeed, for various reasons that are subject to discussion. It is mathematically certain to fail. Discussion is pointless.

The usual case against privatization is that (1) millions of inexperienced investors may end up worse off, and (2) stocks don't necessarily do better than bonds over the long-run, as proponents assume.But privatization won't work for a better reason: it can't possibly work, even in theory. The logic is not very complicated.

1. To "work," privatization must generate more money for retirees than current arrangements. This bonus is supposed to be extra money in retirees' pockets and/or it is supposed to make up for a reduction in promised benefits, thus helping to close the looming revenue gap.

2. Where does this bonus come from? There are only two possibilities: from greater economic growth, or from other people.

3. Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these.

a) If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same.

b) The only change in decision-making about capital investment is that the decisions about some fraction of the capital stock will be made by people with little or no financial experience. Maybe this will not be the disaster that some critics predict. But there is no reason to think that it will actually increase the overall return on capital.

4. If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.

a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.

b) In other words, privatization means betting the nation's most important social program on a theory that cannot be true unless many people are convinced that it's false.

c) Even if the theory is true, initially, privatization will make it false. The money newly available for private investment will bid up the price of (and thus lower the return on) stocks, while the government will need to raise the interest on bonds in order to attract replacement money.

d) In short, there is no way other investors can be tricked or induced into financing a higher return on Social Security.

5. If the privatization bonus cannot come from the existing economy, and cannot come from growth, it cannot exist. And therefore, privatization cannot work.

Q.E.D.

Bzzzzzzzt. Wrong!

Kinsley works from two assumptions:
1. That Social Security should always be available.
2. That Social Security should always work the way it currently works.

Of course, if you look at it from his perspective, privatization looks likes a bad, unworkable idea.

I, however, work from these assumptions:

1. Social Security is the only legal pyramid scheme in this country. We pay out current recipients from current contributions. This is no way to run a retirement plan. If Wall Street offered this kind of a plan, and then ran it the way the government runs Social Security, the SEC would be all over them. Which is a moot point because no Wall Street firm would ever be allowed to run such a scheme in the first place because pyramid schemes are illegal.

2. Most people my age---thirty-four---do not believe Social Security will be available to us when we retire. We have accepted it and have planned accordingly. Moreover, we don't want Social Security to be available to us when we retire because we:

a. don't want to burden our descendants by forcing them to pay into a bankrupt system to support our aging carcasses.

b. it's our bloody money, not the government's. We're tired of dumping cash into a system that doesn't work and will not pay our grocery bill when we finally reach retirement age. Which, considering the government's habit of upping the eligibility age every few years, means I will, roughly, be around Methuselah's age when I qualify for membership.

Social Security needs a complete overhaul that will be pricey in the short term, but will enable it to survive. But an overhaul is only necessary if you believe that there is an inherent social contract between the citizen and the government to provide for a pension in the first place. I don't and that's because I don't believe the government will ever hold up its end. I don't trust the government to spend my tax dollars wisely. Why on earth would I trust my financial future to them, particularly when there are other options available?

It's all about choice. I could do a lot with the money that is currently in my Social Security account. If I lose it in a chancy investment, well, that's my fault. Like the losses we suffered in our 401K account when the market tanked a few years ago, I won't whine and moan about holding someone accountable for what was a market fluctuation. I fully understand what it means to invest in the stock market: it's about as chancy as placing your all your chips on the spin of a roulette wheel. The difference between that spin and Social Security is that I at least have a chance at a return on my investment with the roulette wheel, whereas with Social Security, I know I'm not going to ever see dime one. I'd rather take my chances with the stock market, and as it's my money, and not the government's, I fail to see where they get off denying me the opportunity to do just that. Moreover, that they would deny me this opportunity because the faulty house of cards they've built would collapse if privatization were ever to come to pass is insulting. They're covering their asses with my retirement money and that pisses me off more than Kinsley will ever know.

If Social Security were investigated by the SEC, it would be shut down in a New York Minute. I fail to see why I should be legally required to keep throwing my money into a failed system. It does no one any good in the long run to keep blathering on about the worthiness of a "social contract," when the real issue at hand is the breach of the current social contract by blatant mismanagement.

Q.E.D.

Posted by Kathy at December 15, 2004 01:18 PM