"Get your facts first, and then you can distort them as much as you please." (Mark Twain)
Thursday, December 09, 2004
Today's topic is Social Security privatization. I had a spirited conversation a short while back with a good friend of mine who is all gung-ho about privatization, and I must confess that I don't get it. My friend laid out his argument originally in philosophical terms - he can do a better job of investing his earnings than the government can, so he should be entitled to put the funds in question wherever he felt it would be most productive (he was careful, early in his argument, to presume that the same level of contribution would be required and that he would not be allowed to "invest" his stake in beer and greens fees). When I pointed out that such a system would necessarily result in winners and losers, however, and some retirees would find that they gambled unwisely - leaving their support to the public, anyway - he switched gears on me and started complaining about how much Social Security costs him personally. Now, granted, my friend is in the least enviable position; he is self-employed (and so has to cover the whole nut, including the employers' portion), and his income is very nearly equal to the maximum amount subject to payroll tax (so his overall marginal federal tax rate, including both income and payroll taxes, is about as high as it could be). But these are problems quite distinct from those which privatization purports to address.
One problem with Social Security is that it is a defined benefit (rather than defined contribution) program. The value of contributions varies widely depending on the number of workers contributing to the program and on the productivity of those workers. The cost of benefits, on the other hand, is inelastic (that's a word I've heard economists use, so I imagine it makes me sound smart). The cost of the program is actuarially predictable, compared to the relatively variable funds available to support the program.
That uncertainty notwithstanding, here are some facts: There is little or no dispute that the present Social Security trust fund will remain entirely solvent through at least 2042 (Paul Krugman cites the Congressional Budget Office, rather than the Social Security Administration, and sets the relevant date at 2052). At that point, it is projected that the trust fund will be depleted and incoming contributions will be insufficient to match benefits. Even then, however, the "crisis" is relatively small - as Brad DeLong says, revenues will still equal 81% of expenditures, as compared to general fund revenues which cover only 68% of non-Social Security federal expenditures right now. Correcting that shortfall would require raising funds equal to slightly more than 0.5% of GDP, or less than 3% of federal spending - that is, less than the Iraq War is costing us (Krugman again).
The Junta wants to plug this theoretical shortfall by unleashing the magic of the market - because private investments will surely be more productive than a boring old public insurance program, the shortfall will simply melt away like it was waxy yellow buildup. I can respond to this claim in two words - "poppy" and "cock."
As Dean Baker explains, this "magic of the market" solution depends on one crucial assumption - that stocks will return something in the neighborhood of 6.5-7.0% over the relevant period. If performance is any less than this, then the problem just gets bigger, not smaller. But, if this assumption is correct, then it implies overall economic performance much better than the conservative estimates upon which the whole Social Security "solvency crisis" relies. Indeed, should the economy perform well enough to sustain this level of stock market performance - DeLong calculates it at an annual growth rate of 4.5-5%, assuming reasonable PE ratios - then economic growth alone is more than sufficient to fully fund the existing system into the foreseeable future. In other words, privatization can solve the problem only if there is no problem to solve.
Furthermore, the market-based "solution" has enormous transition costs. Unless we cut off those workers who have already paid into - and have been led to rely upon - the current system, we will have to continue to pay benefits to retirees without access to the present contributions upon which those benefits are predicated. How great are these transition costs? How does $5 trillion plus interest, give or take, over the next thirty years sound? Sounds a little spendy to me. And how will we cover those costs? There are two options - raise taxes, or borrow (which simply amounts to raising taxes later, rather than sooner). Neither of these options will solve my friend's concerns about the bite taken out of his income, but the latter option will certainly please those who make their living on commissions from the sale of government bonds. Of course, there is also a third option: Stiff the retirees. Talk about your three card monte! In this case, all three cards are jokers.
I am pleased to report, however, that there is another idea being proposed, and it's a winner by any standard. It comes from our good friends at The Onion, and I endorse it without reservation:
President Bush signed an ambitious Social Security plan into law Monday that will allow citizens to bet a third of their payroll taxes on their favorite sports teams.
"It's time we gave the American people the chance to make some real money for retirement," Bush said, speaking from the new Office of Social Security and Pari-mutuel Wagering Building. "Some naysayers think the average citizen doesn't know how to handle his own money. When spring training starts next year, it's up to you to prove them wrong."
"It's your money," Bush added. "You earned it. You should be able to bet it on whatever team you want."
Under the new plan, participating citizens will be asked to list their favorite teams on their W-2 forms. At the start of each major sports season, program participants will visit their local Social Security booking offices to review point spreads and sample playoff trees. Citizens' team selections will be subject to approval by their employers, who contribute a percentage of wages to the employee Social Security Earned Benefits Fund, or "pot," under the new system.
"For too long, Social Security has been managed by an elite group of government accountants and economists," said U.S. Sen. Paul Ryan (R-WI), a longtime advocate of Social Security reform and athletics-based gambling. "Why let your retirement money sit around in an account when you could double or triple it in a single year? Under the new plan, anyone with access to a sports page can control his financial destiny."
Added Ryan: "Assuming, of course, that Favre keeps a lid on those turnovers next season."