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    Stuff I Want to Learn: Is Privatizing Social Security a Good Idea?

    By Orlando on Tue, 02/02/2010 - 10:31pm | Politics

     

    I should make clear from the outset that I am not an economist. So this post is more of a question for those of you out there who actually know something about the way economies, and more specifically financial investments, work.

    In 2005, President Bush made embarked on an ambitious public relations tour to convince the American people that privatizing social security was a great idea. He sold us the war in Iraq, so he was probably feeling pretty good about his chances. At the time, I thought it was a horrible idea. I can’t explain why from any fact-based point of view. It just seemed to me that moving what amounts to our citizens’ national trust fund into each citizen’s hands and placing it at the mercy of the stock market couldn't possibly be successful. I didn’t want to be responsible for my own social security investment. I might make a good guess at where to invest the money and when to move it out of one fund and into another, but I might also make a catastrophically bad guess. As it turned out, most Americans, whether from fact-based knowledge or gut instinct, agreed with me and the plan failed.

    After 2009, it seems to me that our collective opinion was correct. Can you imagine the public reaction when the stock market lost so much of its value so quickly had the entire social security fund been in the hands of individuals and the market?

    But what still seems to me to be a horrible idea is back on the table, at least on the conservative side. I’ve just read two stories, here and here, suggesting that, while Republicans won’t necessarily be running on the issue, they are beginning to talk it up on the airwaves.

    So here are my questions: Is there any merit in the idea? Can anything good come from privatizing social security? Would there truly be cost savings? Can someone who think the earth is 6,000 years old successfully manage complicated financial transactions? What about someone who tries hard to understand mathematical and financial concepts but still falls far short (i.e., me)?

    Please help me understand!


     

    Topics: 
    Politics
    Series: 
    Stuff I Want to Learn

    Comments

    oh my god, it's an awful idea - and it's hilarious that conservatives are touting it given how much they hate (and rightfully so) the comingling of the private and public with Fannie Mae and Freddie Mac. privatized social security would only be a boon for Wall Street and financial advisors, who would suddenly have a lot more money to play with.

    the main problem with the idea is that while investments in equities and corporate bonds will on average do much better than the US treasuries which social security funds are currently being invested in (and god help us if the us government can't meet those obligations) - there are no guarantees and some people will do much better than the average and some will do much worse.

    as i see it, the idea of social security is to provide the elderly with a baseline level of resources so they don't become impoverished. The risk that would be inserted into the program with privatization has no role in such a system.

    assuming you have to make-good for the people who privatized poorly by using gains from others who privatized well (or some other undetermined means), I think the cost benefits of privatization would be very small anyway.

    of course, something needs to be done with Social Security. The system is unsustainable as is given current demographic trends and its current pay-as-you-go nature (i dont want to open up that can of worms, but the way we account for the social security trust fun is pretty goofy),

    Unfortunately, politicians on the left are just as spineless when it comes to proposing and championing potential changes that would likely solve the coming shortfall - raising the retirement age, removing or raising the income cap on social security taxes (currently incomes above $106K or so don't get taxed), or a bit more controversially in my opinion, means-testing the program (meaning rich folk who retire would get fewer or no social security funds, despite contributing to the system throughout their working lives).

    i would be OK with the government encouraging people to invest privately for their retirements as a complementary addition to the Social Security program so that some of the changes (ie tax increases, benefit reductions) we will need to make to the program be more palatable - which would basically just mean expanding current IRA programs, increasing their tax benefits for citizens and their employers.

    btw, the reason nothing gets done with social security is very simple - even with a solid transition period thoughtfully planned out, a couple of generations are going to get screwed - putting way more into the system than they will take out. no one wants to be the ones to bite that particular bullet.


    by Deadman on Wed, 02/03/2010 - 1:18am

    Orlando (and Deadman): you're missing the big picture.

    Let me break it down for you: if hundreds of millions of Amerians invest their Social Security funds in the stock market, then big firms will clearly benefit. These firms provide ample campaign funds to politicians. Hence, this idea is brilliant!


    by Nebton on Wed, 02/03/2010 - 9:39am

    Waitaminute... my understanding was that in the post Glass-Steagall era financial firms have been contributing to Democratis at a higher rate than Republicans.  By your reasoning, the GOP should oppose privatization.


    by Contrarian on Wed, 02/03/2010 - 11:23am

    Ah, but if the GOP gets this pushed through, they'll get the financial firms back in their camp. Right?


    by Nebton on Wed, 02/03/2010 - 11:38am

    It's possible.  I'm not sure why it would be likely.

    Look, I think that the Financial Services Modernization Act ended up screwing normal folks, benefiting the banks, and partially caused the current financial crisis.  I may be wrong.  I don't really know much of anything about economics (just what I read in magazines) and some of the business school people I know disagree.  On the other hand, they're all pro-market pro-deregulation taxcutting ideologues, and I don't trust them.  Moreover really smart  (Nobel prize winning) economists whom I do trust disagree with them.

    So, let's operate on the assumption that the repeal of Glass–Steagall was a giant giveaway to the banks.  It was passed by a congress with GOP majorities in both houses (albeit signed by Clinton) and created a "financial services" industry that was super lucrative.  So, why have campaign contributions not favored the GOP?

    My thinking is that the banks give based on who they think will give them the best return on their contribution, not necessarily who thinks most like them.  For one thing, the party with the most politicians likely to win (aka incumbents) gets more money.  (DEMs) Leaders of committees get more money. (DEMs)

    I also get the impression that (bless their tiny hearts) many of the pro-business pols are (like the friends I mentioned) true believers.  I mean, the LDS needn't bribe Romney to oppose marriage equality.  You don't have to twist these folks arms.

    On the other hand, what am I supposed to make of it when Barney Frank nixes an Obama policy to reign in the banks?  Are those giant contributions affecting him?  That is a good return on a banks investment.




    by Contrarian on Wed, 02/03/2010 - 3:39pm

    First of all, I'm taking at face value your claim that the campaign contributions from financial service industries favor the Democrats, mainly because it's not too much of a stretch, because as you say:

    For one thing, the party with the most politicians likely to win (aka incumbents) gets more money.  (DEMs) Leaders of committees get more money. (DEMs)

    This explanation presumes that back in '02, for example, Republicans received more campaign contributions from financial service industries. I'm not sure of an easy way to prove/disprove this assertion, so I don't know if it's true or not. I expect it to be true, but that's not worth much.

    On the other hand, what am I supposed to make of it when Barney Frank nixes an Obama policy to reign in the banks?  Are those giant contributions affecting him?  That is a good return on a banks investment.

    Can you give me more information on this? It somewhat surprises me, as I thought Barney Frank, who is literally a Socialist (with a capital S - the only one in the Senate, despite what certain ideologues might claim), would be above it.


    by Nebton on Wed, 02/03/2010 - 4:13pm

    I believe you're thinking of Bernie Sanders.


    by Contrarian on Wed, 02/03/2010 - 4:23pm

    You are correct.


    by Nebton on Wed, 02/03/2010 - 4:32pm

    This explanation presumes that back in '02, for example, Republicans received more campaign contributions from financial service industries. I'm not sure of an easy way to prove/disprove this assertion, so I don't know if it's true or not. I expect it to be true, but that's not worth much.

    I don't know if that's true, but I'd expect it to be.  My point was that I don't believe that they would, for example bankroll someone challenging an incumbent because he wanted privatization.  I think that they give generously to whoever will be in power in order to get a better deal than they would otherwise.  Barney Frank won't tank regulatory reform altogether.  He's a liberal after all and has a role to play.  Trying to kill the thing altogether is the role of the conservatives.  Frank can take little nibbles off of it.  He can say that he has concerns that haven't been addressed.  He can say something is DOA because moderates wouldn't support it and therefore it's a waste of time to fight for it.  (WTF- you're there to fight for it.  It's your job.)

    His nibbles are still worth many thousands of times what the banks give to his campaign .


    by Contrarian on Wed, 02/03/2010 - 5:02pm

    Yes. You see, you need new infusions of cash into the stock market to keep bubble-level prices.

    Now, if Social Security had been privatized, all of that public money being poured into Wall Street would have kept the crash from happening for another six to eighteen month, meaning sometime after the election.

    And then, of course, the crash would have been much bigger, which is also cool because the GOP could blame it all on Obama. ("Back in the Bush years, your one-bedroom house was worth $3 million ... and then the Deomcrats ruined everything.") So it's a win-win.

    Also, if Social Security had been privatized before the crash, all of those oldsters would have had their main source of income completely wiped out ... helping the GOP prove that government programs just don't work. Win-win-win, baby!


    by Doctor Cleveland on Wed, 02/03/2010 - 10:17am

    You're so cynical, Doc. That's awesome.


    by Nebton on Wed, 02/03/2010 - 10:57am

    Thanks, Nebbie. I don't think I'm cynical. i think I've finally begun to grasp how their minds work.


    by Doctor Cleveland on Wed, 02/03/2010 - 11:46am

    there are conspiracy theories i can wrap my head around and then others which are outlandish - yours is in the latter camp and you probably realize it (and are just having fun with some glorious hyperbole).

    bush wanted privatization because conservatives love the free market and believe it can do a better job providing a safety net than the government, which is ludicrous because the free market doesn't care one whit for safety nets. so what you would undoubtedly have is a partial privatization, some sort of bastardized plan where profits would be privatized and (the inevitable eventual) losses would be socialized. hmmm ... kind of sounds like what happened to Fannie Mae and Freddie Mac, and the banking industry, and to almost every other initiative that tries to have it both ways.


    by Deadman on Wed, 02/03/2010 - 11:45am

    I don't mean to propose this as an actual conspiracy theory. I don't think most Republicans in Congress at the moment think coherently enough to formulate such a plan.  The key to understanding this incarnation of the GOP is getting your head around their double-think and what I'll call their half-think (where they grasp one thing about a policy but not its incredibly obvious and natural corollary).

    There was enormous enthusiasm for privatization among conservatives (and Wall Street types!) because that much new cash entering the market would pump up stock prices (which is translated as "being good for the economy"). But the notion that driving up stock prices this way was a bubble, and obviously unsustainable, seemed impossible for the advocates of privatization to imagine. In this case "believing in te free market" means "using government funds to distort the market in ways that benefit financiers." And no, I will admit, they did not see or refused to permit themselves to see that the market would ever go down.

    But certainly, the results of privatization I mentioned, which would have been absolutely inevitable, would have been blamed on the Dems by the opportunistic GOP, and the sorry part is a lot of the Republicans, especially the House Republicans would actually believe it.


    by Doctor Cleveland on Wed, 02/03/2010 - 11:56am

    I hereby propose that Milton Friedman and his economic theories were conspiracy theories.


    by William K. Wolfrum on Wed, 02/03/2010 - 12:55pm

    His name alone should've made it obvious.


    by Nebton on Wed, 02/03/2010 - 12:56pm

    I think the phrase "conspiracy of stupidity" is the one I want.


    by Doctor Cleveland on Wed, 02/03/2010 - 1:48pm

    Thanks for all the comments, guys! I am only online once a day now, so I couldn't jump in. But I mostly wanted to listen and learn anyway!!!


    by Orlando on Wed, 02/03/2010 - 11:03pm