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Anish

If this happens then there will be nothing secure about Social Security. Also keep in mind, one of the intentions of privatizing is to cut future benefits.

Sid

And really, we already have privatized retirement accounts: 401Ks, IRAs.

The experts tell us to diversify, right? Well, the Social Security program is just one more security if the other eggs in the other baskets break.

Phoenix Woman

One thing to emphasize: Social Security's overhead costs are less than 1% of their budget. Privatized pension plans average 14% overhead costs.

SS has the advantage there, if for no other reason than that government executive salaries top out well below $200,000 and there are no "bonus packages", whereas in the private financial sector, multi-million-dollar salaries and compensation packages for CEOs are SOP.

Sid

Phoenix--
Good observation. I think we really have to hammer on the point that the phase out of Social Security from the government over to Wall Street is just a boon for fat cat executives. The salaries that you point out and the overhead costs are the proof in the pudding.

Sid's brother

As for me, the Social Security privatization debate can be summarized as follows: Privatization supporters aren't truly interested in fixing Social Security, their true intent is to dismantle Social Security. They can't come out and say that directly, of course, because their cause would be dead before ever getting started. But make no mistake, as W himself is fond of saying, privatizers want to dismantle it.

Why do I know this? Because the "policy" points the Bush Administration puts forward simply don't add up for anyone familiar with real policy and theory.

So here is my attempt at a critique of the fallacy of the privatization argument.

Basic Issue: Social Security needs more money either to reduce the gap between projected benefits & revenue, or to improve the lot of retirees. Without more money coming into the system something will have to give eventually.

Basic Fact # 1: More money can only come from two sources. It will come from either more rapid economic growth, or from tax increases on people not currently drawing from Social Security. Increased growth can come only from higher private savings, or from better investment decision making.

Basic Fact # 2: Any money going into private accounts instead of into the Social Security quasi-Trust fund will need to be offset by government borrowing to replace it. The so-called “transition plan” to borrow $1-2 trillion dollars seems to be taken at face value by privatization supporters as being workable outside of the larger economic context of existing budget deficits & permanent tax cuts. Increased government borrowing will generally put upward pressure on market interest rates, which in turn will act as a weight on economic growth. Without faster economic growth, private accounts won’t grow as fast as they might have otherwise.

But this also begs an additional question: If supporters can justify borrowing $2 trillion dollars to cover a transition, why not simply borrow the $2 trillion dollars to cover the gap & leave the structure of Social Security alone? If the answer is that $2 trillion dollars isn’t enough to fix Social Security, then the conclusion causes the basis of the argument to cave in on itself. It’s enough to cover the transition, but not the gap? So, where exactly is the promised fix?

Basic Fact # 3: Privatization would neither make capital markets more efficient nor improve investment decision making at the aggregate level. Fixing Social Security and making better investment decisions have no logical or theoretical relationship. One is an issue of social policy, the other an issue of financial investment theory.

Summary: The fallacy of the privatization argument is that it will both increase the private savings rate and result in more money for benefit recipients in the long run without systemic costs (tax increases, higher interest rates, etc).

A few economists have argued that Social Security reduces the private savings rate because individuals save less based on the expectation of receiving Social Security. Fair enough; but here’s the rub: These same economists have argued that a systemic reduction in Social Security benefits would result in higher private savings.

Higher private savings? That sounds good; that is, until remembering that privatization is supposed to create both a higher private savings rate and increased benefits over the current system in the long run. The promise is of no net loss to recipients. Yet the economic argument is that in order to induce higher personal savings there needs to be a net reduction in Social Security benefits. If the system delivered an increased benefit, then private savings should fall. After all, people save less expecting to receive Social Security payouts in the future.

In other words, the "policy" of privatization as presented by the privatizers will work only if the theory supporting it is false. Privatization will lead to higher returns which will increase benefits which will lead to lower savings which will lead to lower returns at the aggregate.

Remember, ultimately the motive isn't policy. With Bush the motive is always about ideology.

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