Saturday, March 05, 2005

 

Why Social Security privatization is a bad idea

Reason number 15:

Yesterday’s headline in the NYT Business section: Bank of America settled a securities fraud suit against it for its role in getting people to invest in WorldCom shortly before the company collapsed in 2002. B of A will pay the plaintiffs $460.5 million – an impressive sounding sum until you consider that the investors lost billions of dollars, for which the settlement will recover only a few pennies for every dollar lost.

Who are the plaintiff investors? The plaintiff is the New York State Common Retirement Fund. That means the investors who lost out are current and future employees who were relying on these funds for their pensions.

Allowing pension funds to be used to play the stock market is a dangerous thing when done by a huge institutional investor that has sophisticated financial analysts guiding the investment decisions. Are ordinary folks going to be able to outperform the trustees of the New York state pension fund in their personal investment decisions on their personal Social Security accounts? Yeah, right.

***

Comments:
Presumably, WorldCom stock was a small portion of the entire retirement fund. Obviously, if an individual investor were in only one stock, it would be very high risk, but as far as I understand President Bush's plan, you could only invest a few percent of your payroll tax into private investments and these private investments would have to be diversified in mutual fund-type funds.

I would be shocked if you were not an investor and I would be shocked if you would recommend that people with extra money shouldn't invest it in the stock market. Although I don't think it's a good idea to transition to private accounts right now because of the large transition costs, it seems to me that investing in stocks is a fundamentally good idea.
 
Bryan, the key phrase in your comment is "extra money." One of the fallacies of privatization is our broader pension policy confusion between wealth accumulation and income security. I think the Bush Admin really views privatization from the vantage point of their wealthier supporters for whom social security checks are indeed extra money -- in which case, why not play the market with it?
 
I see your point, but then the question becomes, why the hell are we giving Social Security checks to rich older Americans? The elderly control 2/3 of the wealth in this country and working families are paying to prop them up. If we are talking about Social Security as solely a safety net, then let's give it just to the people who need it and we'll solve the part of the problem right away. If Social Security is a system for all Americans, it seems to me that wealth accumulation via private accounts is a worthwhile goal.

In other news, I have ~42 years until retirement. That puts me right near the estimates of 2042 and 2052 for when the system can only pay out ~75% of benefits and goes downhill from there. If college kids and young working adults aren't investing extra money right now, they're likely going to get screwed anyway.
 
Bryan, a central problem with your argument is that most Social Security recipients actually need income security. This includes some relations of mine who are pretty far in the right tail of the wealth distribution for seniors, but who nevertheless could not live solely off their wealth.

Wealth distributions are highly skewed, so while older people tend to be richer thanks to having had time to accumulate savings, most of that 2/3 (in whatever way the figure might be accurate) will be concentrated in relatively few hands.

You're also casting an inappropriately negative light on the system's finances. Under the trustees' projections, which have tended to be pessimistic in the past, the system can pay out something like 70% of scheduled benefits under current law ad infinitum. Those benefits would be higher, in inflation-adjusted terms, than present recipients receive. Moreover, using the same economic forecasts used to score the health of Social Security, projected economic growth would be insufficient to provide anything like historical average stock market returns.

So you are really into a unique meaning of being "screwed" under traditional Social Security.
 
Thanks to both of you for replying! Tom, regarding the "screwed" comment, I'm very skeptical that with the increase in the number of retirees from the baby boom era coupled with the fact that people live longer these days that the Social Security system will be able to keep a 70% payout rate forever. I don't even think that the most optimistic forecasts predict that. But, maybe I haven't seen some of them and you could point me in the right direction - hopefully not to Brad DeLong.
 
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