Even in this stock market, partial privatization would have helped Social Security

Ezra Klein is asking today, Oh My God, what if John McCain had gotten his way three years ago and passed President Bush’s partial privatization of Social Security?

At The American Prospect, Klein wonders with alarm. Offering no evidence at all, he argues McCain was on the team that almost destroyed Social Security:

Today, John McCain said, … “Look at the Stock Exchange today as to what it was even 20 or 30 years ago. So you’ve got to fix that and also, very frankly, people were asleep at the switch. I don’t think there’s any doubt about that.” …

Three years ago, John McCain signed on to George W. Bush's efforts to privatize Social Security. He surveyed Wall Street and decided that it was a stable enough institution to entrust with the nation’s pension funds. Three years ago. …

McCain has consistently argued that much of Social Security should be turned over to...Wall Street. Either he wanted to tank the nation’s pensions funds or he was one of the people asleep at the switch. But those are really the only two options here.

$700 billion option. Ezra, there is a third option: that despite the risks, partial privatization of Social Security is the best alternative.

Consider this: If up to one-third of Social Security had been privatized in 2005, as President Bush proposed, up to $700 billion worth of stocks and bonds would be in Social Security accounts today.

Instead, how much real wealth is in the Social Security Trust Fund? Zero dollars. Nothing.

On Feb. 2, 2005, when President Bush made his proposal to save Social Security, the Dow Jones average was 10,596. Today, the Dow average closed at 11,059. Not much different. Considering the recent turbulence, that’s not bad.

Real lock box. It’s too bad the partial privatization idea gummed up Bush’s proposal, but it’s a sad fact that privatized accounts are probably the only way workers can put money in Social Security without fear the Congress will siphon the money and spend it on something else.

And by the way, I doubt the privatization would get out of hand. Republicans in particular soon would worry that the federal government had too strong a hand in business.

Democrats, too, have come along for partial privatization of Social Security, only by stealth. Last October, on the same day Hillary Clinton said Social Security was not “in a crisis” (that was the party line in those days), she also proposed a new 401(k) retirement plan.

Better than zero. In effect, Hillary said she was willing to let Social Security benefits wither 20 to 30 percent over the next few decades, and, at the same time, retirees could buffer that loss with a new 401(k). That’s exactly the same thing as partial privatization of Social Security.

Just don’t knock partial privatization. It has advantages, the most important of which is that it does accumulate some retirement savings, rather than no retirement savings.

Frank Warner

Comments

[Neo]

This seems to condense it quite well ...

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

Story short, Clinton et al super-charged the role of Fannie and her brother Freddie Mac, appointed a bunch of cronies to sack them, others joined in the fun, and we are left with a big mess that will cost billions.

[David Holliday]

I read somewhere that statistically those loans did not significantly change the balance of what has happened. However, not being an expert in finance I'm in no position to opine on what caused the current situation. I have a tendency to believe it is somewhat a "Perfect Storm" where too many things all lined up to create a catastrophe.

On the other hand, unless something is done, I believe that some day we will be facing a "Perfect Storm" that will lead to the collapse of Social Security. The system is too flawed. Without significant changes it will fail. Congress and the American people are reluctant to fix it. But the clock is ticking.

[Christopher Taylor]

Funny they should bring this up: the Democrats opposed fixing social security when the crisis was brought up, but are now saying Bush failed by not fixing the financial institutions before a crisis came up.

Which is it? No, don't tell me we already know: damned if you do.

[jj mollo]

I think Social Security is on shaky grounds, but I'm not sure privatization would have helped. One of the issues is that the huge influx of money into Wall Street might just be another boom, a flood of cash chasing scarce goods, diluting the honest investment and leading eventually to a collapse and sudden disappearance of "market value".

The social secutity is not a savings policy. It is a transfer. Working people chip in to pay for the needs of retired people. We have, as a society, agreed to do this. The fact that many people didn't really understand the implications of the agreement does not vitiate its force.

There are three trends that bear on the program. The first is that American workers are becoming more and more productive. The second is that the portion of the population being supported is growing. The third is that, although the society may be getting more productive and wealthier as a whole, the people who are being taxed for this program are not the ones benefiting from those increases.

The Social Security tax is huge and regressive, disguised somewhat by the fact that workers think that employers pay half. In fact, it basically comes out of their salaries by means of natural forces in the labor market. Employers are forced to offer lower wages to compensate for their part of social security -- and for health insurance as well.

Good luck on straightening this out. The interests of the wealthy will be strongly focused on pushing the cost down the economic ladder, and the interests of the workers will be focused on preventing the reduction of commitment.

[jj mollo]

IMO the appropriate response is balancing the budget, producing a true surplus. The way to do that is restructure taxes to encourage productive rather than counter-productive economic activity. We must also be honest about the need for revenues to match expenditures.

We have to spend. Spend wisely. We have to tax. Tax wisely.

[Frank Warner]

No, no, "we" never agreed to make Social Security an empty shell that simply takes money from workers and pays retirees. It was supposed to set money aside in the Social Security Trust fund in large enough amounts to safely cover retirements.

Actuaries generally advise that such funds have enough to balance out over the next 75 years. That includes workers' money coming in, but it also includes savings, and should include much larger savings as we saw the number or retirees rising.

It wasn't until the 1960s that the federal government combined the Social Security fund with the general budget. And even then, leaders of Congress repeatedly assured constituents that Social Security funds weren't being touched for non-Social Security spending.

But when Congress sees cash sitting in federal program, it spends it (and more). That would be much less likely if Social Security were in private accounts.

[Frank Warner]

In nine years, Social Security no longer will be generating trust fund money for its savings anyway, so Congress won't have that to steal anymore. And borrowing already has reached the limits. Then Congress will have to start confronting the facts of math.

[Christopher Taylor]

Actually Social Security was supposed to just be a stopgap emergency in the short term for the most needy. Not long-term retirement for every single citizen of the USA.

In any case, "government surplus" means "we taxed you too much" and it's a bad thing. Governments ideally should break even. However I agree we need a balanced budget, and significant spending cuts.

[Frank Warner]

If we are committed to paying all promised Social Security and all other obligations under "entitlements," plus national defense, we could cut every penny of spending for everything else, and we still wouldn't have a surplus.

Make cuts, sure, but cuts won't be enough.

On Social Security, it wasn't and isn't supposed to be anyone's full pension, but it was and is supposed to be a help in retirement. As far as its funding, it is supposed to be a "system" that sustains itself, not an inter-generational financial time bomb.

By stealing all of Social Security's savings (and deceptively labeling that savings a "surplus"), Congress destroyed the system. Heads of corporations go to jail for that kind of pension theft.

[Christopher Taylor]

Make cuts, sure, but cuts won't be enough.

Yeah they would be. You are thinking "trim the fat" when I mean "shut down every part of government that is not constitutional and proper use of the federal government's powers as established by the founding fathers."

In any case, reducing spending would result in a rapid balancing of the budget and in short order surpluses that in theory could be used to pay for social security payments.

However, I'd suggest that privatization is a good step toward eliminating Social Security entirely.

[Frank Warner]

Well, I'm certainly not for privatizing Social Security as a means to destroy it. I'm simply recognizing that partial privatization would be more likely to keep congressional pickpockets away.

Since Social Security is 99 percent likely to remain a federal program, even Republicans won't want too much of it privatized. I can see Democrats, in the first year, calling for "divesting" of politically unpopular stocks, creating more chaos on Wall Street.

[jj mollo]

A surplus on the national level indicates that we are paying down the national debt. It's something we should do. This strengthens our currency and retains national ownership in American hands. It also damps down the business cycle and builds a reserve that can serve us well for the next emergency.

It's part of the Keynesian fiscal bargain. Government spending can theoretically help pull us out of a recession and provide an employment cushion. It only helps, however, if it's actually an increase in spending. You can't have an increase unless you had a previous decrease. During good times you want to reduce the size of government and accumulate the necessary cushion to be used later.

I know that many conservatives think that "only money matters", but the occurrence of "stagflation" effectively refutes that position. IMO, the government's most important economic contribution is to absorb the economic shocks and unpredictable swings. It can't do that if it's overextended all the time, and it can't do it if it has no fiscal flexibility.