Thursday, January 27, 2005

Privatization of Social Security

Much media attention has been given to the Bush Administration's plan to privatize Social Security, and offer private retirement savings accounts to make up for the fact that our grandparents all thought it would be a good idea to make up for the time lost during World War II by re-populating the earth. As a result of their nymphomania and a lack of planning during the Reagan, Bush I, Clinton, and now, Bush II years, the Bush Administration tells us that we have two choices: kill the elderly or create private savings accounts through financial institutions (some of which, like Bank of America and Goldman Sachs, paid for that lavish inauguration party).

It seems that among all the chaos, no one, not the public nor the media, doubts that Social Security is in crisis. Advocacy groups for the elderly have been proclaiming that the system would not support the growth in the number of retirees for as long as I can remember. This article claims that Social Security has been in financial crisis since 1977. The crisis is not as significant as the Chicken Littles in Congress and in the Bush Administration would have you think, however.

Here is a dose of reality from the actual Social Security Administration (you know the government agency that collects and distributes Social Security?). Currently, the Social Security system is receiving billions more dollars in revenue than it's paying out in benefits. Take 2002 for example: Social Security had a surplus of $165.5 billion. Social Security will continue to collect a surplus over what it pays out until 2012.

But 2012 isn't that far away! We better do something fast! The problem with using 2012 as the end of Social Security is that it doesn't take into account that the US Government has been investing that surplus in stable Treasury Bonds, which average about a 7% annual return. According to AARP, about 14% of Social Security's income is from interest from those investments. Presently, Social Security has about a $1.4 trillion surplus invested in trust funds for retirees. Based on that figure, everyone seems to be in agreement that in 2042, the system will not be able to pay benefits at 100% for all retirees. There's obviously a problem here, but when you look at the figures, and the amount of time that we have to fix the problem, it doesn't seem as imperiled as people, including President Bush and the media, make it sound.

President Bush has focused primarily on private savings accounts as a solution to the impending Social Security crisis. Today's New York Times Business Section has an excellent article about the how privatizing government retirement plans in Chile, a country President Bush has said he would use as a model for his plan, has resulted in fewer benefits and more corporate profits. You can read the article yourself by clicking here (requires free registration).

The main problem with diverting Social Security earnings into private retirement accounts is that the system won't last until 2042, if we do so. You see, projections for Social Security are based on continuing contributions from workers into Social Security. Diverting funds into private accounts would leave those people in their late-30s and 40s in quite a pickle. This group of workers would not have enough time to save money in private accounts to create benefits equal to those of regular Social Security, but would also be faced with an inadequate Social Security system because of declining contributions from young workers who are unlikely to contribute anything to a collapsing Social Security program. Have you noticed that none of those in favor a private savings accounts have addressed this issue?

As a young worker now, I am not considering Social Security in my retirement plans. I am fortunate enough to have a job with a gracious retirement plan, and essentially unlimited investment options. In that way, I am quite fortunate. When you're in that position, it's very easy to lose sight of what the majority of the labor force has at their disposal. Most workers, particularly those who will end up relying on Social Security for retirement, don't have those options available to them. I think those of us who are fortunate enough to have those options should not abandon the rest of our labor force. Bridging the gap between what Social Security pays out and what it receives, given the 37 years we have until 2042, may be an easier investment than we think.

1 comment:

CowboyLaw said...

As a by the by, one thing that very few people are brave enough to point out is that there is only one reason to privitize any portion of Social Security. And that reason is very simple. Any privitization of Social Security will involve investing those funds somewhere. For sake of simplicity, let's say that those funds will be invested in the stock market. So, over the course of (let's say) 10 years, Social Security invests (let's say) $100 billion in the stock market (and as Ryan points out, that would only be a small portion of Social Security's assets). That $10 billion a year. Companies aren't printing up new shares of stock (at least, the growth of the stock market in terms of shares available for trade is not statistically significant, and hasn't been since the Beatles stopped getting haircuts), so this influx of new money will accomplish one simple thing: drive share prices up. Econ 101 refresher: when supply is limited, increases in demand result in increases in price. The stock market is one of the most perfectly elastic markets in the entire world, meaning that a 1% increase in demand yeilds an almost 1% increase in price. Social Security privitazation is nothing but enforced stock price welfare for the ultrarich. It's a reverse Robin Hood: grandma gets poorer, while the captains of industry get richer. Gee, those same people who voted for GWB II, and made all those generous campaign donations, will actually directly benefit financially via a voodoo Social Security solution. Whoda thunk? By the way, you can see that the liberal media is all over this story, given that it has appeared in almost every major media outlet.

/or not
/Ben out.