Must… Resist… Urge… to… Fisk

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Now that partial privatization of Social Security is actuually looking like a genuine political possibility, there's been lots of thoughtful criticism of the various proposals floating around. And then there's stuff like this Bob Kuttner piece, which kicks off in the first paragraph by reminding us that:

Without Social Security, a third of America's seniors would be destitute.

Because it's incredibly useful to look at seniors whose wages have been diverted into the system their entire working lives, curtailing their ability to save, and then consider what would happen ceteris paribus if their checks stopped coming tomorrow. Followed shortly by…

With private accounts, you're in big trouble if you happen to reach retirement age when the market is down

and decide, for mysterious reasons, that it'd be a great idea to liquidate all your investments at the bottom of a market slump….

But with individual accounts, there's little redistribution except for a very meager minimum benefit, and hence more poverty in old age.

Because, as we know, redistribution is the only way people can increase their wealth. But this is where I stop reading, because I'm too young for high blood pressure.

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  1. While I’m in favor of moving Social Security out of the government ponzi scheme, I think forcing people to put it into the stock and bond market is dangerous.

    That said, I think it’s curious that this talk of “crisis” by the Bush administration is very telling, considering the dire warnings coming from the economic sector right now about the stock market and a possible collapse very soon. Of course that could be delayed with a fusion of billions from Social Security.

    I’ve been following the news as the economic drumbeat get louder for a few months now, and it’s telling that there’s a sudden urgency with Social Security privatization.

  2. I hope to be re-educated, but why not means test retirement benefits based on wealth? Own lots of capital, gains of which are not taxed by FICA, lose any s.s. retirement benefits.

    Remember that s.s. also has death and disability benefits. Disabilty benefits “pay” more than the current minimum wage, which is taxed under FICA. No one would cut these benefits, however the proposal will cut the expected benefits of low income workers.

  3. The crisis is a fake one. At any old time in the future, Congress can raise the retirement age, gradually or not. Problem solved. Liability gone. Life goes on.

    If you get into forcing people to save, they drive up prices of securities now, and depress them later.

    This lowers the average return (for everybody!) in stocks and bonds.

    It also raises the retirement age, since the return falls below its current historical averages in particular.

    A real crisis will then come if the government guarantees a return on these securities at 65 or whatever, because that cannot be changed. It’s written into the security, in effect. You’ll get a real default then.

  4. My biggest problem with the idea of “privatizing” social security, is that it amounts to the US government borrowing trillions of dollars and investing it in the stock market. There is nothing really all that private about this plan. The ability to manage your own money will be severly limited to companies, bonds and funds chosen for you. This will amount to a massive government entanglement in the finanial markets, and will bring all the problems of government; corruption, excessive regulation, and sloppy oversight even further into the private sector.

  5. You know, it is really entertaining to me
    that all the lefties who were so upset that
    “Bush lied” about WMD to get us into Iraq
    seem completely unconcerned about a program
    that is at its core one giant lie. Social
    Security pretends to be some sort of investment
    based insurance scheme, with regular “statements”
    sent to those who have paid into the “system”
    and with a “trust” fund holding the money that
    has been paid in. In fact, it is a pay as you
    go ponzi scheme that would send its authors to
    jail if they attempted to replicate it in the
    private secror.

    A partial switch to a force savings plan is no
    libertarian panacea, but I think it is almost
    certainly better from a libertarian perspective
    than the current scheme. First, it reduces the
    amount of money in the “trust fund” for congress
    to spend on crap. Second, it gives almost
    everyone a stake in the performance of the
    economy over the long term. Third, it suggests
    that individuals bear some responsibility for
    their retirement. You’ll never get full
    privatization because Americans would never let
    old people starve, and it will never be the
    case that everyone saves enough for their
    retirement. I am repeating Posner’s arguments
    here but I think he is correct on this. Thus,
    we should be happy for the moment with non-
    trivial improvements at the margin.

    Jeff

  6. The wisdom of the current SS scheme aside, I don’t see it “pretending” to be an “investment” scheme all that hard, Jeff. I think, for the most part, folks understand that money paid in goes to retirees, and current payers retirement will be paid for by future workers. It’s only a ponzi scheme insomuch as any government programs that figure to be paid for by future tax revenue are. (Considering the kind of deficits we’re running, that would be all of them.)

    Of all the funny words to put in quotes, why “system?”

  7. it is really entertaining to me that all the lefties who were so upset that “Bush lied” about WMD to get us into Iraq seem completely unconcerned about a program that is at its core one giant lie.

    Iraq war: tens of thousands dead, hundreds of thousands wounded.

    Social Security: 0 dead, 0 wounded.

    Those silly, amusing leftists.

  8. Iraq war: Saddam and his nasty regime
    eliminated at remarkably low cost. Not
    sure it was worth it even so, but by
    historical standards it was a bargain.

    SS: Saving rate reduced => investment reduced
    => growth reduced => lots of sick and dead
    Americans because wealth increases life
    expectancy and improves health.

    Domestic programs that distort incentives and
    reduce the size of the pie can kill just as
    effectively as wars – it is just a lot less
    obvious.

    Silly lefties, indeed.

    Jeff –

  9. It’s good to see other libertarians thinking hard about this. I agree with Stephen Van Dyke’s post at the top for the most part.

  10. SS: Saving rate reduced => investment reduced
    => growth reduced => lots of sick and dead
    Americans because wealth increases life
    expectancy and improves health.

    Yea, the last 70 years have been a miserable failure. Look around you. It’s like we’re living in a third world country!

  11. “‘With private accounts, you’re in big trouble if you happen to reach retirement age when the market is down

    and decide, for mysterious reasons, that it’d be a great idea to liquidate all your investments at the bottom of a market slump….”

    Remember kids, if you’re 59, and the stock market is high, retire immediately. We need to set it up this way, in order to maximize economic growth.

  12. Mike –

    You are confusing levels and changes. The
    counterfactual outcome had the US adopted a
    force savings system in the 1930s would be
    even better than what we observe now, due
    to the change in savings and investment
    over the intervening decades.

    Jeff

  13. If individuals invested their portion in the same thing the government currently “invests” it in: long term debt of the government, then the yield just about doubles, so the monthly check nearly doubles.

    Here’s a no-brainer way to double the FICA check.

  14. it’d be a great idea to liquidate all your investments at the bottom of a market slump….

    here’s where being an advocate of reason, mr sanchez, and blind to the very important role of animal passion get confused.

    what is a market crash? it is a lot of panicked people selling at all costs out of fear. this will NECESSARILY include most small, unsavvy investors — ESPECIALLY with their retirement funds, about which they will easily panic at the possible loss of.

    what a market crash is *not* is people making rational decisions.

  15. The interest earned on treasury Bills? Bonds? what? Anything else that pays significantly more is inherrently risky. Then there is the issue of what will this much money pumped into these markets due to their long term returns?

    The idea of the government getting that heavily involved with the stock market, not only as a regulator but as a major player should scare the bejesus out of any true Libertarian.

  16. “Yea, the last 70 years have been a miserable failure. Look around you. It’s like we’re living in a third world country!”

    SS is indeed a miserable failure in the return on investment rate on their FICA payments that are now and will be acheived by those in the middle income group and up.

    As for the squawkers who claim the stock market is too “risky” for individuals to have their money in, the fact is that over long time periods the stock market has beaten every other investment vehicle. Futhermore the notion that getting your SS check from the government is a “sure thing” is bogus as well. The only “sure thing” about SS is that future benefits will continue to be reduced by reducing the benefit formulas or cost of living adjustment or raising the retirement age or making more of SS income subject to taxation for higher income people or some combination of all of the above.

    Thus the future rate of return on SS is guaranteed to go down. Earlier generations were paid back more than they put in and therefore succeeding generations will get back less than they put in.

    Oh yeah, also SS is was, is and will always be unconstitutional. It is not pursuant to any power delegated to the federal government in the text of the Constitution and is therefore in violation of the 10th Amendment.

    That’s enough of a reason to get rid of it right there.

  17. My biggest problem with the idea of “privatizing” social security, is that it amounts to the US government borrowing trillions of dollars and investing it in the stock market. There is nothing really all that private about this plan. The ability to manage your own money will be severly limited to companies, bonds and funds chosen for you. This will amount to a massive government entanglement in the finanial markets, and will bring all the problems of government; corruption, excessive regulation, and sloppy oversight even further into the private sector.

    exactly, mr josh. this is short-run a great way for wall street to get fees on a massive amount of capital — which is why wall street will support it — but long-run is a massive incentive for mother government to regulate the markets under the aegis of “consumer protection”.

    and the debt immanentization they’re considering — over $2 trillion in one fell swoop, a 30% increase in the already-obscene national debt — at a time when the country is running 6% gdp current-account deficits and 40% of outstanding debt is foreign held is rather like putting a bullet in the cylinder and giving ‘er a spin.

  18. Granted Dubya isn’t “The Great Communicator,” but he could try this:

    1. There was never anything in the lock box.
    2. I’d like to put some of your money in a lock box.
    3. Wouldn’t you?

  19. Mike –

    I am not promoting my own research on this
    for the simple reason that I have not done
    any. This is what the scholarly literature
    says. Thus, it is not “I” who may be wrong
    but rather lots of smart economists (most
    of them likely democrat voters) who have
    written on the topic. There is debate, to
    be sure, about the magnitude of the savings
    effect, but not the sign, where the latter
    it what is relevant here.

    More to the point, I am not sure what your
    words about starvation and such have to do
    with my comment. A careful reading (or
    even a cursory one) shows that I am writing
    in favor of private accounts, not elimination
    of all government payments to improvident
    and/or unlucky old people. I would not
    advocate the latter even if it were
    politically feasible (that’s why I am a
    moderate libertarian …)

    These conversations are more fun when both
    sides read what the other writes.

    Jeff, a bit grumpy today.

  20. Oh yeah, also SS is was, is and will always be unconstitutional. It is not pursuant to any power delegated to the federal government in the text of the Constitution and is therefore in violation of the 10th Amendment.

    surely, mr martin, but we haven’t followed that thing since fdr (who was rather a related soul to my namesake).

  21. “My biggest problem with the idea of “privatizing” social security, is that it amounts to the US government borrowing trillions of dollars and investing it in the stock market.”

    Uh Huh

    As opposed the govt borrowing trillions of dollars from the SS “trust fund” and “investing” it in all sorts of “regular” govt spending like office bldgs, etc. Money that the govt will have to turn around and borrow from the general public anyway once the SS administration has to liquidate the “special” treasury securities that are it’s “investment” holdings in order to pay benefits once the FICA tax collections drpp below the amount to be paid out in benefits.

  22. “surely, mr martin, but we haven’t followed that thing since fdr (who was rather a related soul to my namesake).”

    Yes and more’s the pity.

  23. I would like to say that, although I have been haunting libertarian websites for years, I have no idea what “ponzi scheme” or “jackboot” means.

  24. “SS is indeed a miserable failure in the return on investment rate on their FICA payments”

    Social Security is not an investment vehicle. Therefore, it doesn’t function well as an investement vehicle.

    It is a program funded out of current receipts, than spends money collected this year to fund this year’s payouts. Sort of like the Department of Defense, the FBI, and the Interstate Highway System.

    Social Security has one main purpose – a guarnateed minimum retirement check every month. Sort of like a car has one main purpose – to get me from point A to point B. If the car can’t do that, it doesn’t matter if the chrome shines, the radio kicks, and there’s lots of trunk room. If your Social Security “reform” plan doesn’t provide a guaranteed minimum check every month to recipients, it’s a complete failure. And if the amount of that check fails to keep up with the rising cost of living, it’s slightly less of a failure.

  25. Gil, regarding government borrowing to cover SS outlays:

    It seems like a mathematical inevitability that SS is going to need to borrow to cover promised benefits. The choices before us now are
    a) Borrow gradually, decades from now, when collections drop below benefits due to be paid, or
    b) Borrow massively, right now, when collections are diverted to private accounts.

    The only reason to choose b is if you believe that decades from now the US will not be able to borrow. Sadly, this may be true.

  26. As opposed the govt borrowing trillions of dollars from the SS “trust fund” and “investing” it in all sorts of “regular” govt spending like office bldgs, etc.

    surely there’s a rather disingenuous accounting scheme that allows politicians to claim all is well — but the end of pay-as-you-go means taking some significant chunk of the implicit future debts of social security and make them immediate and explicit.

    some would argue that the market has already rationally disseminated the implicit debt of gov’t promises, and therefore this all is old news. i doubt it — i think many debt traders assume the implicit promises will be scaled back — and it’s a hell of a risk to take with the nation when you already borrow so fucking much.

    sincerely — and this has to be the central point of the ‘con’ — realizing $2tn (or more) of the implicit debts of our system with no concession that the government will scale back its promises could trigger a dollar/debt meltdown (and attendant interest rate meltup) with all the awful consequences attendant.

  27. My biggest problem with the idea of “privatizing” social security, is that it amounts to the US government borrowing trillions of dollars…

    I don’t know if anyone covered this yet (too lazy to read all the posts), but I believe I’ve seen somewhere in the papers that consideration is being given to financing this plan by raising the FICA taxable income cap instead of by borrowing. I’m wondering if that’ll suck in some of those who are currently objecting based on the borrowing aspect, especially from the left. (Being a “political” observer here, not commenting on the wisdom of said hypothetical…)

  28. Gil, actually admitting that this an ideological program seeking a manufactured crisis to hide behind is totally off-message.

    “No it is not “sort of” like the DOD or the FBI since, first, the govt has not deliberatly led people to believe that any of their tax payments going to fund the FBI will guarantee they will get some benefit in return. And second, the govt has not set up a bogus “trust fund” for the DOD or FBI and claimed there is something of value in that can be used to pay future expenses without future increases in general govt borrowing or tax increases to pay for it.”

    Government, and the private sector, create lists of projects to be funded in future years all the time – projects to be funded with future tax collections. Look at any state, or federal, transportation program, and you’ll see bridges that are going to be replaced in 2009 and pavement that is going to be laid in 2007. Similarly, the Pentagon puts out documents stating that it is going to buy X number of Joint Strike Fighters in 2010. So what?

  29. Life is not about winning material goods, Meatwad.

    Yes, life is about taking material goods when others are not looking.

  30. Actually, that’s not fair, Gil. You can very effectively convince a small community of like-minded ideologues with that argument.

  31. Though you really can’t effectively defend a position you don’t stick with, Joe.

    Is Social Security a fully-funded program with because of the treasury bonds in its “fund”, something “everybody knows”, or is it a paid-at-the-moment program that doesn’t have to save anything, as “everybody knows”? Do pick one.

  32. joe,

    The difference between taxes paying for year n of a project which can be canned by Congress in a subsequent year, and SS withholdings being taken from you never to return should be obvious.

    But your larger mistake is supposing that other Hittites and Runners want any of the other programs you cited.

  33. It’s a pay as you go program, as I’ve said every time I addressed the subject.

  34. “I would like to say that, although I have been haunting libertarian websites for years, I have no idea what “ponzi scheme” or “jackboot” means.”

    Yes. A shame there isn’t some sort of global information network where you could do basic research and check into these ideas..

    Oh wait….

  35. Then, Joe, you might want to tell that to the guy using that name who’s going around saying there’s a trust fund with Treasury Bonds in it…

  36. fyodor, please explain. If I read you correctly, increasing the FICA wage cap would amount to a tax increase. How would this make it more politically palatable?

    Oh right, you said palatable to “the left”. Never mind.

  37. CTD, the only way the Social Security checks will stop coming is if Congress decides to cut them off.

    I, for one, am pretty confident that the massive realignment of Democrats to the Libertarian Party that such an event would require isn’t going to happen.

    It’s a pretty neat strategy, though. The only way Social Security ceases to be popular is if people don’t believe it will be there when they retire. Do your best to make sure that it won’t be there when they retire, or at least to create that appearance. Then claim that people actually don’t WANT it to be there when they retire. All the while, if you’re George Bush, pretend that you really, really DO want it to be there, and that the only way to make sure it will, is to implement the very program designed to eliminate it.

  38. joe: “The only way Social Security ceases to be popular is if people don’t believe it will be there when they retire.”

    Wrong. Even if I believed I’d get every penny “promised” to me by Social Security, I’d still want out, even without taking into account the crippling taxes on future generations that would be required. Early and current SS recipients get more in benefits than they paid in. It’s a zero-sum transfer payment system, so future recipients must necessarily get less. I can do far better investing my own money, and would happily pay (substantially reduced) taxes to support the elderly who really do need welfare to meet basic needs.

    So how about this:
    1. Abolish the regressive payroll tax. Fund SS payments out of general revenues, ending the fiction that there’s any sort of lockbox.
    2. Means-test the benefits. There’s no reason why a 19 year old making $8/hour delivering pizza should be funding Warren Buffet’s retirement.

    Of course #2 would have to be phased in, but I’d like to hear your objections to making the tax code more progressive and reducing welfare payments to the rich.

  39. One thing I haven’t seen mentioned yet. Anyone think it odd that when Social Security is generating tremendous surplus, the government happily runs it for us, and now that its going belly up it gets devolved back to the people?

  40. Does anybody have a good source for some actual facts on SS privatization, and not just the usual scare stories? A lot of people seem to think that privatization means just handing people back their money – which seems like a good idea to me – “but what if Grandma starves because she made bad investment decisions?!” The few details of proposals I’ve seen suggest that the individual would not be in control of their own money. A certain “account” would be associated with them in a database, but it wouldn’t be under their control. And “what if Grandpa has to retire when the market is down, huh?” is a non-starter: there are studies out that that have intentionally picked the worst possible beginning and ending points for investing in the stock market in the 20th century, and they still work out pretty well over a 50-year or so working lifetime, so barring an Even Greater Depression, it’s not something to worry about, long term. But, maybe I’m wrong, maybe there are plans out there that give people more control over their own investments…anybody know?

  41. “the only way the Social Security checks will stop coming is if Congress decides to cut them off.”

    Well, yes, that is the direct determinant, but whether or not that check will be worth the pulp it’s printed on, and how large a millstone those checks will place around the economy’s neck, will be determined more by SS’s prospects for ongoing solvency – not to mention the government’s!

  42. JD, try CATO.org, they have position papers on privatization.

  43. “Gilbert, you have spent the entire thread decrying the fact that we don’t have a pile of money in a vault to pay planned Social Security benefits. It is not irrelevant to point out that we don’t have a pile of money to pay for other planned expenses as well.”

    No, what I’ve been doing is pointing out that the SS “trust fund” that the govt and other SS boosters claim has a bunch of assets in it to pay toward SS benefits ACTUALLY doesn’t have anything of value in it at all.

    And no matter how many times out try to spin it, SS is NOT the same as other govt spending programs. There is no special separate tax for defense spending and no one has been led to believe that they will get some defined benefit in return for tax dollars they pay that wind up going for defense spending.

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