The Social Security Debate

Here are few comments by a reader on my recent post dealing with privatizing social security. And, of course, my terse and somewhat sarcastic replies....

Several points of disagreement:

1. If you want to see fairly exhaustive documentation that there is no Social Security crisis, I'd recommend you to this link: http://www.nytimes.com/2005/01/16/magazine/16SOCIAL.html?oref=login

Well, as it is a link to an article from The New York Times, I see little chance of me actually reading it. Still, to deny that there is no crisis in the pyramid scheme that is Social Security is somewhat irresponsible. I am sure you and I will receive what is coming to us in benefits, but at what cost to future generations? I’m not sure if the president’s reform plan is the end all/be all, but I also do not believe in ignoring the white elephant sitting squarely in the room. One last point here, if Social Security is and was such a great plan, explain to me why it has to be reformed every ten years. If I had a car that kept breaking down, at one point I'd realize that I had a lemon.

The point made in the article boils down to this: a Social Security Commission appointed by Reagan in 1983, chaired by Alan Greenspan knew the exact demographic trend that you speak of, and so they planned ahead by raising the payroll taxes to a level above what was needed to pay out benefits. This is the fix that needed, and it's worked basically. The ratios you're talking about can be remedied -- if it turns out to be necessary -- by a relatively modest tweaking of benefits or taxes in the future.

‘Relatively modest’? Lets look at some numbers. The average monthly social security benefit in 2002 was $874. If we figure a 3% increase in benefits per year, by 2030 the average retiree benefit will be $1999.71. If, as predicted, there are then only 2 workers per every retiree, that works out to be $249.96 paid out per week per worker. That comes out to be nearly 17%. 17%! And that is just from social security. Explain to me, using history as a rule, how other taxes such as medicare will not increase as well.
And as long as we are bringing up Alan Greenspan, there was this from CNN.com dated 2-25-04:

'Greenspan warned a House committee Wednesday that growing federal budget deficits and the retirement of Baby Boomers will require future cuts in Social Security and Medicare to avoid tax increases that would damage the economy. Since that population will begin to draw Social Security benefits within the decade, he said Congress has a "reasonably short" time to head off a crisis.'

2. Stocks historically get a better return than other investments. But that's very longitudinal view, not taking into account the fact that individuals may retire in a bear market. The Dow in 1982 was at the same level as the Dow in 1966 -- and that' (sic) not accounting for inflation. Privatization does not give a satisfactory answer for people who retire during a bear market. Either result is undesirable: old people would run out of income altogether or there would be a S & L - style bailout that will encourage overly risky investment later (what economists call "moral hazard".) This also undermines the desirability of private accounts being "voluntary."

First, I will state again , noone would be forced into privatization. Those who would wish to privatize could; those who opt not to, would not be forced into the program. But just as now, investing requires some amount of personal responsibility and education. Any financial planner will tell you that as you approach retirement it is in your best interest to move your monies to more stable funds...such as bonds(I would add here that it may be a good idea to also allow CD’s into this plan as even they would bring a better return than what is to be expected from the grand plan that is social security as it now exists). A young person entering the job market today, can expect to pay into social security for nearly fifty years. The average compounded annual return in the market from 1926-2000 was 10.7%. 10.7%! I’ll take that over 1.8% any day, but of course I’m just a greedy conservative.

3. Social Security pays survivors' benefits and disability benefits, of which African-Americans are beneficiaries at rates that are disporportionate(sic) to their numbers.

This is a misnomer, as you have included disability benefits, which skew the numbers that we are talking about here. This discussion involves earned benefits as they relate to workers and their ownership of those benefits. Because Africa-American men die younger than persons in other demographics,

‘Single, black low-income males born since 1959 who earn about 50% of an average wage, for instance, will get back only 88¢ for every dollar they pay in Social Security taxes.’

Still, I find it interesting that you ignore the fact of the 'mysterious disappearing benefit'. Under the current plan, if a spouse passes away, the surviving spouse must choose between his/her benefit or that of the deceased. Under privatization, that money is owned. And as such, it can be willed to the next generation. This, historically, has been a large factor in the generation of personal wealth.

4. For every dollar that the govenment(sic) diverts from payroll taxes to rivate (sic) accounts, the government will have to borrow a dollar by issuing Treasury bonds. The net additional investment capital in the economy is zero.

I’m not sure what your point is here, but if you are referring to the ‘reinvestment in our economy’ point, let's look at this scenario. A man decides to start a new company and goes to the bank for a loan. He is loaned the money and he opens his business. His business grows, succeeds, and expands. Along the way, he pays back the loan. The loan is paid in full. However, in contrast to your assumption, the ‘net additional investment capital in the economy’ is not zero. The ‘net additional investment capital' is in his profit, it is in his employee's pay checks, it is in the thousand different ways his company has affected the economy. This corresponds to the exact way bonds add to the economy.

5. If there is an artifical(sic) increase in demand for stocks and a concimtant(sic) decrease in demand for bonds, in the short term, the price of stocks will rise but the price for bonds will fall. This means that the return on stocks will fall and the return for bonds will rise. As the two converge, there is no aggregate bonus that privatization will give the economy or the Social Security system.

Again, see my above as your answer.

Really, when it comes right down to it, I wonder why so many from the left seem so afraid of letting American citizens own their own retirements. The only possible answer I can come to is the fear, from the left and politicians, that they may lose their power and control. If a citizen owns his own benefits(control over which is now solely the reign of government), then politicians can no longer touch that money. Thereby, bureaucrats lose their control and thus, their power. They lose the power that money forwards them to buy votes. They lose the power to scare the elderly. And ultimately, they lose the illusion that a citizen needs the government for their very survival.