Privatizing Social Security too risky [KRUGMAN BARF ALERT]

Seattle Post ^ | February 6, 2005 | PAUL KRUGMAN

[ejdrapes]

Privatizing Social Security too risky

A few weeks ago, I tried to explain the logic of Bush-style Social Security privatization: It is, in effect, as if your financial adviser told you that you wouldn't have enough money when you retire -- but you shouldn't save more. Instead, you should borrow a lot of money, buy stocks and hope for capital gains.

Before President Bush's big speech, a background briefing by a "senior administration official" (which can be found at www.nytimes.com/opinion) made it clear that the plan calls for exactly the "borrow, speculate and hope" strategy I described -- not just for the system as a whole, but for each individual.

Here's the money quote: "In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent rate of return" -- after inflation -- "which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent rate of return."

Translation: If you put part of your payroll taxes into a personal account, your future benefits will be reduced by an amount equivalent to the amount you would have had to repay if you had borrowed the money at a real interest rate of 3 percent.

Peter Orszag of the Brookings Institution got it exactly right: "It's not a nest egg. It's a loan."

For years, privatizers -- including Bush -- have claimed that people would do better with private accounts than with traditional Social Security even if they played it safe and invested in U.S. government bonds (which yield 3 percent after inflation).

But the official at the briefing made it clear that his boss was fibbing: If you invested your private account in government bonds, you would face benefit cuts equal in value to your investment, so you would be no better off than under the current system.

The only way to get ahead would be to invest in risky assets like stocks, and hope for higher yields. But if the investment went wrong, and you earned less than 3 percent after inflation, your benefit cuts would leave you poorer than if you had never opened that private account.

So people are expected to take a loan from the government and use it to buy stocks, and if that turns out to have been a mistake -- well, too bad.

Experts usually tell people to plan for their retirement by investing in a mix of stocks and bonds. They disapprove strongly of speculation on margin: borrowing to buy stocks. Yet Bush wants tens of millions of Americans to do exactly that.

Meanwhile, what does any of this have to do with the ostensible purpose of the whole thing: saving Social Security?

Here's the senior official again: "In a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of Social Security." The government would have to borrow huge sums up front to create the personal accounts -- $4.5 trillion in the first two decades -- but it would supposedly make up for all that borrowing with offsetting cuts in account holders' benefits, many decades later.

Color me skeptical: Will retirees with private accounts that performed badly really be forced to repay their loans in full? Even if they are, private accounts will at best have a "net neutral effect" -- that is, they will do nothing to improve Social Security's finances. Bush says the system faces a crisis; what does he propose to do about it?

The answer, presumably, is that his plan will also involve major benefit cuts over and above those associated with private accounts. And it's true that you can improve Social Security's finances with privatization, as long as you also slash benefits -- just as you can kill a flock of sheep with witchcraft, provided you also feed them arsenic. (Thanks, M. Voltaire.)

Do you believe that we should replace America's most successful government program with a system in which workers engage in speculation that no financial adviser would recommend? Do you believe that we should do this even though it will do nothing to improve the program's finances? If so, George W. Bush has a deal for you.

[ejdrapes]

The Administration is going to have to do one hell of a media blitz to get people on board with this. Because the MSM will continue to peddle lies about it until there is little to no public support left.

[Mr. Buzzcut]

Krugman is parroting a Washington Post error which they retracted the same day they published it ... How did the Seattle paper let this through DAYS later? Never mind, I know ...

Don Luskin has the best ongoing analysis of this "debate" at The Conspiracy To Keep You Poor and Stupid.

[Jacquerie]

Only the left could peddle a system that guarantees a low or negative rate of return (after taxes) as a success. But hey, at least you can't pass it on to your heirs.

Someone correct me if I am wrong, but I recall that no 20 year period including the great depression resulted in a negative rate of return from US stocks.

[t_skoz]

ping / barf

[april15Bendovr]

Its so simple

Allowing people to invest their money into the stock market for Social Security
is a great idea.

Not only is there a better return than 2% that the government provides but it
also provides a means by which the government can reduce the deficit.

Here's how it will reduce the deficit: As the stock market grows as a result of
the increased influx of investment money, so does the economy, and when the
economy grows so does the amount of taxes businesses pay the government, which
reduces the deficit.

Everyone wins even liberals that complain about the deficit.

[kittymyrib]

No, Krugman, you fool. We'd rather let the power-drunk politicians confiscate the money from our paychecks, loot the pension fund by buying votes with it, leave IOUs they can never cover, and declare the government our beneficiary if we die before we collect what we put in. Only an idiot liberal would think this was a good plan. The rest of us see it as a massive Ponzi scheme that really should probably just be allowed to go belly up and die, but our conscientios president is better than that...and certainly a thousand times better than his detractors.

[stevem]

Color me skeptical...

Disclaimer: My daughter has studied meteorology through her college career. It's a field that has her utterly fascinated.

Being a liberal has to be better as a vocation than being a meteorologist. Meteorologists get paid day after day regardless of the outcome of their predictions. Yet, meteorologists do need to make plans and formulate ideas. Also, the science has improved since the days of omens.

Being a liberal means never (pronounced NEVER) having to have an idea, new or otherwise. For a long time it has been popular for conservatives to say liberals haven't had a new idea since the New Deal. However, that doesn't apply since the New Deal was but the Bull Moose Party Platform hauled out after 20 years in moth balls. So, it's fair to say that liberal Democrats have never actually had an original idea.

I seriously doubt Paul Krugman has ever actually completed a thought.

[NorCalRepub]

Being an Investment Broker I used to have the Ibbotson chart memorized and I can't remember if there was a twenty year period but the market from 1920 to 1936 after the depression went pretty much sideways.........no other periods were negative for longer than 5 or 6 years or so

[gogipper]

Based on his record of economic predictions if Krugman's against it it must be the right thing to do.

[Goodgirlinred]

That is what my broker told me. I am a 55 year old widow. I am not counting on SS for much at all. I like my IRA's. When my husband died, I sat down with his broker and, knowing nothing about any of that sort of thing, asked him what was the safest thing I could do with the IRA's and the other things my husband had in his portfolio. So, we kept the things that were under The Hartford, got rid of riskier investments, and chose something similar to The Hartford, but not quite as "safe", and my portfolio has grown surprisingly well. If I were one of the Gen Xer's, I would opt for the President's plan in a heartbeat. With a good broker like mine, I could do much better than SS. :)

[Torie]

Krugman apparently read my post. The guy can be a nutcase, but on this matter he is totally correct in his analysis.

[NorCalRepub]

yes and you didn't tell me what your portfolio looked like only that you had it at the Hartford so it must be an annuity or something similar or maybe just IRA's like you say......hope you have a great broker.....it really all depends on what your goals are and your time horizon. At your young age you will see SS but don't know if you worked or not so not sure how much you will see.......the Hartford is not an investment but a company that uses mutual funds or annuities to achieve your means.....you should have a balanced moderate to mod conservative portfolio that has at at least some growth like 30% or so and the rest in income producing instruments if that is your need.......always need to keep some in stocks (mutual funds for you) so you have growth of your portfolio long term to keep up with inflation.......

[Torie]

Actually, if you had invested at the market top in 1967 or whenever it was, you would not have had a portfolio with incresed purchasing power until something like 1982. In short for about 15 years, the return was below the inflation rate.

[Goodgirlinred]

Yes, I worked. I don't now. And yes, I have stock. I guess there are annuities. I don't understand that stuff as I said. My broker just did it all, I just told him to pick safe things and he did and it has grown very well. :) Since my husband trusted him (he was an accountant) I trust him, too. I know you are groaning, but what else can I do? My eyes glaze over and my ears roar if he tries to explain it to me.

[qam1]

Xer Ping

Ping list for the discussion of the politics and social (and sometimes nostalgic) aspects that directly effects Generation Reagan / Generation-X (Those born from 1965-1981) including all the spending previous generations (i.e. The Baby Boomers) are doing that Gen-X and Y will end up paying for.

Freep mail me to be added or dropped. See my home page for details and previous articles.  

********* Note ********
With the coming battle over Social Security, There is obviously going to be a Gazillion articles daily. To avoid overkill, I think it would be best to keep the Gen-X Ping list as a Medium volume ping list. So after today I think it's best that the Pings on this topic be limited to only one per day (That doesn't mean everyday there will be a ping on SS, Just when there is one, there won't be another one until at the very least the next day). Unless of course that second article is really, really great/noteworthy.

[NorCalRepub]

yeah that was the miserable sideways market but she was asking about negative returns and I think you would have eeked out like 2 or 3 % then which of course is so bad you would have been better off in in any of a number of different investments

[NorCalRepub]

I'm not groaning at all ......alot of people don't understand, have the time or are not interested and all the more they should find someone honest like you did

[libertarianben]

It's not the government's job to pay or have anything to do with your retirement. You know you're going to get old, so either learn to save, invest, etc or work until you die. It would also really help if the government didn't steal 40% of everything we make in some form of tax. This may sound cold hearted but so is life.

[Chgogal]

Well that clinches it. If PK says it's bad....then it must be one heck of a great idea.

[GreenHornet]

During his State of the Union Address, President Bush mentioned that his proposal for private savings accounts is very similar in concept to the Thrift Savings Plan (TSP), a 401K type plan in which hundreds of thousands of federal employees participate. As part of his public relations campaign, I think the President should continue to make that comparison, and urge people to talk with family members, friends, neighbors, etc. who are federal employees participating in the TSP. He should encourage them to ask these people if the TSP's a risky venture, or if they feel that they're gambling with their retirement money. The overwhelming majority will tell you that it's a much better deal than the current Social Security system. Why shouldn't all Americans have the opportunity to take part in a plan like this? If President Bush can bring home the point that he's offering something to the people that the federal employees have enjoyed for the past 20 years, he'll have a much easier time persuading the public to support him on this.