January 28, 2005
In A Nutshell
From the recent Rolling Stone interview with Paul Krugman:
What do you mean? Those who are pushing privatization say that our financial markets are one of our greatest strengths -- that private investment will work better in the long run than government-managed accounts with lower rates of return.
There are two problems with that. First, the fees charged on private accounts will be a significant drain on returns. In a typical portfolio, we're probably looking at a return of four percent. But fees are likely to take at least one percent, like they do in Britain. So now we're down to a return of three percent or less on private accounts. And since Bush wants to borrow $2 trillion to pay for the transition, we're talking about borrowing at interest rates of three percent to establish private accounts that will yield three percent -- with a lot of additional risk. So it's a lose-lose proposition, except for the mutual-fund industry.
The second problem with the market is that some people -- probably many people -- will end up getting much less than they would have under the current system, depending on which funds they pick and how the market does. A lot of people will hit age sixty-five with very little in their private account -- and that means a big return of poverty among the elderly, which is exactly what's happening in Britain right now. As a result, the government will have to step back in and rescue people. We'll have more suffering and bigger bills. People will ask: Where did all that money go? The answer will be: It basically went into mutual-fund fees.
But what if stocks do well? Isn't it possible that privatization would work?
The only possible way that stock returns can be high enough to make privatization work is if the U.S. economy grows at three to four percent a year for the next fifty years. But Social Security's own trustees expect the economy's growth rate to slow to 1.8 percent. If that happens -- if their own assumptions are correct -- then privatization would be a disaster. And if that doesn't happen -- if the economy continues to grow at a steady rate -- then the trust fund is good for the rest of the century, and we don't need privatization.
By the way, while Krugman's dissection of the politics Social Security "crisis" has been very helpful, even he hasn't (to my knowledge) mentioned a basic logical flaw of the Bush Administration's argument.
To wit, if the Administration's proposals are borne from the President's "ownership" evangelism, why does the Federal Government need to interact with Wall Street at all. If we wanted to do away with Social Security, we could simply cash out all workers an amount based upon the annual update sent to us each year -- with nothing off the top from Wall Street. Then, citizens would be free to spend that money as they wished (and, of course, the FICA deduction would no longer be taken from one's paycheck).
This blog isn't advocating such a measure. Merely, just saying that it seems to be the simplest way to achieve the President's goals -- that is, if they are what they say he is, rather that what they appear to be (i.e., a massive gift to Wall Street brokerage houses).
Update, 2/3/05: More from Krugman:
Which brings us to the privatizers' Catch-22.
They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don't need to worry about Social Security's future: If the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.
Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.
It's an argument that Doug Henwood of the Left Business Observer has been making for many a year.
Posted by Eddie Tews at January 28, 2005 03:22 PM
Comments
I've never seen it mentioned anywhere but it strikes me that this proposed interface between the feds and wall st. in the handling of billions of dollars of citizens funds is ripe for graft, colussion, kickbacks, political patrimony and corruption on a scale that would make the UN food for oil bruhauhau look like Elks Club raffle. -- Posted by: digital amish on February 7, 2005 03:49 PM