Wednesday, May 04, 2005
Social Security Privatization: A Bad Plan
Social Security Privatization: A Bad Plan
Social Security, for all its good intentions, cannot survive as it is currently set up. Within fifteen years, the so-called trust fund of obligations due to Social Security will begin to draw upon the government bonds which it holds, and by 2042, it will have run out of bonds (Rosenbaum 7). The system has only maintained its solvency for so long because of the nature of the scheme, by which the increase in population after the initialization of the program enabled the retirees to be supported without extreme discomfort to the workers who funded them. However, as Robin Toner and David Rosenbaum report, while 3.4 Americans now work to fund each retiree, “by the end of this decade, when boomers begin to retire, the ratio will be 3.1. By 2030, there will be 2.1 workers paying taxes for each retiree” (Toner 22).
Indeed, while those figures may serve to highlight the nature of the fiscal problem, in truth, the system rests on more severe faultlines yet. The system embeds what Hans Sennholz refers to as “a divisive construction that is creating unending bitter discord”(Sennholz 20) between generations and classes. Furthermore, the taxes on labor are a cause of youth unemployment. The system pretends to be an insurance program but, in truth, individuals acquire “no contractual right to the funds contributed to the system” (Sennholz 3). The very idea of Social Security springs from the insidious notion that the labor pool needs to be limited for the good of the workers by the cajoled ejection of the elderly into retirement (Steinrich 39). In all of these ways, the system has failed.
It is true, of course, that society's various agencies ought to come together in some manner to provide for the security of the elderly—given the desire for that end to be achieved. But Social Security neither, in fact, represents reliable security nor can it do so. Social Security is broken, and many intellectuals have proposed a solution called privatization. Unfortunately, as we shall see, the solution is worse than the problem.
Privatization has been forwarded in many forms, such as one proposal by the Cato Institute's Project on Social Security Choice and another by the White House itself. All the proposals share the same essential faults, as they attempt to reconstruct the program around a new forced-savings system. As Berna Yigit Brannon of Cato writes, in the bill they sponsor, “individuals would be able to voluntarily invest their half of the payroll tax, amounting to the entire 6.2 percent worker contribution, into individual accounts” (4). Under the President's plan, workers would be able to set aside “4 percentage points of their payroll taxes in their accounts” (White House 2). Some plans explicitly account for the costs of transition to the savings accounts more so than others do. Some strive for a greater or lesser measure of heritability. Regardless, the plans exemplify some key features that all citizens with eyes set to the future should be concerned about. I will examine the macroeconomic consequences of these plans, as well as the fiscal consequences and their ethical meaning.
First, privatization introduces several possible mechanisms through which the government may interfere with the genuine private ownership of capital. Readers who have some understanding of economics will be especially concerned to note the potentially devastating effects on the allocation of capital through markets that tend to result. Paul Cwik cites the eminent economist Ludwig von Mises on the centrality of a free stock market to a free economy: “A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market” (Cwik 2). The mechanisms of political interference arise from the perceived need of the political class to protect the interests of the future retirees. For, should the stock market fail to perform adequately, the demand will return for the reintroduction of a forced transfer program.
First of the mechanisms is the prospect that the government may introduce floors to the prices of stocks, whether directly, through regulation, or indirectly, through increased demand for the Federal Reserve to inflate the securities market. The problems associated with price floors revolve around the necessity that some securities will have to be removed from trading, for the fact that they will not be perceived to be worth the minimum price. The problems associated with inflation are manifold, but relate to the distortion of price signals in the market and the consequent distortion in the quality and quantity of investment made, relative to the needs of the consumers.
But, if the political class eschews these mechanisms, it may instead choose to regulate the investments available to those with private accounts. For instance, as Paul Krugman suggests, there may be a “charge cap” limiting the investments to those with low overhead. More significantly, what may result is what Cwik calls “regulation by whim” (Cwik 11), as the politicians and regulators decide whether this or that stock is acceptable. For instance, tobacco companies may be excluded on the basis of political values, or foreign stocks excluded for patriotic chauvinism. The ominous implications bode poorly for the rational allocation of capital.
Still, it is possible that the political class will renounce even this method. What is not likely, however, is that, should the stock market go “up, down, [or] sideways—sometimes for many years” (Corzine 9), the bailout will be resisted. In this event, a massive sum of money would be spent to subsidize the firms on Wall Street. This event woud echo the case of the partial deregulation of savings and loans banks in the 1980s, in which the liberalized policy met with continuing political commitment to the institutions with the result of a huge transfer of funds to industry.
We have seen, now, how pernicious the effects on the stock market would be, of privatization. We have yet to explore the sheer moral duplicity of the program. For the privatization plans represents increases in coercion matched only by the increase in the appearance of freedom. Most obviously, we see that they politicize the personal and private decision of how to invest one's money. The decision of whether a person needs more health care, investments, housing, consumption, insurance, or whatever else, is profoundly personal. The attempt to dictate the answer of investment is, economically, an invalid attempt at determining the true values of society beyond those values as actually expressed in the free and discrete actions of people. As Michael Tanner of the Cato Institute admits, “A privatized system would essentially be a mandatory savings program” (qtd. in Rockwell, “Private Accounts?” 11). Morally, it is indefensible to determine that one ought to plan for a longer horizon than one himself or herself sees the need for. I imagine that few would defend an attempt at forced savings that demanded that all the benefits go to the third and fourth generations. Somehow, this idea has been obscured by the fact that the savings are purported to go back to the investor himself.
Moreover, it has been obscured that privatization means less choice over the form one's investments should take. Wall Street would receive the benefits--”the big financial companies that would earn fees to administer privatized accounts” (Corzine 17). But, one may wonder, what of those who object for one reason or other to placing their investments on Wall Street? Some may prefer to invest locally, or beyond the corporate world. Others may take issue with the morals of the companies traded in the indexes permitted. Others may simply perceive the best profit opportunity to lie outside of the choices offered in the privatization plans. However one might have chosen, privatization would by its nature impose restrictions, and, while the investments would not be made directly by the government, still the following holds true: “[A]s a former Social Security commissioner Stanford Ross told the WSJ, 'if you would have proposed in the 1930s to invest in the private market, you would have been accused of being a socialist or fascist'” (Steinrich 25). So it should still be today.
And today, socialist or fascist or otherwise, we have reason to be concerned about yet another severe flaw in the logic of privatization. For the system to pay benefits out to all the current retirees and other retirees who remain a part of the old system, an astounding sum of money will need to be borrowed or taxed, as much of the revenues get diverted to private accounts. Greg Anrig of The Century Foundation calculates that $4.5 trillion would need to be raised over 20 years (Anrig 12) to cover the shortfall. This is the problem of transition costs. The fact that benefits must stop being paid out as soon as revenues stop coming in means that, in Lew Rockwell's words, “there is no there to privatize” (Rockwell, “Save or Else” 9) and hence no way to capitalize the program into private accounts without costing much. The question, indeed, is only whether the costs will be funded by debt or by taxes. President Bush indicates that he “prefers to see these tax hikes occur when he is no longer in office” (Weller 9), as might be expected of a politician. Whether by tax or by debt, genuine private investment will be crowded out and the economy will suffer.
At this point, the proponent of privatization may rebut that these transition costs, while real, will pay for themselves as the investments made yield higher returns which can fund the transition. The argument runs that greater costs now will mean greater savings later. While this may or may not be true relative to keeping the system in place as it currently stands, it is both far from certain and also an improper argument. It is not certain, because this is the argument that government always makes with respect to its touted reforms, and yet, in retrospect, the savings rarely materialize. Writes Rockwell: “We have to 'invest' now in education in order to save money.... We must nationalize the health care system now so that we can save money later.... We must go to war now to prevent a worse war later” (Rockwell, “Save or Else” 10). Furthermore, even should the argument have merit in this respect, it is inappropriate to compare the returns against a system that can yield no returns; rather, the privatized system must be measured against a truly voluntary system.
It is not just the roseate hypothetical future that privatization advocates look to, but also to a supposedly merry Chilean present. That Chile has undergone a privatization that has not yet failed spectacularly has given steam to domestic proponents. Yet, a closer look illuminates some problems. For, while the market's returns have averaged a high 13 percent, this figure is distorted by the range of time examined, since the returns of the 1980s and '90s were not likely to, and in fact likely have not, held up to such high figures. And when the market does crash, as is the case in modern economies subject to the business cycle, the system—insured against losses as it is—will be bailed out (Steinrich 16). Furthermore, concern about regulation of investments has been borne out by the Chilean example. There, “the content of portfolios is strictly regulated” (Steinrich 14) so that foreign holdings are barred, and government securities are mandated, among other aspects.
Now that we have examined the flaws of privatization, it is in order that we look at least cursorily at other options. The question that needs to be asked is, significantly, how a truly voluntary system can be set up, rather than how a coercive system can be shored up. Imagine such a world, and the solutions come readily to mind. Allow retirees, current and future, to opt out of the system. Perhaps at this point the system may be actually saleable to retirees as insurance policies. Finally, recall the role of a spirit of charity unforced and free-flowing in a free society, to help those in need; and retain faith in the ability of people to make decisions wise enough to provide for their own futures—decisions better made than by the State.
We must let people make choices more suited to their best interests, indeed. In this, in rhetoric, I agree with the privatizers. But I support the reality behind the rhetoric, too, while the privatizers would mortgage our future to Wall Street in reality. Savings is laudable, but only when it is the outcome of free choice. Otherwise, as history and logic--and economics and ethics--teach us, the outcome tends dangerously towards fascism in the role the State comes to play in the market. The choice remains with us, but only for a limited time. Let us choose wisely.
Anrig, Jr., Greg. "What the President Didn't Say about Social Security." The Century Foundation. 7 February 2005. 21 paragraphs. 6 March 2005.
Brannon, Berna Yigit. "A Social Security Plan to Last." Project on Social Security Choice. 3 August 2004. 9 paragraphs. 6 March 2005.
Corzine, Jon S. "Will the President's Plan for Privatization Take the Security Out of Social Security?" Insight on the News. 3 June 2002. 21 paragraphs. 6 March 2005.
Cwik, Paul. "Socialist Stock Market?" The Ludwig von Mises Institute. May 1999. 13 paragraphs. 6 March 2005.
Krugman, Paul. "Buying Into Failure." The New York Times. 17 December 2004. 16 paragraphs. 6 March 2005.
Rockwell, Jr., Llewellyn H. "Save or Else." The Ludwig von Mises Institute. 8 December 2004. 29 paragraphs. 6 March 2005.
Rockwell, Lew. "Private Accounts?" The Ludwig von Mises Institute. May 1996. 17 paragraphs. 6 March 2005.
Sennholz, Hans. "Distractions in the Social Security Debate." The Ludwig von Mises Institute. 8 December 2004. 30 paragraphs. 6 March 2005.
Steinrich, Dale. "Social Security Reform: True and False." The Ludwig von Mises Institute. October 1996. 48 paragraphs. 6 March 2005.
Toner, Robin and David Rosenbaum. "Social Security Poses Hurdles for President." The New York Times. 17 September 2004. 30 paragraphs. 6 March 2005.
Weller, Christian E. "White House Memo Implies Tax Hike." Center for American Progress. 7 January 2005. 11 paragraphs. 6 March 2005.
White House, The. "Strengthening Social Security for the 21st Century." February 2005. 27 paragraphs. 6 March 2005.
Social Security, for all its good intentions, cannot survive as it is currently set up. Within fifteen years, the so-called trust fund of obligations due to Social Security will begin to draw upon the government bonds which it holds, and by 2042, it will have run out of bonds (Rosenbaum 7). The system has only maintained its solvency for so long because of the nature of the scheme, by which the increase in population after the initialization of the program enabled the retirees to be supported without extreme discomfort to the workers who funded them. However, as Robin Toner and David Rosenbaum report, while 3.4 Americans now work to fund each retiree, “by the end of this decade, when boomers begin to retire, the ratio will be 3.1. By 2030, there will be 2.1 workers paying taxes for each retiree” (Toner 22).
Indeed, while those figures may serve to highlight the nature of the fiscal problem, in truth, the system rests on more severe faultlines yet. The system embeds what Hans Sennholz refers to as “a divisive construction that is creating unending bitter discord”(Sennholz 20) between generations and classes. Furthermore, the taxes on labor are a cause of youth unemployment. The system pretends to be an insurance program but, in truth, individuals acquire “no contractual right to the funds contributed to the system” (Sennholz 3). The very idea of Social Security springs from the insidious notion that the labor pool needs to be limited for the good of the workers by the cajoled ejection of the elderly into retirement (Steinrich 39). In all of these ways, the system has failed.
It is true, of course, that society's various agencies ought to come together in some manner to provide for the security of the elderly—given the desire for that end to be achieved. But Social Security neither, in fact, represents reliable security nor can it do so. Social Security is broken, and many intellectuals have proposed a solution called privatization. Unfortunately, as we shall see, the solution is worse than the problem.
Privatization has been forwarded in many forms, such as one proposal by the Cato Institute's Project on Social Security Choice and another by the White House itself. All the proposals share the same essential faults, as they attempt to reconstruct the program around a new forced-savings system. As Berna Yigit Brannon of Cato writes, in the bill they sponsor, “individuals would be able to voluntarily invest their half of the payroll tax, amounting to the entire 6.2 percent worker contribution, into individual accounts” (4). Under the President's plan, workers would be able to set aside “4 percentage points of their payroll taxes in their accounts” (White House 2). Some plans explicitly account for the costs of transition to the savings accounts more so than others do. Some strive for a greater or lesser measure of heritability. Regardless, the plans exemplify some key features that all citizens with eyes set to the future should be concerned about. I will examine the macroeconomic consequences of these plans, as well as the fiscal consequences and their ethical meaning.
First, privatization introduces several possible mechanisms through which the government may interfere with the genuine private ownership of capital. Readers who have some understanding of economics will be especially concerned to note the potentially devastating effects on the allocation of capital through markets that tend to result. Paul Cwik cites the eminent economist Ludwig von Mises on the centrality of a free stock market to a free economy: “A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market” (Cwik 2). The mechanisms of political interference arise from the perceived need of the political class to protect the interests of the future retirees. For, should the stock market fail to perform adequately, the demand will return for the reintroduction of a forced transfer program.
First of the mechanisms is the prospect that the government may introduce floors to the prices of stocks, whether directly, through regulation, or indirectly, through increased demand for the Federal Reserve to inflate the securities market. The problems associated with price floors revolve around the necessity that some securities will have to be removed from trading, for the fact that they will not be perceived to be worth the minimum price. The problems associated with inflation are manifold, but relate to the distortion of price signals in the market and the consequent distortion in the quality and quantity of investment made, relative to the needs of the consumers.
But, if the political class eschews these mechanisms, it may instead choose to regulate the investments available to those with private accounts. For instance, as Paul Krugman suggests, there may be a “charge cap” limiting the investments to those with low overhead. More significantly, what may result is what Cwik calls “regulation by whim” (Cwik 11), as the politicians and regulators decide whether this or that stock is acceptable. For instance, tobacco companies may be excluded on the basis of political values, or foreign stocks excluded for patriotic chauvinism. The ominous implications bode poorly for the rational allocation of capital.
Still, it is possible that the political class will renounce even this method. What is not likely, however, is that, should the stock market go “up, down, [or] sideways—sometimes for many years” (Corzine 9), the bailout will be resisted. In this event, a massive sum of money would be spent to subsidize the firms on Wall Street. This event woud echo the case of the partial deregulation of savings and loans banks in the 1980s, in which the liberalized policy met with continuing political commitment to the institutions with the result of a huge transfer of funds to industry.
We have seen, now, how pernicious the effects on the stock market would be, of privatization. We have yet to explore the sheer moral duplicity of the program. For the privatization plans represents increases in coercion matched only by the increase in the appearance of freedom. Most obviously, we see that they politicize the personal and private decision of how to invest one's money. The decision of whether a person needs more health care, investments, housing, consumption, insurance, or whatever else, is profoundly personal. The attempt to dictate the answer of investment is, economically, an invalid attempt at determining the true values of society beyond those values as actually expressed in the free and discrete actions of people. As Michael Tanner of the Cato Institute admits, “A privatized system would essentially be a mandatory savings program” (qtd. in Rockwell, “Private Accounts?” 11). Morally, it is indefensible to determine that one ought to plan for a longer horizon than one himself or herself sees the need for. I imagine that few would defend an attempt at forced savings that demanded that all the benefits go to the third and fourth generations. Somehow, this idea has been obscured by the fact that the savings are purported to go back to the investor himself.
Moreover, it has been obscured that privatization means less choice over the form one's investments should take. Wall Street would receive the benefits--”the big financial companies that would earn fees to administer privatized accounts” (Corzine 17). But, one may wonder, what of those who object for one reason or other to placing their investments on Wall Street? Some may prefer to invest locally, or beyond the corporate world. Others may take issue with the morals of the companies traded in the indexes permitted. Others may simply perceive the best profit opportunity to lie outside of the choices offered in the privatization plans. However one might have chosen, privatization would by its nature impose restrictions, and, while the investments would not be made directly by the government, still the following holds true: “[A]s a former Social Security commissioner Stanford Ross told the WSJ, 'if you would have proposed in the 1930s to invest in the private market, you would have been accused of being a socialist or fascist'” (Steinrich 25). So it should still be today.
And today, socialist or fascist or otherwise, we have reason to be concerned about yet another severe flaw in the logic of privatization. For the system to pay benefits out to all the current retirees and other retirees who remain a part of the old system, an astounding sum of money will need to be borrowed or taxed, as much of the revenues get diverted to private accounts. Greg Anrig of The Century Foundation calculates that $4.5 trillion would need to be raised over 20 years (Anrig 12) to cover the shortfall. This is the problem of transition costs. The fact that benefits must stop being paid out as soon as revenues stop coming in means that, in Lew Rockwell's words, “there is no there to privatize” (Rockwell, “Save or Else” 9) and hence no way to capitalize the program into private accounts without costing much. The question, indeed, is only whether the costs will be funded by debt or by taxes. President Bush indicates that he “prefers to see these tax hikes occur when he is no longer in office” (Weller 9), as might be expected of a politician. Whether by tax or by debt, genuine private investment will be crowded out and the economy will suffer.
At this point, the proponent of privatization may rebut that these transition costs, while real, will pay for themselves as the investments made yield higher returns which can fund the transition. The argument runs that greater costs now will mean greater savings later. While this may or may not be true relative to keeping the system in place as it currently stands, it is both far from certain and also an improper argument. It is not certain, because this is the argument that government always makes with respect to its touted reforms, and yet, in retrospect, the savings rarely materialize. Writes Rockwell: “We have to 'invest' now in education in order to save money.... We must nationalize the health care system now so that we can save money later.... We must go to war now to prevent a worse war later” (Rockwell, “Save or Else” 10). Furthermore, even should the argument have merit in this respect, it is inappropriate to compare the returns against a system that can yield no returns; rather, the privatized system must be measured against a truly voluntary system.
It is not just the roseate hypothetical future that privatization advocates look to, but also to a supposedly merry Chilean present. That Chile has undergone a privatization that has not yet failed spectacularly has given steam to domestic proponents. Yet, a closer look illuminates some problems. For, while the market's returns have averaged a high 13 percent, this figure is distorted by the range of time examined, since the returns of the 1980s and '90s were not likely to, and in fact likely have not, held up to such high figures. And when the market does crash, as is the case in modern economies subject to the business cycle, the system—insured against losses as it is—will be bailed out (Steinrich 16). Furthermore, concern about regulation of investments has been borne out by the Chilean example. There, “the content of portfolios is strictly regulated” (Steinrich 14) so that foreign holdings are barred, and government securities are mandated, among other aspects.
Now that we have examined the flaws of privatization, it is in order that we look at least cursorily at other options. The question that needs to be asked is, significantly, how a truly voluntary system can be set up, rather than how a coercive system can be shored up. Imagine such a world, and the solutions come readily to mind. Allow retirees, current and future, to opt out of the system. Perhaps at this point the system may be actually saleable to retirees as insurance policies. Finally, recall the role of a spirit of charity unforced and free-flowing in a free society, to help those in need; and retain faith in the ability of people to make decisions wise enough to provide for their own futures—decisions better made than by the State.
We must let people make choices more suited to their best interests, indeed. In this, in rhetoric, I agree with the privatizers. But I support the reality behind the rhetoric, too, while the privatizers would mortgage our future to Wall Street in reality. Savings is laudable, but only when it is the outcome of free choice. Otherwise, as history and logic--and economics and ethics--teach us, the outcome tends dangerously towards fascism in the role the State comes to play in the market. The choice remains with us, but only for a limited time. Let us choose wisely.
Anrig, Jr., Greg. "What the President Didn't Say about Social Security." The Century Foundation. 7 February 2005. 21 paragraphs. 6 March 2005.
Brannon, Berna Yigit. "A Social Security Plan to Last." Project on Social Security Choice. 3 August 2004. 9 paragraphs. 6 March 2005.
Corzine, Jon S. "Will the President's Plan for Privatization Take the Security Out of Social Security?" Insight on the News. 3 June 2002. 21 paragraphs. 6 March 2005.
Cwik, Paul. "Socialist Stock Market?" The Ludwig von Mises Institute. May 1999. 13 paragraphs. 6 March 2005.
Krugman, Paul. "Buying Into Failure." The New York Times. 17 December 2004. 16 paragraphs. 6 March 2005.
Rockwell, Jr., Llewellyn H. "Save or Else." The Ludwig von Mises Institute. 8 December 2004. 29 paragraphs. 6 March 2005.
Rockwell, Lew. "Private Accounts?" The Ludwig von Mises Institute. May 1996. 17 paragraphs. 6 March 2005.
Sennholz, Hans. "Distractions in the Social Security Debate." The Ludwig von Mises Institute. 8 December 2004. 30 paragraphs. 6 March 2005.
Steinrich, Dale. "Social Security Reform: True and False." The Ludwig von Mises Institute. October 1996. 48 paragraphs. 6 March 2005.
Toner, Robin and David Rosenbaum. "Social Security Poses Hurdles for President." The New York Times. 17 September 2004. 30 paragraphs. 6 March 2005.
Weller, Christian E. "White House Memo Implies Tax Hike." Center for American Progress. 7 January 2005. 11 paragraphs. 6 March 2005.
White House, The. "Strengthening Social Security for the 21st Century." February 2005. 27 paragraphs. 6 March 2005.
Comments:
I agree we must nationalize our health care system as it can be a great aspect to health coverage.
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