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December 15, 2004



Sacrificial lamb? Interesting. Or perhaps Bush is treating SS reform as the equivalent of his long stalled faith-based initiative proposal.

steve sturm

Tom: you give short shrift to what I believe is the bigger problem with 'privatization' plans: the ripple effects of those fools who go and lose their retirement dollars.

For anyone interested, I go into this in detail at thoughtsonline

Cecil Turner

Arnold Kling has a related article (hat tip: Blogfather). He had similar heartburn with Kinsley's "works" concept, and goes on to suggest privatization would stimulate savings significantly:

Under privatization, if you work harder and earn more, this increases the funds in your own account. If you are relatively more dependent on your own saving and less reliant on government support, then you have a greater incentive to save. Anything that increases work and thrift tends to raise economic growth. Harvard's Martin Feldstein has argued that these effects could be quite large, on the order of hundreds of billions of dollars per year in higher national output for a complete transition to privatization.


My take on Kling:
The analogy posted as response at TechStation, referring to Social Security as a "worn-out roof," would only make sense if the roof was in fact not performing properly, and thus "worn out." In this analogy, the ability to pay off retirees at the promised level is equal to the ability of the roof to keep out water and wind, correct? We are able to keep out that water for the next 38
years--three years LONGER than we theorized 10 years ago, meaning 13 years later than we originally thought.

Can you think of any lamer justification for using precious debt capital, than replacing a "worn-out roof" that will do its job perfectly for another 38
years? By that standard, we should also buy 4-5 cars right away, because over the next 38 years we're going to need them to replace the one we have now--despite the fact that our current car is running fine.



Is there is a more accurate approach to that analogy?

Your roof has been inspected frequently, the latest inspection says the roof starts leaking in 13 years (2018). However, you plan to use your credit card's available balance to float a loan that allows you to patch the roof and put off replacing the roof for 43 years (2048).

Or maybe that's a terrible analogy ... I just made it up over a glass of wine.

Jim Glass

"the bigger problem with 'privatization' plans: the ripple effects of those fools who go and lose their retirement dollars."

SS *guarantees* the younger generation that it will lose up to 65% of its contributions, by law.

Markets may be risky, but but try to find a market investment that *guarantees* a return of from 0% to -65% over forty years!

It takes a government to do that.



Sometimes in analogies you have to, like, you know, rescale the numbers.


Since everyone else hates torridjoe's comment too, let me beat on this:

...using precious debt capital...

As Kinsley notes, the net initial impact of privatization on our savings pool is zero.


Blixa is humorous. Nonetheless, I too found fault with Kling's analogy. Here's the way I looked at it:

Kling is saying that the roof is worn and that we should take out a $10,000 home equity loan to replace it (and that this should be viewed at moving the off-balance sheet liability of the bad roof onto the balance sheet with the HE loan). However, I say: woah! I don't want to take out a $10,000 loan to replace the whole roof! I just want to spend $500 to put a patch on it and extend its life by 5 years. And if I find that I need another patch to extend its life again, so be it, I'll do that when the time comes. It's much better than having $10,000 of debt on my books and also having to pay those high interest rates (which crowds out the spending I plan to do on other items).

Now, the problem with my example is that eventually you can't patch the roof any more, so you will have to replace the roof anyway. But is that true with Social Security? Or can we just go along forever, merely spending $500 on patches whenever we need to?


The partial-privatization *is* a "patch", and not a "replacement", if it makes you feel better. (Does partial-privatization "replace" Social Security?)

So, read Kling's article again, this time doing a mental find-replace of all instances of "replace" with "patch". And pretend that your cash-flow is such that even patching that roof will require a loan.

Again, it's an analogy, not an equation.


Anybody work for Galveston TX?
Colin McNickle (who was told by Theeeereeeza Kerry to "shove it") has a review of Chile.


I have not been following the privatization of SS too closely,but there are 2 items I never see mentioned in any discussion. First,it would be a massive,ongoing cash infusion into Corporate America. If 10 million younger workers making $25,000/yr. put 2% of income(or 1/3 of SS payroll tax)into Market,that's an extra $5Billion into US Corp coffers,yr.after yr.after yr. Further,since this a retirement fund,a large percentage of people will play it safe,so a few Corps will get pretty good percentage(Coke,Pepsi,GM,Ford,etc). How will these newly cash-flush co.s react?
I also haven't seen discussed what will happen when a large co. is about to go belly up,yet has alot of privatization funds invested in it? Will the Govt. let it fail,or will political pressure ensure a bailout? Will inept,failing co.s continue to be propped up by taxpayer dollars merely because they have significant privatization investors? Imagine an Enron that was in a half million privatization accounts.

jon ravin

Uh - Stephen - the money doesn't go to the corps (unless they sell new stock). Stock price increses go to the stockholders (not the same thing).


The problem with the way many of you are treating the "leaky roof" analogy is that you assume that the roof is currently working. Having seen retirement projections for many people, I can tell you that the present level of Social Security payouts is insufficent to support a reasonable standard of living.

More than that, those of us in the younger generation have concluded that we will likely never see a dime from Social Security per se, and are in no mood to throw good money into the gaping government maw on the false premise that it will take care of that money for us.

Regardless of the actuarial pros or cons of Social Security privatization, you will see a huge groundswell of support for it from the younger portion of society, simply because we will be able to keep control of our money. Even if some people are catastrophically poor investors, ten percent of something is better than one hundred percent of nothing.


I'm not economically literate enough to follow this line of thought to its full conclusion, but Kinsley's argument rests on assuming that the "pool of capital available for private investment" (3a) is identical to the pool of capital that WILL be privately invested. Social security privatization mandates that the pool in question will be privately invested rather than only possibly going towards private investment (as opposed to consumption, foreign investment, etc). Since the investment is mandated, this would seem increase investment capital, destroying point 3 and neutralizing the argument. Or am I missing some ultimate equivalence between investment and consumption?


Uh-Jon-with such huge quantities of cash available,you don't think a few co.s will issue new stock? My mythical young worker will prob work for 40 years. Just how many co.s have not issued new stock in the past 4 decades?
My point is that most of discusssion I've read is on will it mean more money for retirement. But such a massive transfer of funds from the govt.to the private sector is going to have all kinds of consequences.
If these are true retirement accounts,an individual could not get any money until he/she retires. What happens w/account if individual dies before retiring? I can't inherit someones Social Security. Can I inherit a privatization account? If I inherit an account and I die before retiring,can my(hypothetical)children inherit the account I inherited? Silly questions,maybe,but they do show how nebulous the plans are.

Frank IBC

Stephen wrote:

"It would be a massive,ongoing cash infusion into Corporate America."

And those corporations are bad...because...because they're so...corporationey.

/channeling Tim Robbins ala "Team America"


I think Stephen raises an interesting point about whether Soc Sec investors would become a politically favored class that could force the government to promote/protect certain companies. My guess is that it would not happen, and here is why -

(1) the current market capitalization of the US stock market is about 15 trillion. (I would welcome a more impressive source for that, BTW)

(2) Soc Sec raises around 500 billion annually in payroll taxes. If 1/3 of the worker contribution is privatized,that is 1/6 of the total, which amounts to roughly $100 billion per year.

(3) Here comes the really sophisticated part of the analysis - $100 billion annually strikes me as small relative to $15 trillion. Even a decade later, Soc Sec investors would have less than 10% of total equities.

Helpful numbers here would be anual figures for dividend payouts, new mututal fund investments, new IRA/401(k) investments, or numbers like that.

(4) SOme of the concentraion risk Stephen mentions will be avoided *IF* the plan structure is like a 401(k), where the government offers a range of investment pools run by professionalmanagers. (My pref). If the structure looks like self-directed IRAs, folks might bunch into certain popular stocks.

Related to the unmentioned hazard Stephen mentioned is my own secret worry - will the independence of the Fed be further eroded if their decisions directly affect the retirement funds of an even broader chunk of America? This strikes me as a probably-phony issue - already, if the Fed slows the economy, we are all affected directly through a higher risk of layoffs, for example. But it might be worth demagoguing.

Or in another arena, would voters-turned-investors become *more* protectionist? Maybe - plenty of big business (the automakers in the 70s, steelmakers today) love tarrifs, and would welcome new political support.

I guess the basic objection would be that giving more folks a stake in the profitability of corporate America might change the political dynamic of "government versus business" in a bad way. And, yes, I suppose it might. But on net, I think proponents believe that a broader political backing for a profitable corporate America is not a bug, it's a feature.

Jim Thomason

One item in Kinsley's piece that has gone unremarked upon, as far as I can determine, is that by his logic liberals (at least, modern American liberals) should be 100% in favor of the proposal. He argues that privatisation would in effect transfer money from current investors to the new "SS investors" in the form of lower returns on original investments. Would this not then be a redistributionist scheme which takes from the (non-working) rich and gives to the (working) poor?

So why is Kinsley against it?


As a comparison, Vanguard 500 Index has almost $45 billion market cap. Fidelity Magellan: ~$65B.

In fact, recent total assests for the Fidelity Group Mutual Funds has ranged between ~$430B (2002) to ~$615B (2004).

Appalled Moderate

Just one thought.

Has anyone thought about how these reforms are going to affect people's retirement patterns, and how retirement patterns are going to affect the stock market? For example, ordinary behavior during a recession, when a level of retirement income is guaranteed, is to go ahead and retire (and maybe accept an early retirement bribe from your employer.) In an account balance driven world, folks will know the level of their account balance, and will be sensitive to large drops in it. People will refuse to retire during a recession, because their retirement reserves will be low, and will retire when times are good (and there are likely job shortages.)

Frankly, encouraging this short of economic behavior seems a bit perverse. But I could just be wrong here. As this has become Social Security central,does anyone have any ideas?


I recently began poking around in Pete Petersons's new book, "Running on Empty "
I think his proposal (eliminating wage indexing of SSI) as quoted below, in combination with private accounts would be the perfect response to the problems built in to SSI.


Running on Empty (pgs 198-201)
by Pete Peterson

“One feature of Social Security that few people understand, including some officials high up in government, is that it promises ever higher benefits to each new generation of retirees. The reason is simple. Under Social Security’s benefit formula, your pension is calculated as a percentage of your lifetime earnings; but these earnings are “indexed” to the average earnings or “wages” of all workers in the year you reach age sixty-two. Since wages over time tend to grow faster than inflation, each generation receives pensions that have more and more purchasing power.

Here’s an example of how it works. A full-time average-wage worker retiring in 2001 received an initial monthly benefit of $1,051. But by 2031 a full-time average-wage worker will be entitled, under current law and projections, to a benefit of nearly $1,460 in today’s dollars---in other words, a benefit worth 39 percent overall- pushing “wage-indexed” benefits up by the same amount. Wage-indexing explains why it’s impossible to “grow our way out of “ Social Security’s long-term deficit—even if we faced no demographic pressure. Since benefit levels rise in tandem with wages and productivity, faster GDP growth simply translates into faster total benefit growth.

Wage-indexing was not always part of Social Security. For many years after the program began operation, the benefit formula was not indexed to anything. Congress adjusted it every few years as it liked. As we have seen, these ad hoc benefit hikes got out of hand in the late 1960s and went haywire after the Social Security expansion of 1972. In 1977 Congress instituted wage-indexing to set new benefits. And it’s been wage-indexing ever since. This, in combination with yearly 100 percent cola adjustments for benefits already awarded, means that Social Security benefits become continually more generous even as the relative number of workers available to pay these benefits declines.

Did we have to take this course? Not at all. In fact, just a couple of years after Congress opted for wage-indexing, Prime Minister Margaret Thatcher came face to face with a similar crisis in the British national pension system. As part of her solution, which was later endorsed by Laborites as well as Conservatives, she chose price-indexing instead of wage-indexing to set new benefits. The outcome of this tale of two countries is quickly told. In the United States, projections of insolvency continue to plague Social Security’s future. In Britain, sustainability has been totally achieved. Britain’s pay-as-you-go pension costs show zero projected growth as a share of worker payroll or GDP—a positive fiscal prospect."

Later, Peterson states, as is actuarially sound, larger real-benefit amounts could be granted.



One more data point, FWIW: The federal government's Thrift Savings Plan (pdf) holds ~$130B in net assets with ~$15B in new contributions in 2003 and another ~$15B in investment income that year.

Also, Drum weighed in on the wage index vs. price index (inflation) issue.


I would think the cash infusion would reward stability as it's not mad money but retirement. Therefore wouldn't the markets trend towards safety rather than risk? Not that the blue chips are risk takers (unless you think Vanilla Coke is plunge into the unknown). Still might individual accounts seeking safety (Sure, some will choose riskier options but I image most would side towards safety) change the entrepreneurial landscape (whoa dog "entrepreneurial landscape"?) towards a more plodding and less vibrant tilt? Just mumbling out loud what the voices in my head tell me. Ohh look shiny things!


Frank,I happen to be a firm believer in Capitalism. That is why I have my doubts about privatization. While TM showed the %s may be quite small,look at the $100Billion-does anyone believe no one(Democratic Party)will not push for Govt. oversight of these accounts? 10,20 yrs. down the road,who knows how politicians will act when horror stories of "entire retirement lost to corporate greed" start running. The past 60 yrs. have been decades of increasing govt.control of business,and I don't see that reversing anytime soon.
Again,this will not be a one-time cash infusion,this is an assured pool of money available yr. after yr. This will have a huge impact on US,the economy,Corporate behavior,investing(if something like $50Billion goes into "safe" stocks,will those who sold stocks now invest more in start-ups?)and I would hope smarter,more knowledgeable people than myself were thinking of consequences,not just whether or not I get a few more dollars when I retire.


I can't believe the number of "experts" who casually debate the merits of Social Security investing in equities vs. government bonds as if they were somehow a comparable investment strategy.

People, the only money our government has is what it prints, what it borrows, and what it collects in taxes and fees. When the general fund currently "borrows" (and immediatly spends) the Social Security payroll tax surplus each year, it issues govenrment bonds (paying "interest") to the SS Trust Fund.

Then, when Social Security seeks to redeem these bonds at some future date, the only way the general fund can honor them is to take from then-year tax revenues or borrow. If the government chooses to borrow, it will be issuing bonds (which will pay interest) to pay for the principle and "interest" due the trust fund. If you believe this is a sound financial approach to SS fund management, I have a chain letter I would like to send you.

While it makes sense for individuals to invest in government bonds, having the government "invest" in government bonds is a Ponzi bookkeeping scheme. Return on equity investments made by the government would provide a real return to the trust fund, well worth the risk.


If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets.

This is the central factual premise of Kinsley's argument. Is it just me, or isn't this wrong? Kinsley assumes that all money sent to private accounts will need to be replaced with borrowings because the government's liability for fixed benefits will not change. In the short run, this is true. But in the long run, it is not. This is like saying that when you take out a mortgage, you are obligated to make interest payments. Yes you are, until you pay off the loan. Eventually, once the transition costs are paid down, the result is a largely bifurcated system of a self-financed defined-contribution plan side by side with a shrunken defined-benefit plan still financed by transfer payments. At that point, the accounts no longer carry an opportunity cost in government borrowing - just as your house no longer costs you loan payments once you've paid off the mortgage. Or have I missed something?

Joe Mealyus


"If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same."

Actually, I believe (correct me if I'm wrong, someone?) that two other things can happen here: 1), the trade deficit could rise; 2) consumption spending could decrease. Either would mean that the total pool of capital available for private investment would increase.

Kling's GDP-increasing incentive effects (and maybe Crank's future effects) are no doubt more interesting, but I just thought I'd point this out.

Also, that's a big "if" there which Kinsley is putting a lot of weight on. It seems to me that you might fashion a pretty strong argument against privatisation by arguing that Kinsley's "if" is *not* likely to be descriptive of what happens. If the total pool of capital is increased (in an artificial, government-mandated fashion becase of SS privatisation), maybe that will lead to a sub-optimal consumption/savings/investment mix....

Patrick R. Sullivan

"What happens w/account if individual dies before retiring? I can't inherit someones Social Security. Can I inherit a privatization account?"

Yes, that's the point, the investments BELONG TO YOU.


Fine it's MINE. I'm interested in the lawsuit angle. Let's say I have 100% of my private account with the Enron of 2050-and goes belly up in a fraud meltdown-and it turns out it certain SEC investigators were active participants in hiding the fraud-will I able to sue the federal government for my loss? Hmmm perhaps this is why their talking tort reform up at the white House.

Real conservatives have to admit the possibility exists for the government to make things worse.

Joe Mealyus

Stupid Dog:

"This blanket assertion nicely sidesteps the question of whether individuals should be allowed to invest their money as they see fit. (After all, if government bureaucrats can invest my money better than I can, it would hardly be in my best interest to tell them no.) But many investors are not so certain that the money we deposit into Social Security will yield any return at all."

The "return" on the money we deposit into social security is of course the long-run alleviation of elderly poverty. (Which was a big problem back in the day). What gets purchased is the absence of a collective burden - fewer welfare payments to old people. That's the "return" you get - less taxes in the future.

The government does some forcing either way - under the current system, you're forced to pay taxes, under a privatized scheme, you'd be forced to invest. But the ultimate "return" or purpose of the program doesn't change. The lure behind privatization is that you might get higher benefits from getting your own chance to invest wisely instead of depending on the economy as a whole (not the government - SD errs) to invest wisely and then pay taxes.

Joe Mealyus

PRS: "Yes, that's the point, the investments BELONG TO YOU."

Except of course that under the current system you could say that your contributions lead to a real asset (Kevin Drum sort of has a point here, I guess) that belongs to you - you get a check every month - unless you die. So essentially the argument here is that under privatisation, it no more belongs to you than before (except for the extra returns due to your personal wiliness in investing), but now it BELONGS TO YOUR HEIRS.


you could say that your contributions lead to a real asset (Kevin Drum sort of has a point here, I guess) that belongs to you - you get a check every month..

Sure, if the taxpayers of 2050 choose to honor that obligation.

Jim Glass

Shortest Kinsley: He's nuts.

Shorter Kinsley:
1. His economic analysis -- Investing $100 billion more a year via private SS accounts in a $45 trillion stock market (0.2% of capitalization) will "bid down" the return on all stocks to the level on government bonds. Ergo privatization can't work. QED.

2. His social principles -- Investing SS in real economic assets to close the funding gap can't help and must fail because it is a zero sum game (see 1.), adds nothing to the economy and ends up only taking from others.

OTOH, closing the funding gap on a paygo basis as we always have with *tax increases* since the tax rate was 3%, and with benefit cuts, is *superior* because ... um ... they add to the economy? and don't take anything from anybody??

Both of which are nuts.

Longer Kinsley:

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