Social Security Reform

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Okay, so this question goes out to all of us who are thinking about it: Social Security or 401(k)s? Basically, are personal accounts helpful or necessary for Social Security reform??

 

I think privatization of the social security system is a bad idea -- but first we have to define privitization.

Some people think

(1)we should privatize by having the government be able to invest in private companies, like other investors.

(2)Others think that the government should privatize by finding a private fund manager to invest in private stocks -- the social security money becoming like any other private account, albeit a huge one.

(3)Others think that individual accounts should be created and each individual should be allowed to invest the money in that account for herself or she should be allowed to invest a certain amount of that account.

There are likely other ideas and I'm sure a number of variations on the ones above.

I think the first two ideas for privatization are a bad idea because instantly the government would become the single largest owner of private stocks in the world. In short, there wouldn't really even be much private stock left, it would overnight become government owned stock. Presumably there would be special rules put in place where the government would not be allowed to have a voice in the way a business is run like a private majority owner. Still, I dislike the idea of the government buying up all the private stock in this nation. It would no longer be independent and the temptation for politicians to interfere via government help for the companies chosen by the government would be overwhelming. Things tend to go more awry the more the government (any government) attempts to micromanage the economy and I'd anticipate unfair business practices to skyrocket.

I believe the third idea is a bad one because of administrative costs, a lack of feasibility, and I'm ashamed to admit, a lack of trust in the general public. As it is right now, the administrative costs of social security are insanely low. Compared to the administrative costs of mutual funds, the administrative costs of social security are rock bottom -- the government doesn't get enough credit for this. With the creation of personal accounts those administrative costs will jump through the roof. Just imagine the cost of setting up and maintaining an individual account for every single person who has paid into social security! Talk about a bueracracy, we'll need the beuracracy to end all beuracracy just to keep track of how many accounts there are, let alone what they're doing and how to pay out of them. It just isn't efficient in my opinion.

Perhaps most importantly, I don't trust people to manage their individual accounts. Part of the reason social security is so politically strong is that when it was set up the people who came up with the idea knew that if it was viewed as a welfare program, which are historicially unpopular during time of economic boom, then it would be much easier to get rid of. So, they imbued the system with a sense of entitlement. People now think they all deserve what they have coming from social security and that they've in some way earned it and therefore see it as an entitlement as opposed to welfare. The truth is, it is welfare. People who earn large amounts of money pay higher social security which is then used to pay out benefits to those who have earned less money. Over the course of their social security benefits, the rich person will never come close to getting back how much was paid into the system and the poor person will receive more than she paid into the system often times. This is wealth redistribution. This is welfare. I say this not because I'm setting up a debate to end social security, it is a good thing. But, when we see it as the welfare system that it is we can more easily see its purpose which is to act as a safety net. A safety net needs to be safe.

I have no doubt that a number of people who are apt at investment would outperform social security. However, in my opinion, these knowledgable people are most likely to be those who least need social security. They're the ones who already have sufficient money to invest. The problem comes when you consider what is likely the majority who has no clue on how to invest. There is a good chance these people will lose their investment or underperform social security. Since social security is supposed to be a safety net, the idea of a system that could underperform what we have now is illogical. Since many people do not have the knowledge to invest at all let alone competently, I'd say you would need some education programs. Imagine the cost of these progams, then imagine their effectiveness. That is simply another massive cost that would come into play.

One idea I've never seen in print but that a friend of mine mentioned would be to set it up like a lifestyle account (for some reason I think I've got that name wrong.) The idea is that when you're young certain types of stocks would be picked for you to invest in and as you get older and closer to retirement different more conservative investments would be found. This is a nice idea but it still requires the government to pick and choose a group of stocks for you which still leads to a strong possiblity of government interference.

In short, I think government ownership of private stock is bad. I don't think it feasible. I think it is contrary to the intent of a safety net. And I think that many and likely most are not equipped with the education to invest effectively.

[ November 09, 2002, 17:37: Message edited by: Laches ]

 

WEll, quite frankly, I'm pessimistic about the Social Security system. It has been systematically been misused for years, and will collapse from the political wrangling.
I am depending on my own IRA's and other investments I make privately becasue I'm sure Social Security will not be around by the time I retire.
I seriously doubt privatizing it in any way will improve it, and merely hasten it's demise.

 

Actually, there is a lot of talk about how social security is going to "collapse" but that is in large part a scare tactic aimed particularly at elderly citizens. The most reliable determinations of the worst case scenario indicate that as the population ages there may come a time when social security payments will have to be reduced to 80% of their current value (instead of receiveing $100 you'd get $80) and that the reduced payments would go on for a while and then would return to 100%.

Smart not to rely on social security for your entire retirement. It was never intended to provide for your entire retiremnet, it is a safety net, sort of a last ditch resort.