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Progressive Arguments in Favor of Partial Social Security Privatization
I have never understood why more progressives don't favor some form of partial privatization of social security, as long as it is designed correctly. The most common plans I have seen have been something along the lines of the following: individuals would have a small portion of their regular SS contributions placed in an individual investment account in the person's name, analogous to a 401k. It wouldn't be an ordinary investment account; only certain categories of investments would be eligible (i.e., no junk bonds or cattle futures). The money would actually belong to the individual but he/she wouldn't be able to withdraw the money until retirement age. However, the money would be inheritable as it would be a part of his/her estate. I would also add that upon retirement, the government would guarantee a certain level of income, but only to supplement the amount that's in the individual retirement account. E.g., if the guaranteed minimum was $30,000 per year, and your retirement account only had enough in it to support $25,000 per year, then the government would kick in only $5,000 per year.
I think there are plenty of good progressive reasons to support this:
1. It is a source of inheritable wealth for everyone. One of the cruel ironies of the current social security system is that it disproportionately disadvantages minorities because they tend to die younger than white folks. Hence white folks tend to get more SS money out of it than minorities do, and the system ends up being a transfer of wealth from minorities to whites. That would change with a partially privatized system: the money in the account would belong to the person's estate regardless, and it would be an active step in fighting white privilege.
2. It relieves the government of a significant financial burden. Instead of having to provide for a barely minimal retirement fund for everyone, the government would only have to provide a supplemental retirement fund for some, and then only if necessary. Whatever money is left over could be devoted to other purposes.
3. It is more consistent with the original intent of SS, which was to be a supplemental retirement fund. Right now it isn't that; more and more people actually depend on it for their retirement nest egg and that trend is bound to continue as more baby boomers retire, not all of whom have healthy 401k's.
4. This is one issue in which progressives can realistically expect to find common cause with conservatives and actually get something done in a deadlocked Congress.
5. And - let's face it - one reason why, IMO, progressive ideas fail at the ballot box is because they tend to stress communitarian goals over individualist goals. This is a way to have it both ways - to preserve the essential communitarian nature of social security while still acknowledging that individualism remains an important factor in people's voting decisions.
The arguments that I tend to hear against partial privatization are that (1) it would cost too much, (2) it would "destroy" SS, (3) the money would be lost in the stock market anyway so it would be just throwing good money after bad, and (4) it would only put money into the hands of greedy bankers.
For the first argument: SS is going to have to change, one way or another. The status quo is untenable. So the question is do we have to bear huge costs, because the answer is yes. The real question is: how much is it going to be, and when will the bill come due? The current unfuded liability for Social Security is approximately $11 trillion. This figure is NOT included in the national debt figures, so it is in addition to what the government already owes its creditors. We can either pay this figure later - and then keep paying it, and keep paying it, as more and more people retire and the wage-earner-to-retiree ratio goes further out of whack - or we can spread out the pain a little bit so we aren't forced with huge debts later. Think of it as prepayment on a balloon mortgage payment. It's easier to make smaller, regular payments in advance than to try to save up the money yourself, resisting the temptation to spend the money on something else (and we all know that Congresscritters always resist temptation!), then when the balloon payment comes due, you have to scramble to find the cash. And the beauty of this plan is that prepayment now will actually lead to lesser obligations by the government in the future, as the retirement account grows on its own.
For the second argument: SS as a form of social insurance wouldn't be destroyed as long as the guaranteed minimum benefit was retained. Yes the system would change but the concept would not. It would simply be a different means to reach the same goal.
For the third argument: The data are in, and investing in the stock market for the purpose of retirement actually works. Since 1926, the average annual return for the Dow Jones Industrial Average was 11%. This time period includes the Great Depression, wars, unrest, recessions, two precipitous stock market crashes (1929 and 1987), 9/11, and all sorts of other bad stuff. Yet over the long haul, people make money. Of course if you speculate in the market you are likely to lose your shirt. But that is not the same as long-term investing, which works.
And for the fourth argument: Well, this borders on paranoia and I can't help you there. If you are stuck on this argument then you must tremble in fear that every time you go to the supermarket some big corporation somewhere is exploiting you. Greedy bankers or no, ordinary people still manage to make money in the stock market.
As a matter of full disclosure: If you read my profile you will learn that I am a conservative Republican, not a progressive. Yup it's true. If it were up to me I would completely privatize social security. But I know it's not up to me and, fortunately, never will be. But I hang around a lot of progressive folks, and these are the things that they tell me; what's more, I've learned a lot about progressivism from my conversations with them. So I really don't think these are inauthentic arguments. My progressive friends are all keenly interested in issues of social justice, for instance, and I don't doubt their sincerity. So this is a proposal in which progressive ideals can be applied in a way that benefits conservative values as well.
I await your constructive criticism.
Comments (9)
I'm a middle-ground DLC-type Democrat. I broadly agree with the concept of a partial "privatization" of Social Security, carefully conducted under controlled, incremental conditions.
Just as a rough experiment, if the Federal Government simply "GAVE" everyone $1000.00 at their one year birthday to invest in a simple Total Stock Market Index Fund, approximately $128,000 would be available to that person at 71 years of age, assuming normal historical returns over the long term.
I realize this is just the broadest outline of a general concept, and there are surely many devils in the details. Nevertheless, it seems to me that the enormous earning combination of the private equity markets and the power of compound interest over time could be better harnessed to provide a better basis of support for individual retirement security.
June 15, 2008 8:33 AM | Reply | Permalink
Additional note: I see you're using 11% average gain. I was using a more conservative 7%. If 11% were the actual rate of return, one would have somewhere in the area of $1 million plus (?). Seems too good to be true, I know, but aren't those the basic numbers? I think the point is that people tend not to realize the tremendous power of even rather small shifts in return % compounded over a long period of time.
June 15, 2008 8:43 AM | Reply | Permalink
You're redefining the purpose of the Social Security system. Social Security Act of 1935:
It's not an investment fund and it's not a system for building wealth. It's a social insurance system. Diverting tax revenue from the Social Security system to subsidize private investment accounts isn't "progressive" by any definition I've seen.
Markets and economies go up and down. Markets and economies are subject to manipulation due to loopholes in the tax and regulatory system (see "Enron", "Subprime Meltdown", "WorldCom", "Michael Milken", "Hunt Brothers", etc.). When economies and markets go down is often when there's the greatest need for social insurance. It's disingenuous to argue that since, historically, over long periods of time, markets go up, then it makes sense to underfund Social Security and let the market make up the rest. Social Security needs to be a system that provides a minimum level of protection from the ups and downs of the market and the economy. Recall that it was created during the Great Depression, not when the economy was booming...
Privatization is mainly pushed by people who don't like taxes. That's their overriding concern.
Yes, changes to the system will need to be made. I think the retirement age should be raised slowly, I think the income limit subject to FICA should be raised slowly, and I think benefits should be means-tested. (Warren Buffett doesn't need Social Security benefits.)
If you want to encourage savings and investment, one can argue about how best to do that. But involving Social Security in that decision is a distraction. Privatization won't "fix" anything to do with Social Security.
If you believe that the markets are really fair and efficient and the best solution for providing social insurance, well, I guess that illustrates that you've never needed it. Count your lucky stars. ;-)
June 15, 2008 9:42 AM | Reply | Permalink
It seems to me it would be possible to perform BOTH functions: Social Insurance, and Investment for growth (Actually, where does one leave-off, and the other begin?). That's essentially why I don't advocate privatization either immediately, or completely. I STILL think it is a mistake not to harness the demonstrated wealth-creating power of the American economy (over the longer term) in the service of public retirement goals.
I think you are both clearly agreed and clearly right on the need that something must be done. The current Social Security system is neither very efficient (debatable, I guess), nor (more importantly, perhaps) sustainable over the longer term in our public demographic trends.
June 15, 2008 10:34 AM | Reply | Permalink
Hey One,
(Take two.)
There is a certain abstract appeal to trying to take advantage of the historical higher returns in the stock market. I still think it's a bad idea for SS, though. Social insurance is best done by the government. The markets are too focused on the short-term. Look at the way the private sector is trying to shift pensions to the PBGC. As long as the stock and bond markets are driven almost exclusively by quarterly results, it's foolish to rely on it for a baseline safety net for the long term. Especially since the safety net is most needed when the economy is in the skids.
Remember that it's impossible to look at "reform" of SS in the abstract. Even making changes to make the benefits "means tested" will be controversial (since political support was built on the agreement that the system would be universal). There would be huge amounts of money shifted to Wall Street and a great deal of pressure for brokers and investment banks to game the system to increase their fees and perceived performance (just as there was in the Subprime mess). There would be a lot of unintended consequences.
And what would we as a country do if people's private accounts suddenly dropped 25%? Do you really think that there wouldn't be pressure for the government to make people "whole"? There's tremendous pressure right now just to keep yearly SS check increases coming even if it's just a few dollars more a month! If 80 year old people were suddenly unable to afford their winter heat or rent payments because their SS investment income dropped, would we as a country be willing to let them be thrown out on the street or freeze? I don't think so. (Even partial) Privatization is fraught with risks that its proponents don't want to address.
I agree that we, as a country, need to save more. 401k's and the like are a good idea. I have one myself. That is a separate issue from social insurance, though. Mixing them only helps the Grover Norquist's of the world who are adamantly opposed to taxes and those want to abolish Social Security.
My $0.02.
June 15, 2008 12:16 PM | Reply | Permalink
There are better ways to make the adjustments needed to SS.
June 15, 2008 6:19 PM | Reply | Permalink
Hi metamorphicH2O,
First, thanks very much for your contribution.
As to the original intent of SS: Not even the selection of law that you quoted states that SS is supposed to be "social insurance". Rather it says that SS is supposed to be an "old-age benefits" program. This is very different from insurance. With insurance, you collect only if you have need to take advantage of the benefits; with SS you collect even if you don't. And the fact of the matter is, while many people view SS as a form of social insurance, the program has, in the mind of the general public, morphed into a quasi-pension program. So the way I see it, we have a couple of choices:
1. We can continue in the status quo, where SS is this not-really-social-insurance-not-really-pension program which, in the long run, is unsustainable.
2. We can de jure eliminate the pension part of it by turning SS more into what an actual sustainable insurance system ought to be: e.g., everyone pays 'premiums' (taxes) but you only collect if you have a verifiable 'claim'. This is analogous to means-testing SS and IMO it is probably the most politically unpopular option out there. Many people, who are in the SS-as-pension mode, are going to rightly complain that their benefits are being "taken away from them".
3. Or, we can emphasize more the pension part of SS, which is the most popular part of it anyway. But, we can do it in a smart way, in the way that actual pensions are run: i.e., the contributions are invested in the market, but not just willy-nilly; there are plenty of regulations that control how pension money can be invested. It does not have to be a "pure" pension system, which is why I suggested the guaranteed minimum benefit, to be supplemented with tax dollars only if necessary.
So it's not merely a temptation to want to invest piles of cash in the market. It's a recognition of what SS really is in today's world. Honestly I doubt that most people would defend it in the context of social insurance. They would defend it instead in the context of a pension.
About the market: Yes, the market does go up and down. Yes, there have been scoundrels in the market and there will continue to be scoundrels in the market. But please don't fall for the Fallacy of Asymmetric Idealization though - there are merits to partial privatization and there are substantial demerits to the status quo other than the financial unsustainability. For instance, right now, SS is a political football which, from my point of view, is generally used by Democrats to scare elderly voters into voting for them, for fear that Republicans will "take it away" (a complete strawman argument). It's also used as a slush fund for Congress to dispense money however it wishes - on wars, on earmarks, on wasteful boondoggles - and therefore simply invites corrpution. Yes SS has all but eliminated poverty among the elderly but I am arguing that those same goals can be met in other ways without having to rely on status-quo ideas. My impression, however, is that you have general apprehension of investing in the market. Is this impression unfounded? You say you have a 401k yourself (as do I), which I presume is invested predominantly in the market; if it's okay for us why wouldn't it be okay for everyone else too?
About Grover Norquist: Well, if you just don't like the guy then I can understand that you don't ever want to be seen agreeing with him. But every once in a while your opponents will have good ideas and it would be foolish not to count yourself as a supporter of the ideas just because you don't like the proposer. That is the epitome of the ad-hominem fallacy. Yes there are some on the right who would like to see SS go away completely - I can tell you honestly, though, that that sentiment does not reflect mainstream Republican views. It's not what George Bush proposed, for example. What's more, not even the authors of the web page to which you linked advocated eliminating SS abruptly or immediately.
About people being thrown out on the street: The purpose of the guaranteed minimum benefit is to prevent this situation. That is the social insurance part. Of course I would advocate that this minimum amount be set intelligently so that nobody freezes or starves.
And, about encouraging people to save: To be real honest, if you want to encourage people to save, IMO abolishing SS is the best thing you could do - because then saving for your retirement would be entirely your responsibility, and not saving for it could literally mean freezing in the winter, and no rational person wants that. Of course I don't advocate that. But neither the status quo nor this plan would "encourage people to save" - they would discourage saving because people wouldn't "have to" save, the government does it for them.
I guess the bottom line is, if SS is to be a pension system, then it should be a sustainable pension system run according to good standards of practice; if SS is going to be an insurance system, then it should be a real, sustainable insurance system, which means means-testing it (IMO that's never going to happen); but it can't stay in this sort of quasi middle ground.
June 15, 2008 6:40 PM | Reply | Permalink
But, we can do it in a smart way, in the way that actual pensions are run: i.e., the contributions are invested in the market, but not just willy-nilly; there are plenty of regulations that control how pension money can be invested.
Do you favor the SS admin investing in thee market?
June 15, 2008 7:13 PM | Reply | Permalink
Hey Jeff,
I don't have time to address all of your comments.
You say that you would suggest a guaranteed benefit so that if a person's SS benefit and their private account earnings dropped below some minimum, then other budget dollars would make up the rest. How would that work, exactly?
Presumably if investment income drops in an investment fund that is "conservative" yet has a higher return than government bonds - like, say, an S&P 500 Index fund - then it's because the economy as a whole is in a slump. That means tax revenue is going to drop, and it means that expenditures for "stimulus" and unemployment insurance and the like are going to rise. IOW, such a SS+Private pension/insurance/whatever-you-want-to-call-it system would be less predictable than the current system. In addition to those expenses, there will be the expense of topping-up Social Security benefits.
You pooh-pooh the market going up and down, but I'm sure you realize that a basic founding principle of economics is that Risk and Reward are inextricably linked. If you want a 7% return from the market, you're taking on more risk than if you put your money in a 3% Treasury bond.
TANSTAAFL.
Unless you, and like-minded people, can convince skeptics like me (and their representatives) that you have an answer for real concerns about what happens when the market drops, and how would things be better in such a system under those circumstances than they are now? That's just one of many hurdles you'll need to cross, but IMO, it's one of the biggest.
Again, savings for retirement is a different issue than a Social Safety Net. As FDR said:
Diverting tax money from Social Security to private accounts will not make the safety net more secure.
Gotta run. You can have the last word.
June 15, 2008 8:40 PM | Reply | Permalink
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