Privatization

So here is my take on the whole Social Security Issue.

Social security was brought about to raise the elderly out of poverty. Prior to the enactment of Social Security, almost 50% of seniors lived in poverty. Even today, it helps lift the elderly out of poverty. Leaving aside Social Security income, nearly one of every two elderly people — 46.8 percent — has income below the poverty line. Once Social Security benefits are taken into account, just one in twelve — 8.7 percent — is poor. [1].

The purpose of Social Security is to provide supplemental income to retirees. It is a security blanket. It is not a retirement plan, but a form of insurance that provides income to help sustain a comfortable living after retirement or disability. If you are in an accident and unable to work, you can still draw Social Security. A congressman (I think Earl Pomeroy) from North Dakota told an interesting story today. His father was killed in an accident when he and his brother were young. Their mother was a stay-at-home mom and didn't have any income. The family recieved Social Security benefits after their father's death. The congressman said that without that money, he and his brother would never have been able to attend college and he would have never become a congressman.

The Congressional Budget Office "projects that under current law Social Security outlays will first exceed revenues from payroll taxes and taxation of benefits in 2020 and that the program will exhaust the trust funds in 2052. After the trust funds are exhausted, Social Security spending cannot exceed annual revenues. As a consequence, because dedicated revenues are projected to equal 78 percent of scheduled outlays in 2053, CBO projects that the benefits paid will be 22 percent lower than the scheduled benefits. After 2053, the imbalance will widen, CBO projects."

President Bush is pushing a plan to privatize social security. Instead of paying in to the social security system as you do now, you would put money into an account. That money would then be invested in the stock market to hopefully appreciate. If a person did not wish to participate in investing the money, they would end up recieving 40% less than the benefits currently given by Social Security.

The latest polls have about a 35% approval rating of this plan, so the President is on a $100 million plus campaign to get us to change our minds. He is flying around the country trying to change opinions on the plan, advertising on TV, Newspaper, and online, and sending out others from his cabinet such as Treasury Secretary Snow and VP Cheney to promote the idea.

In Britain, they have a pension system which includes private investments. Unfortunately, for the citizens of Britain, the plan is largely regarded as a failure. In fact, members of the British Parliament are looking at the current US Social Security system as an example of a a good system. David Willetts, a Conservative member of Parliament whose intellectual acumen has earned him the nickname "Two Brains," is one admirer of the American system. "I like the way they distinguish between Social Security and means-tested welfare," he says. "They have higher Social Security benefits to keep elderly people off welfare."

The cost to overhaul the system and create private accounts is going to cost a staggering $2 trillion over the next ten years alone. The current US deficit is somewhere around a record $7 trillion. And judging from Bush's past economic blunders, privatization will likely cost much more than current estimates. This money will likely be borrowed from foreign countries, and we are going to be stuck with paying off that debt.

So who does like the idea? Well, Wall Street is absolutely salivating with the prospect of private accounts. They would make a killing off of fees associated with private accounts. To quote Paul Krugman, a professor at Yale, MIT, Stanford, and now Princeton, "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." Hmmm...I wonder how much money Wall Street gave to Bush's campaign and other Republicans?

So, Social Security is going to need some adjustments to keep it going. Many economists and politicians believe that the current system can be fixed without drastically overhauling it, and it has been strengthened in the past. I don't believe it is worth the risk of the privatization program that W is proposing. If you like the investment idea, then I encourage you to start up (or continue) a 401k plan like I have. Social Security has been one of the most popular and successful government programs in history. Let's not let him screw it up.