While you are at it, any rebutal to Milton Friedman's Social Security Chimeras on the WSJ op-ed page (11/11/99)? Henry C.K. Liu "William S. Lear" wrote: > I have appreciated greatly the contributions of several on this list > (Gerald Friedman, Frank Durgin, Jim Devine, Max Sawicky, Ellen Frank, > others I'm certainly forgetting) to my understanding of the Social > Security debate. My brother, who has somehow become enamored of > Republican ideas on economics, has sent me a list of objections he has > to the current system. > > Below I have reproduced his points, and responded to them. If you > Social Security gurus could look things over and comment, I would > sincerely appreciate it. > > >1) If the 12% Social Security Tax was invested (in some conservative > >investment) by the individual over their lifetime, they could retire > >quite nicely on it. I don't know the exact number, but they could > >probably replace 50% of their income with their investments. > > It is true that the 12% could be invested "conservatively" by > individuals. It is dubious that "they" in the aggregate could retire > any more comfortably than "they" do now. First: by investing > individually rather than collectively, the investors *each* will incur > various transaction fees and overheads, not to mention their own time > necessary to evaluate "conservative" investments and to track them, > etc. Second, the stock market is a zero-sum game, essentially a > casino that has very little to do with raising new monies for business > (new or old). With each person untethered from the other, there would > be inevitable winners and losers. > > The current system *guarantees* benefits to everyone. What would you > do if there were 60% winners and 40% losers? What program would you > put in place for the 40%? What even if it were 10%? Unless you can > guarantee that *all* of these new investors are more savvy than other > players in the market, including professional individual and > institutional investors, you guarantee that huge chunks of the > population will be become destitute. Herbert Stein, former chief > economic advisor to Richard Nixon, alluded to this (albeit in an > inverted way) in his piece "Social Security and the Single Investor" > (*Wall Street Journal*, 02/05/97, p. A18) by saying that one possible > argument for privatization was that it might produce "a redistribution > of income from other savers and taxpayers to workers" but hastens to > add that "one should not think that there is any free lunch here". > > Stein is quite correct. There is no free lunch. But Stein fails to > directly pursue whose lunch will be eaten. There is no reason to > believe that the average worker, whose hours of work has been > increasing, can compete with the upper-class and institutional > investor who has the resources and the time to "invest in investing". > So, Stein's example would be better worded as: "there is a good chance > that privatization might very well produce a redistribution of income > from workers to other savers such as the wealthy and Wall Street > institutions generally". With the savage cuts in welfare and public > assistance, and legal protection for employers who pay sub-poverty > wages, along with the general slide in real wages since the mid-70s, > more and more of the population is harder-pressed to spend time away > from work, let alone spend hours sifting through investment > portfolios, monitoring investments, reading the business press, etc., > and they are too poor individually to purchase sufficient professional > aid as they might need in order to "compete" with other investors who > have the resources to do so. > > [Note to gurus: I need to find out what the current system typically > pays back, as a percentage of final wages --- and shouldn't this > calculation also be "capped" since those earning $500K pay as much > as those earning $80K?] > > Stein does however pursue the general logic of a casino versus a > collective insurance system: > > Suppose there are two kinds of investment. One will yield at > retirement a certain 50% of the retiree's final salary. The other > will yield a probable 60%, with a 50-50 chance of yielding zero > and a 50-50 chance of yielding 120% of the final salary. Which of > these is suitable for the Social Security system? The example, to > be sure, is extreme. But even if on the average over long periods > of time investments will all yield a specific return, the returns > earned by particular investors in particular portfolios over > particular periods differ enormously. > > One can say that workers are consenting adults and if they choose > investments that will make some of them very rich and some very > poor, that is up to them. But if you say that, you have to ask > why we have a Social Security system, with mandatory > contributions, at all. > > Why not just leave the workers free to save or not and to invest > whatever they save in the way they like? If there is no social > interest in the income people have at retirement, there is no > justification for the Social Security tax. If there is such an > interest, there is a need for policies that will assure that the > intended amount of income is always forthcoming. It is not > sufficient to say that some people who are very smart or very > lucky in the management of their funds will have high incomes and > those who are not will have low incomes and that everything will > average out. > > One could argue that the SS administration be directed to putting some > of the money in the stock market, but again, I see no reason for this > either. The stock market provides very little capital for business. It > essentially effects wealth transfers among players in the casino. This > is therefore *not* something that the government, which according to > the Constitution was established to "promote the general welfare", > should be interested in. Rather, I think, it should engage in either > investment in government securities (as everyone knows, the US has > *never* defaulted on its debt) or if you want "riskier" investments, > use it for direct social investment of some sort that is productive, > rather than gambling it in a lottery. > > The only sane answer to retirement and disability insurance, in my > opinion, is a collective one; the individual solution is not rational: > it destroys the strength of pooled money (large institutions have > economies of scale that individuals can't match, they can also much > more easily get fees waived or reduced with "volume discounts", > overheads per dollar invested are usually vastly lower). > Privatization simply converts the current insurance model of > retirement and disability benefits into a casino model. > Individualizing the investment would satisfy Wall Street brokerage > houses, the lucky winners in the casino, and that's about it. > > Another point to consider about a private system is what happens > should the worker die or become disabled before the investment has had > time to accrue. With a privatized casino-based system, a disabled > worker would simply be out of luck. The current SS system, in contrast, > provides not only retirement insurance but disability insurance and > benefits to surviving members, as the *need* arises, not as the need > arises *if and only if* the investment has accrued. The current > system today pays out approximately 38% of its benefits not to retired > workers, but to disabled workers or dependents and survivors of > retired, deceased or disabled workers, so this is a very important > consideration. > > As to the implicit claim about the vastly superior performance of a > stock-based retirement system, this was addressed, and refuted to my > mind, by the economist Dean Baker in a *Washington Post* op-ed piece, > "A Deal Privatization Can't Beat", Wednesday, December 23, 1998; Page > A23. > > I have placed the entire article on my website. You can view it at > http://www.zopyra.com/~rael/SS/DeanBaker.html. > > Finally, to sum up the differences in approaches, the Social Security > system is designed as a safety net. It is essentially an insurance > system. Insurance systems are a means of spreading risk --- State > Farm does it, Aetna does it, every private insurance system does it. > To suggest that our public system of insurance should be replaced by a > casino system is akin to saying State Farm should allow each person > who buys insurance to invest their premiums as they see fit. State > Farm takes current receipts and pays benefits to those who suffer > catastrophe. They can also, as a large institution, save costs in > investing any "surplus" money because they have economies of scale > that individuals cannot hope to approach. The Social Security > Administration does the same thing: they pay benefits to those who > suffer old-age, debilitating illness, etc. out of current receipts and > invest the surplus in government bonds, a conservative investment, to > be sure. > > Here's an example that should convince you of the flaws of the > privatization proposal: > > Currently all drivers in the state of Texas are required *by law* to > have automobile liability insurance (to protect *other* people and > property in the case of an accident), and they are required *by > lenders* to carry collision insurance (i.e., when you get a car loan, > the loan company requires that you be covered). The money collected > by the insurance company from those insured is pooled, benefits payed > (profits skimmed) and everything works more or less as it is supposed > to. Why does the state, and why do corporate lenders require the > coverage? Why don't they just follow the "conservative" line and say > each person should be allowed to invest their money as they see fit, > because, after all, there are potentially higher gains to be had in > the stock market? For the simple reason that the risk is not > therefore pooled, because they realize that such an approach to > insurance is *not* in fact insurance, and is therefore simply > unworkable, dangerous, and socially destructive. > > >2) The Social Security Tax surplus has been spent by our Congress. > >The surplus has funded the budget to make the deficits appear smaller. > >When the Social Security Tax is no longer enough to pay for retirees, > >the extra monies will come from a higher Income Tax, a higher Social > >Security Tax, or higher deficits > > First, your claim that the surplus "has been spent" is not the whole > story: the money has been *lent* to the government (who has never > defaulted on a loan) and they have indeed spent it. Second, no > private-sector insurance company would do anything different. In a > private insurance company, during the year monies are collected. If > the monies outstrip pay-outs, the money is usually invested (i.e., > effectively lent at interest) rather than left sitting "idle". > Private-sector insurance companies can keep the profits, but sometimes > are required to pay back parts of this "surplus" should it be > egregiously large, but the government can simply loan it to itself and > pay it back later. This is simply a non-issue. > > It is important, though, I think, to ask *how* this surplus has been > spent. As Ellen Frank points out (see below for a reference to a > short essay by her), we ought to be spending it on things that help to > improve the quality of life for all workers (actually, for every > citizen). For example, I would not mind it if the surplus funds were > used to fund educational programs (which would also help economic > productivity). I would much rather that type of investment than to > have it spent buying yet another round of armaments that we supposedly > need to defend ourselves from the world. As long as the money is > conservatively invested in a way that generally benefits retiring > workers, I'd be happy. > > >3) If the Social Security Tax were invested in private investments > >instead of a tax, the private investments would be paying for a portion > >of peoples' retirement instead of the younger generation. > > And by this reasoning, therefore, all insurance systems should be > thrown out the window. You seem to think that this distance of age is > somehow significant. I pay into a home insurance fund through State > Farm. Why should I "pay" for other people's misfortunes who live > possibly thousands of miles (or 34 feet) from me? Because, simply, > insurance is a rational system of pooling risk. Pooling implies > distance of one sort or another. Distance is therefore nothing to > worry about. > > Incidentally, if by "private investments" you mean having the SS > administration itself purchase (some) private-sector securities, one > of the reasons we today have a current pay-as-you-go system, which > invests any surplus in government securities, is that "conservatives" > did not want the government to invest any surplus in private sector > assets, nor to expand public sector direct investment. > > >4) I don't know how much the Social Security "Trust" Fund balance is, > >but it may be in the 100's of billions of dollars. With the current > >crunch that we're facing, maybe we could have handled the baby boomers > >retirement by divesting the "Trust" Fund's balances over time. We > >probably wouldn't have to raise the Social Security Tax or reduce > >benefits yet again. > > The current trust fund balance is about $800 billion. Ellen Frank has > written a short piece that I have posted on my web site which covers > the essential figures. You can see it at > http://www.zopyra.com/~rael/SS/EllenFrankSS.html > > We could also handle any shortfall very easily by raising the salary > cap a small amount. This would have the added benefit of making it > slightly more progressive. When our "current crunch" is over, sometime > well into the next century, should we so desire, we can always lower > the relative cap. > > Also, why the current crunch, aside from shifting demographics? Part > of the reason, surely, is that private health-care costs for the > elderly (and everyone) have skyrocketed beyond imagination, far > outstripping inflation (what are the exact figures?). So, the > government is not the only one that we should scrutinize when we are > worried about shortfalls. > > One final thing about crunchies: the "crunch" is defined as an > increase in the ratio of elderly retirees to then-current workers, but > it should be defined as the ratio of dependent non-workers to workers, > if you want to get an idea of the financial burden placed upon the > average worker. Workers also have children, and the demographics of > children have been shifting in the opposite direction, lessening the > burden on workers. Looking at this ratio (all dependents to workers), > it reached a peak in the decade from 1960 to 1970 (about .9, i.e., > about one non-worker dependent per worker), and fell to about .7 in > 1995. Projections put this number at about .8 in 2055 and .83 in > 2075, well below the .9 ratio of the 1960s. This point is never, as > far as I can tell, addressed by those who see a huge "crunch" headed > our way. As a basic point of honesty, this issue must also be > included in the debate. > > >5) I haven't been paying attention, but I'm pretty sure that Congress > >has been slowly reducing the Social Security Benefits over the last > >decade or two: inch by inch raising the minimum age for retirement and > >full benefits. Congress is debating taking much more drastic swipes > >at these benefits in the future, and I don't see them stopping anytime > >soon (or ever). > > These are arguments to get the members of Congress to stop believing > everything the *Wall Street Journal* tells them, and to listen to the > vast majority of the population which likes Social Security, not an > argument against Social Security. > > Does anyone know any of these details? I think part of the rationale > given for raising the retirement age is because people are living > longer, but I'm not sure. > > >6) For a long time, businesses would not fund the pensions for their > >employees. If the business went bankrupt, the employees were SOL. > >The current SS system is just like how pensions used to be funded by > >businesses. I believe business must now set aside funds for their > >retirement pensions as they go along. When people retire annuities are > >purchased or cash values are given to the employee. I suspect this is > >one reason fewer and fewer companies are offering pensions. Social > >Security, however, is still funded on that same principle. > > If the US government ever goes bankrupt, we'll have more to worry > about than the Social Security system. To compare a private > corporation, which does not have the sovereign ability to tax, to the > government, which does, is not a valid comparison. Private pensions, > by the way, have been declining probably because business has > demolished unions in this country, allowing them to not only raid > pension funds for speculative investment, but to do away with them > entirely. > > Folks, what are the reasons for declining pension coverage? > > >7) I was reading an article in the WSJ and came across this sentence. > >It shows how much the SS Tax has gone up in the 60 years since. > >"Mr. Varbaro, the son of Italian immigrants, was 16 when he dropped > >out of school and started working at Neilsen's in 1938 for $11.88 a > >week (that's $12 gross, with a penny taken out of every dollar for > >Social Security)." > > You might also ask what his retirement benefits were. Poverty levels > among retirees used to be quite high before Social Security. As > Social Security became better funded, these poverty levels became > quite low. Also, back in 1938, Social Security was simply an old-age > pension plan, with the Medicare program added 30 years later. > Mr. Varbaro was worse off back then than he would be today, all other > things being equal. > > I actually need some more support for my above contentions. Does > anyone know the history of benefits payed out? When was disability > added? Any other ideas to strengthen this point? > > Bill
