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Posted February 14, 2005.

Social "Security" Privatization,
Some Whys and Wherefores

Wirkman Virkkala

When I was a young person, first feeling my way around politics, I was a little surprised at all the support for Social Security. Here was a policy obviously based on force, and yet billed as a great liberator. Where others saw a great and noble institution, I must say I heard dishonesty from nearly every advocate. And from the government. Most of the slogans surrounding it were untrue:

• It's your investment in your future.
• It's not a tax.
• It's a sign of generational responsibility.

It was obviously not an investment in the usual sense. None of the money taken from me went to people trying to build a business who would then, after success no matter how modest, return the money to me with increased returns. I may not have known a lot about economics, but I had read the Bible, and was familiar with Jesus' parable of the talents. Social Security was based on a principle that Jesus condemned.

Further, to call one's payments into Social Security anything other than a tax is to engage in something very much like lying. This is money forcibly extracted from people, if for the (alleged) public good. The money does not go into separate bank or investment accounts, so it was not even forced savings. It is taken from people according to a schedule, and given back according to a different (if related) schedule — which is constantly changing, and which has nothing to do with returns on investments. So, the forced extraction means it is a tax. To pretend otherwise — as the government has done, and as some advocates still do — is certainly not honest.

And as far as generational responsibility goes, I was not an idiot. By the '70s it was quite obvious how the demographics were shaping up. Early entrants into the system got far greater returns than later entrants. This meant that it was not a revolving tonteen, which might have been responsible. It meant it was more like a Ponzi scheme. The inequities built into the system were the result of its construction, and exacerbated by later fiddling at the hands of Republicans and (chiefly) Democrats.

Now, even as a teenager I quickly developed a theory about Social Security's support. It was the so-called third rail in politics, the one that above all must not be touched, because it was built on inequities, generational inequities, that older people — retirees — just could not face. So the lies continued. For whom? Why, for the Greatest Generation, of course. The parents of that generation are the ones who got the best deal from Social Security, yes; but Social Security also relieved Gen Greatests of odious burdens to support their parents. But Gen Greatests still got pretty good returns — far better than Boomers will get, and better yet than Gen Xers and others will get — so they have long been supporters of FDR's crooked scheme. The reason that Social Security has jumped off the third rail and into public debate is simple: the Gen Greatests are dying off. Now that the biggest beneficiaries to the intergenerational crime are dying, we, the victims, can start cleaning it up.

In this context I'm having some difficulties with my many friends' opposition to those Social Security reforms that would add in options for real investment. Now, on one level I'm with them. With George W. Bush pushing this, we've reason to be skeptical. The idea of taking investment advice from a man who got rich from sweetheart insider deals that bilked honest investors, and who then set about to take America down a never-ending war while lying through his teeth, well, this does seem a bit nuts.

But it's not quite on target regarding the reform proposals themselves. If Democrats could stomach the largest increases in the welfare state coming from Richard Nixon, then surely a good proposal to improve Social Security could be accepted even coming from a vile a person as George W. Bush. So, is it good policy? Well, I'm not sure yet. But if I listened only to the critics, I'd tend to be for it. The critics seem to be continuing the tradition of untruth about Social Security. Some traditions should die.

I've encountered quite a few attacks on Social Security privatization in principle, some of them on ThinkingMatters, a discussion group I moderate. Here's one argument that caught my eye:

Another fact the privatizers don't want you to know: privatization will cost a lot — and working families will be the ones who pay.
Ask the people of Chile — they've gone down this road. Chile instituted a system of mandatory private savings accounts in the early 1980s, and administrative costs there exceed 20 percent. Our Social Security program only spends 1 percent on administration. This is your money, going straight into the pockets of Wall Street.

First off, I understood that Chile had made opting into the individual retirement accounts system voluntary. That is, one could continue in the old, American-modeled Social Security system, or one could leap into the unknown, Chile's new private system. One was forced to do one or the other. But one had a choice. What happened, though, was that most Chileans leaped at the new system. Why? It paid greater returns.

But there's a far worse charge embedded in that passage. What is it? Well, Paul Jacob attacked that very argument, apparently:

In favor of the current Social Security administration, the government bureaucracy is said to have an administrative cost of only one percent. On the other hand, many emails say that Chile's private system has an administrative cost of 20 percent.
One email advisory put it, "This is your money, going straight into the pockets of Wall Street."
But this comparison misses an important element. In Chile's system, and in the various proposed private systems to reform or replace our current government-run one, we don't just pay a bureau to take money and then distribute it. We pay for knowledgeable people to invest the money.
So, when it comes time to collect our retirement pensions, the money has increased. We get more.
In Social Security, there's no investment per se. There's just churning of funds from one person and account to another.
In an investment system for retirement, of course, "administrative costs" increase because you get what you pay for. You get more; it's a market exchange, not a mere redistribution.
Me, I don't begrudge paying someone a bit more, if I get more in honest return.

Arguably, Jacob is being far too nice. The charge about the pockets of Wall Street is not merely wrong-headed, it is vile. To complain about how much somebody else makes off your money while you get more in return is to engage in the politics of envy. I guess we should graph this out, with three alternative retirement schemes and best-case and most-likely worst-case scenarios:

To complain about others making money off of your increased returns is bizarre at best.

Now, of course there are many other issues involved here. Many people fear that they'll lose their investments in a downturn. What security is there in private investments? As one friend put it, haven't we learned anything from the Great Depression?

Well, actually, maybe we have. It could be that the reason we haven't had a recurrence is because no two presidents have been as foolish as Hoover and Roosevelt. No Congress has perpetrated anything as idiotic as Smoot-Hawley. No president has done anything nearly so dramatically evil as nationalize the gold supply. The main source for bank failures — government regulations against interstate banking — have been removed. And perhaps with this last boom, people now realize the wisdom of investments circa 1950: don't put all your eggs in one basket: diversify. Putting everything in stocks is idiotic. Leaving everything in stock options in one company (and one that you work for) is the height of idiocy.

But even with the occasional bust, your average stock portfolio since 1945 has increased enormously, compared to the gains from Social Security.

There are, of course, a few classes of people to whom that doesn't apply. My grandfather worked just long enough to qualify, then retired. He lived nearly fifty years after that. So of course his returns were great under Social Security. Ida May Fuller of Ludlow, Vermont, was the first to collect Social Security, starting in 1940. She had paid in $44 in payroll taxes. When she died 35 years later, she had collected $20,933.52 in benefits. That's some return! But then, we shall see the likes of such returns no longer. That's simply because of the demographics, because of the intergenerational inequities I mentioned earlier.

People who tout the great effects of Social Security on the first few generations should no more be listened to than people who tout their returns on a chain letter or other Ponzi scheme.

Now, I know a few people who have been retired out on disability at fairly early ages, and these people are reaping huge returns, too. But that's another story, one that I won't deal with here. Of course private investment accounts aren't going to help the bulk of such people. Charity might. The right kind of insurance would. But private investment accounts won't — not if a person works a year or two — or even a decade — at low wages and then retires.

There are many other issues that need to be discussed openly and honestly before going down the road to privatization. But for now, I need concern myself with only one. And that's the obvious truth.

Social Security was never meant — some of its proponents said — to be a person's sole means of retirement income. All my life I've heard advice that one should set up one's own retirement plan. (In addition to any company plan, too.)

But a lot of people haven't. Let's call these people fools. But hey, let's extend a little sympathy, too.

It's pretty hard to save and invest when a huge chunk of one's income — it's now an eighth of every paycheck! — is already going to a retirement system.

When I hear well-off liberals protest the very idea of Social Security privatization, I sometimes stand back in wonder at the narrow constraints of their sympathy. They say they complain and protest for the poor, but it is the poor who are most certainly hurt most by the current system. It's they who pay such a huge, regressive portion of their income into Social Security, and it is they who get so little from it. They tend to die younger, and thus collect less. And it is their SSI taxes that crowd out the possibility for additional investment. Professionals and union members have their group plans for retirement, and can afford to put money aside into IRAs. But try doing that on less than twenty thou a year.

And it is our current government, under sway of ideas concocted during the terror of the Great Depression, that is doing this to them. I've the feeling that the lower middle class would be the biggest supporter of privatization, if they thought for a minute that the ruling class had any good intentions towards them. But on that account, they've realized long ago not to expect too much. Like with Social Security.

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