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The Problem With Privatizing Social Security...

JoeTheEconomist

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The Social Security debate contains a lot of noise, where people argue in great earnest with the worst of cliches. Arguments are repeated over and over until people accept them out of volume rather than reason.

The idea to privatize Social Security deserves more consideration than it gets from either side. Opponents - with a straight face - will warn you about the risk of the stock market, when the money today sits in a system that is insolvent by any measure of the insurance industry. Proponents - with equal ardor - will promise you that a privatized Social Security system would create a pool of capital on which the economy will grow as though Social Security would be a magical money tree.

Lost in the cliche is whether privatizing Social Security is sound public policy. The question is whether it is better for society to prepare for retirement with insurance or savings or a combination of both. Insurance and savings are not the same thing. Both provide money for retirement, but they do it in different ways. Insurance manages risk where as savings accumulates wealth.

In terms of society, a mix is more efficient. With pure insurance, society only has to allocate sufficient resources to provide for only those living to retirement. With savings, society has to allocate sufficient resources for the entire population. The mix of both allows insurance to manage the risk of old-age, and personal savings to manage the risk of the failure of the insurance company.

It is possible to look at this question as we do auto-insurance. People are legally required to get insurance for every car that they own. For that car, it is possible that we could self-insure and have a personal savings account for auto-wrecks. The fact is that we don't. We use a mix of insurance and deductibles, and hope that we don't have a wreck. It is cheaper. Insurance is an expense not an investment.

This is what we have today - in theory. Social Security provides old-age insurance that augments personal savings. Privatization would rewrite Social Security on new terms with a new goal. Privatization would shift the intent of the system from insuring old-age to building savings. In terms of retirement, these insurance and savings are complements not substitutes. They work together like bacon and eggs. Replacing the current Social Security with a personal savings account is like replacing the eggs with sausage.

Before we replace, the eggs with sausage, someone should ask why is it that a new Social Security will perform the job of accumulating wealth better than the savings programs that we already have, and already subsidized. Virtually every American has access to personal savings accounts. They may be 401Ks, IRAs, brokerage accounts. If savings accounts with tax incentives are not getting the job done, how is throwing more money at them going to work any better?

Any publicly mandated retirement planning will affect private savings. Social Security, and all insurance, will lower private savings because as people spend money to buy insurance, they have less money left over to save. Unlike insurance, a privatized Social Security would displace the need for private savings on a dollar for dollar basis because there is no difference between the two. Privatization creates nothing but noise.

In terms of public policy, insurance is a valuable component of retirement planning. Whether it is Social Security or a private market offering, people should at least have the option to buy old-age insurance. Employers should be given incentives to encourage employees to buy private insurance. Given the state of Social Security and the fact that insurance manages risk, it should be a growing part of everyone's retirement plan.

Here is the real problem with privatization: most Americans do not have access to old-age insurance in the private markets. So privatization would change what we can't get elsewhere into something that we already have and already doesn't work.
 

specklebang

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The Social Security debate contains a lot of noise, where people argue in great earnest with the worst of cliches. Arguments are repeated over and over until people accept them out of volume rather than reason.

The idea to privatize Social Security deserves more consideration than it gets from either side. Opponents - with a straight face - will warn you about the risk of the stock market, when the money today sits in a system that is insolvent by any measure of the insurance industry. Proponents - with equal ardor - will promise you that a privatized Social Security system would create a pool of capital on which the economy will grow as though Social Security would be a magical money tree.

Lost in the cliche is whether privatizing Social Security is sound public policy. The question is whether it is better for society to prepare for retirement with insurance or savings or a combination of both. Insurance and savings are not the same thing. Both provide money for retirement, but they do it in different ways. Insurance manages risk where as savings accumulates wealth.

In terms of society, a mix is more efficient. With pure insurance, society only has to allocate sufficient resources to provide for only those living to retirement. With savings, society has to allocate sufficient resources for the entire population. The mix of both allows insurance to manage the risk of old-age, and personal savings to manage the risk of the failure of the insurance company.

It is possible to look at this question as we do auto-insurance. People are legally required to get insurance for every car that they own. For that car, it is possible that we could self-insure and have a personal savings account for auto-wrecks. The fact is that we don't. We use a mix of insurance and deductibles, and hope that we don't have a wreck. It is cheaper. Insurance is an expense not an investment.

This is what we have today - in theory. Social Security provides old-age insurance that augments personal savings. Privatization would rewrite Social Security on new terms with a new goal. Privatization would shift the intent of the system from insuring old-age to building savings. In terms of retirement, these insurance and savings are complements not substitutes. They work together like bacon and eggs. Replacing the current Social Security with a personal savings account is like replacing the eggs with sausage.

Before we replace, the eggs with sausage, someone should ask why is it that a new Social Security will perform the job of accumulating wealth better than the savings programs that we already have, and already subsidized. Virtually every American has access to personal savings accounts. They may be 401Ks, IRAs, brokerage accounts. If savings accounts with tax incentives are not getting the job done, how is throwing more money at them going to work any better?

Any publicly mandated retirement planning will affect private savings. Social Security, and all insurance, will lower private savings because as people spend money to buy insurance, they have less money left over to save. Unlike insurance, a privatized Social Security would displace the need for private savings on a dollar for dollar basis because there is no difference between the two. Privatization creates nothing but noise.

In terms of public policy, insurance is a valuable component of retirement planning. Whether it is Social Security or a private market offering, people should at least have the option to buy old-age insurance. Employers should be given incentives to encourage employees to buy private insurance. Given the state of Social Security and the fact that insurance manages risk, it should be a growing part of everyone's retirement plan.

Here is the real problem with privatization: most Americans do not have access to old-age insurance in the private markets. So privatization would change what we can't get elsewhere into something that we already have and already doesn't work.
The difference between 401K type savings and a quasi-private SS replacement is that it would be mandatory. You would have to buy T-Bills until you accumulated enough to be allowed to invest more aggressively and even then you would be limited to well rounded funds, not individual stocks. You would have to reach retirement age and take distributions on an actuarial basis. I call this Mandatory Savings Accounts and I would expect 10% to come from you and 5% from your employer. So this is doable but utterly unlikely.

Instead, we have SS which can be robbed by congress and thats the way they like it, ah-ha, ah-ha.
 

Fisher

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No we should require employers to contribute an additional 2.5% of pay to portable ira's with SS as the payable on death beneficiary.
 

Fisher

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The difference between 401K type savings and a quasi-private SS replacement is that it would be mandatory. You would have to buy T-Bills until you accumulated enough to be allowed to invest more aggressively and even then you would be limited to well rounded funds, not individual stocks. You would have to reach retirement age and take distributions on an actuarial basis. I call this Mandatory Savings Accounts and I would expect 10% to come from you and 5% from your employer. So this is doable but utterly unlikely.

Instead, we have SS which can be robbed by congress and thats the way they like it, ah-ha, ah-ha.
if employers had to pay more and wall street were not allowed to raid the trust fund, then their brilliant idea to "help workers" would be dead on arrival.
 

specklebang

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if employers had to pay more and wall street were not allowed to raid the trust fund, then their brilliant idea to "help workers" would be dead on arrival.
My brilliant plan is LESS than employers pay now so the Corporations will idolize me. Imagine those huge bronze statues. But the congresscrooks, not so much. Right now, it's about 7.5% from each. In abn effort to propose something even vaguely plausible, I shifted the burden to 10 and 5. But at least you know thats YOUR money, not a tax. You'll get it back later or your heirs will get it.
 

YoungConserv

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My brilliant plan is LESS than employers pay now so the Corporations will idolize me. Imagine those huge bronze statues. But the congresscrooks, not so much. Right now, it's about 7.5% from each. In abn effort to propose something even vaguely plausible, I shifted the burden to 10 and 5. But at least you know thats YOUR money, not a tax. You'll get it back later or your heirs will get it.
Why can't we just ditch Social security altogether it's just a powder keg waiting to blow?
 

TiredOfLife

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Why can't we just ditch Social security altogether it's just a powder keg waiting to blow?
We can end it with the stroke of a pen. And it's no powder keg, but it would trash the economy if we did.
 

YoungConserv

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We can end it with the stroke of a pen. And it's no powder keg, but it would trash the economy if we did.
Right cold turkey but why can't I as 23 year old just starting out not pay in and guarantee ss for those 10 years out and those reviving it the rest you give it back to them as a tax cut over the rest of their life.
 

TiredOfLife

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Right cold turkey but why can't I as 23 year old just starting out not pay in and guarantee ss for those 10 years out and those reviving it the rest you give it back to them as a tax cut over the rest of their life.
Do you have that in English?
 

YoungConserv

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Do you have that in English?
1 we stop forcing new people into social security.
2 we still give it to those currently on it
3 we guarantee those 10 years out that they will still recieve ss
4 give what has been put in back in tax cuts over time.
And that's how you phase out social security.
 

specklebang

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Why can't we just ditch Social security altogether it's just a powder keg waiting to blow?
We can end it with the stroke of a pen. And it's no powder keg, but it would trash the economy if we did.
Because having to watch people starve to death in front of my house will upset the cats.

What's the objection? I'd like to see a change but to just dump it and count on people to save money is not even slightly realistic.
 

TiredOfLife

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1 we stop forcing new people into social security.
2 we still give it to those currently on it
3 we guarantee those 10 years out that they will still recieve ss
4 give what has been put in back in tax cuts over time.
And that's how you phase out social security.
I see. Won't happen. The entire system is based on I pay for your mom and dad, you pay for me, my kid pays for you. It ends when the US ends, not before.
 

specklebang

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I see. Won't happen. The entire system is based on I pay for your mom and dad, you pay for me, my kid pays for you. It ends when the US ends, not before.
Ugly, but true.
 

YoungConserv

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Because having to watch people starve to death in front of my house will upset the cats.

What's the objection? I'd like to see a change but to just dump it and count on people to save money is not even slightly realistic.
Maybe in the 40s but with all the research and training tools we have today there really isn't any reason to expect that people wouldn't be capable of doing that. And even then why not make it optional so those with no investment knowladge stay in and those with some opt out.
 

YoungConserv

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I see. Won't happen. The entire system is based on I pay for your mom and dad, you pay for me, my kid pays for you. It ends when the US ends, not before.
So call it what it is a giant ponzie scheme.
 

Paschendale

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The only purpose for privatizing social security is to allow the Republican party's rich business cronies to get even more of our tax dollars on a silver platter. Because how dare anything in this country operate to help people without rich people getting even richer because of it.
 

YoungConserv

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The only purpose for privatizing social security is to allow the Republican party's rich business cronies to get even more of our tax dollars on a silver platter. Because how dare anything in this country operate to help people without rich people getting even richer because of it.
Really because Obama and the deomcrats never give tax dollars to their buisness friends.:roll:
 

TiredOfLife

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Maybe in the 40s but with all the research and training tools we have today there really isn't any reason to expect that people wouldn't be capable of doing that. And even then why not make it optional so those with no investment knowladge stay in and those with some opt out.
Mainly because when the market tanks, and it always does for a time, those caught in it get screwed, like the last group did. The basis of the program is to tie us together as a nation, not to have winners and losers. We already have enough of that.
 

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Who Owns Most of the US National Debt

Most of the news headlines focus on how much the U.S. owes China. And, in fact, China is the largest foreign owner of U.S. debt. However, the biggest single owner is ... you. Why? Because the single largest holder of national debt is the Social Security Trust Fund,

•Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.72 trillion

Jan 2013


Over 3 trillion now.


That money would have to be repaid to the private SS fund and the US gov would have the Fed Reserve print that money, so the money YOU have would be devalued and your salary would buy less. And the SS benefits would be worth less.

The only one who wins is politicians.

they just taxed everybody with dollars another 3 trillion yet they can all claim they didn't raise taxes.

it's a mess!
 

TiredOfLife

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So call it what it is a giant ponzie scheme.
But it's not a Ponzi scheme at all. That has a man at the top who gets rich for a time. This is you paying for those who paid for what it took you to grow up so you could pay for them. That's not a Ponzi.
 

YoungConserv

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Mainly because when the market tanks, and it always does for a time, those caught in it get screwed, like the last group did. The basis of the program is to tie us together as a nation, not to have winners and losers. We already have enough of that.
That's not what it was sold to the us people as.
 

YoungConserv

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But it's not a Ponzi scheme at all. That has a man at the top who gets rich for a time. This is you paying for those who paid for what it took you to grow up so you could pay for them. That's not a Ponzi.
But in all other aspects you would agree this is in essence a scam similar to a pyramid scheme.
 

TiredOfLife

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But in all other aspects you would agree this is in essence a scam similar to a pyramid scheme.
No, I wouldn't because there is no one at the top getting rich. Wealth redistribution is correct however, from the younger to the older, the workers to the retired.
 

Henrin

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Mainly because when the market tanks, and it always does for a time, those caught in it get screwed, like the last group did. The basis of the program is to tie us together as a nation, not to have winners and losers. We already have enough of that.
Really? I always thought the purpose was to get the young to pay for the old by force. I have to admit I love hearing old people scream to people like myself that we want to take away their social security. Hey, what could possibly be wrong about supporting the theft of your children to support you? I can't think of anything, can you?
 
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