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February 01, 2005

Thinking Outside the Box

By Jim Dallas

Paul Krugman hits what has now become one of my favorite reasons for why privatizing Social Security is unlikely to work as promised: that the comparisons between a privatized system and promised benefits under the status quo involves a little bit of economic hanky-panky.

But just as my precious meme hits the big time, I've realized that there's an escape hatch for the privatizers on this one.

At the core of Krugman's argument is an assumption which does not bear out - that the only rate of return that matters is the rate of return for American corporations in the American economy.

Investors can send their dollars overseas and get higher rates of return as the developing world "catches up." Under the status quo, however, payroll tax revenue is tied to the good ol' USA.

It's possible that you could earn 6.5 to 7 percent abroad even if you couldn't possibly get such a return in U.S. equity markets. That's the escape hatch I am postulating.

The thing is, do privatizers want to admit that their plan necessarily will involve high-risk-for-high-rewards investing in foreign countries? (Or in more politically-charged language, "outsourcing"?)

Posted by Jim Dallas at February 1, 2005 07:58 AM | TrackBack


Meanwhile, I think the CBO just extended the Social Security trust fund "starts paying out more than it's taking in" date by another 3-4 years.

Plus, maybe SS would do a little better if it weren't raided every year to make a monumentally shitty deficit situation seem marginally less monumentally shitty.

Posted by: norbizness at February 1, 2005 08:45 AM

You could start investing in foreign currencies, like The Iraqi Dinar!

Posted by: zencomix at February 1, 2005 10:39 AM

The notion that accounts could be invested overseas to improve the rate of return is not a serious argument for privatization.

What would be different about overseas investing for a SS account? Anyone can invest overseas today--relatively poor data, no SEC protection against fraudy reporting (not that it's been a guarantee here, considering Enron et al, but it does provide a degree of transparency), currency rate risks, risk of revolution or war, maybe much higher brokerage fees...

For example: Mexican banks for many years paid superior interest on deposits, and the Peso was rock-solid. Until suddenly it wasn't any more, and Americans who had money in those accounts got back pennies on the dollar.

And now we'd be talking about TRILLIONS of dollars. You think that sharks only live on Wall Street? Imagine the feast that foreign brokers and companies and governments would have at the expense of American account holders.

It's hard to imagine even Bush proposing this with a straight face.

Posted by: Demo Memo at February 1, 2005 11:29 AM

I agree with Demo Memo. Making our retiree's welfare dependent on the economies of foreign countries is not a wise political move. Krugman's point is a very good one - the economic gains necessary to make privitization work also put the current system in the black. It just doesn't enrich W's wealthy core support base. Too bad.

Posted by: Jujitsuka at February 1, 2005 11:46 AM

I'm still confused about the rationale for the whole privatization thing. Lots of people today CAN invest retirement funds in stocks-- IRAs, 401k plans, 403b plans, etc. Why not just expand the law, guaranteeing that every worker can put pre-tax wages in an IRA, just like before? Or is that too much freedom?

Posted by: JoJo at February 1, 2005 11:47 AM

JoJo, the big reason for the push to privatize has a lot to do with how much Republicans hate FDR and the New Deal liberalism of the past 60 years. There's a really good article in Slate about it.

What people don't understand is that these private accounts are going to have to be strictly regulated. The ownership society is going to require a big govt. beauracracy to invest those accounts for you so that they are diversified and lower risk. People won't really get a say in how their money is used or where it is invested, otherewise we could end up with a system where administrative fees are half of the entire account, like in the UK.

We could simply make it easier for people to invest in IRAs and the like, but that would be a smart thing to do with our money. Republicans never do the smart thing with money. These people don't realize that taking money out of SS means there is less money in the system. It breaks my heart to explain to my 7-year-old niece that the president can't add or subtract like she can.

Posted by: Nate at February 1, 2005 06:10 PM
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