Burnt Orange Report

Nate --

FWIW, I'm not a formal student of finance, business, or economics, but I do consider myself an amateur dismal scientist. :)

I'm irked by the self-congratulatory tone. Other people do think about Social Security, and think about it harder.

Moreover, I'm pretty sure her history is off, especially with the flawed-from-the-beginning canard. When originally conceived, pay-as-you-go Social Security made a lot of sense. You had a rapidly expanding population base and relatively high potential for productivity growth. Moreover, Social Security was envisioned as a small program.

People did think it through, and the FDR administration thought they had a pretty sharp idea, because they did.

One of the things that has gotten us in real trouble is (1) wage-indexing, instituted in 1977, and (2) base issues. Of course we all hear about how demographics will reduce the number of payers and increase the number of receivers. What you don't hear about is the fact that the cap on OASDI taxes has actually shrunk the base. Originally, 90 percent of income fell below the cap (currently about $100,000). That's now more like 85 percent because the rich are getting richer! Raising the cap level up to the 90-percent point would return some sense without being as unfair as eliminating the cap altogether.

Right now we have a slightly-greater than 50 percent chance of seeing Social Security as it is currently structured is going to go broke around the middle of this century. It is not absolutely headed for doom, and even if it were, the result would not be the end of Social Security but a reduction in benefits by about 30 percent. Seventy percent of Social Security would still be there, and of course if we wanted to save the rest we could borrow more or tax more. But both could be painful.

I would rather not see the combined employee-employer OASDI/FICA tax hit 20 percent in my lifetime. It's already a regressive tax which sucks money out of working people's paychecks.

Properly managed, I don't think the transition cost issue is as bad as you are making it out to be. We can probably afford to go to private accounts unless it is done in a ridiculous manner.

What has me concerned, frankly, is the form that private accounts would take. Firstly, corporate governance issues. If the accounts are direct-investment, the market will be flooded with a large number of naive investors, which will (1) reduce the dividend yield and the real rate of return for the *entire stock market* and cause institutional investors - which are a key part of keeping corporations accountable - to redirect their investments away from equity. (2) A large number of micro-investors won't be able to keep corporate America in line. The result is less accounatability and a decrease in quality of corporate governance.

My second concern is that gains will be eaten up by administrative costs, and that most of the benefits would be burned up, converted to profit for stockbrokers and the like.

If we do go to a system where we have private accounts, I would prefer to see the choices restricted to a few public/private mutual funds, sort of like the Thrift Savings Program. Mutual funds would be good at reducing risk as well as insuring adequate corporate governance. And if the choices are adequately restricted, then administrative costs will be kept low.

If I had to choose one private account plan currently on the table, I'd pick the second reform model described in the CSSS's 2001 report.

The downside to this is that it would mean that guaranteed benefits for people born in 1982 and relatively well off would be about 30 percent less than currently guaranteed by law. The difference would have to be made up with the private account or IRAs.

At any rate, the way I see it is, we can either do nothing and let benefits fall 30 percent, or do something and let benefits fall 30 percent but hold out hope that an account might do better than break even when all the costs are counted.

Again, we could also borrow or tax more, or just do nothing and get lucky (as I said, there's maybe a 40 percent chance that Social Security is actually solvent as it stands, depending on future economic growth).

Really, what I think this comes down to is the desire on the part of the Republicans to pander to the mistaken belief that the free market is a money tree which will allow us all to be rich. It is also an opportunity for them to comfort the comfortable.

(Incidentally, what worries me the most is that a sudden rush of new stock market investment would cause a huge run up in market cap and share prices, but when the big investors realize that the increase in market cap is killing dividend yield and price to earnings ratio approaches infinity, well, quite frankly they're gonna bail on us, causing a stock market crash if not an economic depression).

So I think in theory, if reasonable people were putting Social Security personal accounts on the table, I'd listen to them and have a good chance of agreeing with them.

But the Bush people are not reasonable people.

Incidentally, this appears to be the same position taken by Professor DeLong (www.j-bradford-delong.net -- I read his blog every day!)

Let's put this plain and simple. I am 35 work two jobs, do not recieve health benefits, and work my butt to the bone. I want my money back. I do not want the govs helping me invest my money or put it into social security. As for the boomers, well, they are the generation that really hepled screw it up in the first place so let them have theirs and no more or less. I never asked for social security to be taken from my paychecks and would never voluntarily choose to do so. If I pay a certain amount of money into the pig I want it all back plus interest. This is how banks do it and I expect my money to do the same. What should we do? Pass it on to my kid? I think not. The boomers are a bunch of crying self centered babies who should have thought of more then themselves. I do not mean to generalize here but without writing a doctrine there has to be some. I am educated with a masters degree and a family. My politics are middle of the road. I believe that when I go to work that paycheck is mine. The boomers all wine and complain. Become lazy in their jobs. Check out what they've done to tenure. Good going guys! Pat yourselves on the back.