Privatization of Social Security

Privatization of Social Security
2-10-05

Dear Friend:
To add to the debate on the two previous articles I sent you, Assuming too much and Gambling With Your Retirement, herewith are three more articles, excerpts below highlighted, which make points. And below these excerpts is my idea for what we should do (or not do) with SS/savings, etc. I welcome your comments to be a part of this process, which will affect our children’s lives in the years to come.
Best wishes,
Cornell Cox

· Social Security Poker: It's Time for Liberals to Ante Up: As Will Marshall, a founder of the Democratic Leadership Council and now president of the Progressive Policy Institute, said: "The Democratic Party ought to be developing a vision of a modernized social insurance system for the 21st century and moving beyond the 'just say no' position. If Bush is wrong, then what is right?"
· How to Retire Rich: Social Security privatization and tax incentives for the affluent have another major drawback that endangers everyone's retirement security. Neither would add to national savings - the sum of government and individual savings that is a key determinant of the nation's overall standard of living. Privatization would not add to national savings because every dollar that goes into a private account would be offset by the government borrowing needed to establish the private system. Tax incentives for the rich do not add to national savings because they simply induce wealthy people to shift current assets from taxable to tax-free accounts.
· American Casino: An ownership society should build on the social-insurance system we already have, not replace it. For instance, in April the United Kingdom will begin making every one of its newborns a capitalist from birth, by setting up a personal trust fund of about $500 or more. Relatives are encouraged to add to the trust fund, which accumulates tax-free. Here in America the economists Shlomo Benartzi and Richard Thaler have constructed a "Save More Tomorrow" plan, based on the premise that people understand they should be saving more, but are bound by habit and often procrastinate. Under the plan participating employers merely ask their employees if they would like to commit to automatically saving a fraction of future pay increases, through payroll deduction. The first company to try the scheme found that nearly 80 percent of employees signed up, and retirement saving rates quadrupled within forty months. Both plans are attractive, because they actually increase saving, rather than merely encouraging a shift of existing savings toward risky investments. The second plan would cost the government nothing.
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Cornell’s Comments:

It’s my belief that privatizing any portion of SS can only lead to a faster erosion of our society’s premier retirement system. This country can ill afford an already growing albatross of debt, by adding another 2 trillion plus transition cost, to assist those who may want to gamble with any portion of their (our) SS retirement. (Take a lesson from what’s now happening in England as a result of their privatization and many other countries as stated in Mollie Ivins column in today’s N&O. I also believe individual savings for retirement is vital and should be encouraged. What President Reagan did to enact Individual Retirement Accounts (IRA) was a good thing. However, while middle to upper class individuals were taking advantage of the tax-free income for retirement investment during Reagan’s years and since, no doubt it cost in tax revenues. But the advantages outweighed any deficits that tax-free income caused, because many seniors’ retirement will be enriched by the extra income influx to economy, and now taxes on this income will go back to tax base. Of course the problem with IRAs was that few lower-income people could afford, or believed they could not. These were the people who needed it most for their retirements. From my personal experience in business, the same mentality exist with many of those who have the opportunity through a 401K Plan when provided by their employer. Both these are good vehicles for retirement – but only for those of us who make use of them.

So how should Democrats, Republicans and Independents be responding to these issues? Of course it should be approached with an open mind as Bush has suggested, all ideas on table, except increased SS taxes. But I fear tunnel vision may prevail to bring a campaign promise that really was not a good idea in the first place. Whatever the plan it must be feasible to give the impetus to bring as full participation as possible for those at the bottom and middle of society. That hopefully will make the difference in years to come for our government’s social services relief of seniors in need, and it should help to lower the poverty level.

My idea of a solution, to enhance retirement with an emphasis on low to middle income, is to offer a government assisted savings plan to expand 401k (a like plan) beyond the corporations and businesses who now offer them. It will support small businesses who are unable or do not offer 401Ks:

1. Setup automatic payroll deductions such as in a 401K (pre-tax), which may be elected by employee (and self employed) up to a certain percent, i.e. 3 > 4% --- an amount in addition to SS deductions. This works the same as IRA but allows those of lower income to participate where as otherwise they would not be able to buy a full IRA. Starting early in life on entering the work force, the small contributions can substantially enhance their retirement funds. Further, it’s less painful having a small amount deducted from a meager income.
a. For the low income, poverty status or higher – maybe a certain level of income, consider giving an incentive match of ½ or more the selected % of participation. Matching must have a cap at certain level. (Of course we don’t know what we can afford, but any amount of the proposed 2-trillion transition spent here would eventually be much more effective and positive element of the economy’s pie.
b. Employee election must be automatic --- no forms to complete, just check offs by indicating to their employers there desire to participate.
c. Ongoing mass public service promotions to remind, encourage, and motivate employee to sign up. (Is this too much to expect from our public air waves: A part of the bill should call for PSAs from all TV and Radio Stations throughout the nation at no cost to government.)

Anyone care to tell me why any of this would not work?

2. Do not tinker with SS System as we know it today, but as the next few years’ progresses keep a vigilance to ensure its viability. So for privatization verses doing nothing with social security, I refer you to the article “Assuming Too Much” of which I have copied an excerpt below. If economist Paul Krugman’s (one upon many to make this point) figures are correct and if privatization were to be successful, then SS will also be successful in the years down the road.

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· Assuming too much: Social Security privatizers usually de­fend their bullishness by saying that stock investors earned high returns in the past. But stocks are much more expensive than they used to be, relative to corporate profits; that means lower dividends per dollar of share value. And economic growth is expected to be slower. Which brings us to the privatizers' Catch-22.
They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underesti­mating future economic growth. But in that case, we don't need to worry about Social Security's future: If the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax rev­enue that will keep the current system sound for generations to come.
Alternatively, privatizers can unhap­pily admit that future stock returns will be much lower than they have been claim­ing. But without those high returns, the arithmetic of their schemes collapses.

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February 5, 2005
OP-ED COLUMNIST
Social Security Poker: It's Time for Liberals to Ante Up
By NICHOLAS D. KRISTOF

Liberals are making a historic mistake by lining up so adamantly against Social Security reform.
It's impolite to say so in a blue state, but President Bush has a point: there is a genuine problem with paying for Social Security, even if it isn't as dire as Mr. Bush suggests.
As Bill Clinton declared in 1998 about Social Security reform: "We all know a demographic crisis is looming. ... If we act now it will be easier and less painful than if we wait until later." Mr. Clinton then made Social Security reform a central theme of his 1999 State of the Union address, saying, "Above all, we must save Social Security for the 21st century."
Figures tossed about these days - such as the system's having to slash benefits in 2042 - are wild guesses that depend in part on longevity. The Social Security Administration estimates that U.S. life expectancy will increase by only six years by 2075. But life spans grew by 30 years in the 20th century, and if you believe (as I do) that biotechnology will greatly raise life expectancy, then we'll face a huge problem paying for long-lived retirees (touch wood, like me).
Mr. Bush is also right to try to promote savings - though financing a savings plan by borrowing is a lousy idea. A crucial economic weakness of America is its low savings rate, and one way to address that would be to finance retirements more out of savings - with wealth creation rather than wealth transfers.
Singapore helped pioneer private investment accounts (a good rule of thumb in economic policy is to do what Singapore does), and its system has raised home ownership and alleviated poverty.
Democratic senators in the 1990's like Charles Robb, Bob Kerrey, John Breaux and Daniel Patrick Moynihan championed Social Security reform. After Senator Moynihan offered a reform proposal in 1998, The Washington Post noted, "Republicans want to put Social Security reform on the back burner." But now that Republicans want it on the front burner, Democrats are screaming foul.
One objection has been that Mr. Bush will use his reform as another occasion to soak the poor. But that's a reason for Democrats to participate and suggest progressive alternatives.
Policy wonks have shown a variety of ways to organize retirement accounts so the poor are better off. "Our goal should be to eliminate poverty among the elderly" - through progressive Social Security reforms - Mr. Kerrey said. For example, Mr. Clinton favored private accounts as add-ons to Social Security, with the government matching contributions by low-income Americans.
True, there is one powerful objection to private Social Security accounts: We can't afford them now. Mr. Bush's plan would cost $1 trillion in its first decade and $3.5 trillion more in its second decade. Financing this with debt - an Argentinian approach - would be utterly reckless.
It shouldn't be liberal to oppose wealth-creating savings programs for workers. And it shouldn't be conservative to use loans to launch a multitrillion-dollar program.
But what if we paid for Social Security reform by keeping the inheritance tax? Or by undoing Mr. Bush's tax cuts for the wealthiest Americans? Rescuing Social Security strikes me as a good use for that money - while paying for it with debt would not secure our children's future, but mortgage it.
If it hadn't been for the Monica Lewinsky affair, Mr. Clinton might have achieved Social Security reform. But that didn't happen, and these days both parties are behaving irresponsibly. Mr. Bush is disingenuous - and perhaps fiscally reckless - by refusing to explain who will pay the bill, and the Democrats are trying to shout him down without offering solutions of their own.
As Will Marshall, a founder of the Democratic Leadership Council and now president of the Progressive Policy Institute, said: "The Democratic Party ought to be developing a vision of a modernized social insurance system for the 21st century and moving beyond the 'just say no' position. If Bush is wrong, then what is right?"
Bill Clinton was correct that there is a real problem out there. And I'm deeply afraid that we're going to go through this debate as we did the health care battle of 1994 - by rejecting a White House proposal but agreeing on nothing in its place.
In that case, it won't just be Mr. Bush who loses. We'll all lose.

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January 16, 2005
NY Times
EDITORIAL
How to Retire Rich

If you are like most people, your sadness over losing, say, $1,000, would be twice as great as your happiness at winning $1,000. That all-too-human tendency to feel the pain of a loss more deeply than the joy of a gain is called "loss aversion" and is one of the central discoveries of behavioral economics - a branch of the dismal science that recognizes that when it comes to money, people are motivated by various impulses that are measurable and even predictable, but seldom rational.
Behavioral economics has vital implications for retirement savings. But in his zeal to privatize Social Security - a quest which is itself driven more by ideology than economics - President Bush is obscuring better approaches to a comfortable retirement for all Americans.
We all know that the benefits from Social Security do not provide enough income for a comfortable old age. But they do provide a guaranteed basic level of financial stability for all old people and, in so doing, enhance the socioeconomic well-being of everyone. And for the large majority of old people for whom Social Security makes up more than half of income, it is the difference between destitution and the ability to live with dignity. Clearly, the reliability of the income stream is critical. Mr. Bush does not want you to believe that such social and financial stability is possible. In a forum last Tuesday aimed at persuading "younger folks" to support privatization, he said that Social Security would be "flat broke" in the coming decades. That is false. The system's trustees expect that even if nothing whatsoever is done, the current system will be able to pay full benefits until 2042, when it will be able to pay 70 percent of the promised benefits. The independent Congressional Budget Office is even more optimistic. Of course, no one is suggesting that no reforms be made. But modest, straightforward tax increases and benefit cuts, phased in over generations, are all it would take to bolster the current system.
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As the Social Security safety net is strengthened, it is also essential for government and business to work together to make it easier for everyone in the work force to increase personal savings. Unfortunately, the coming fight over the president's plan for privatization will very likely draw attention away from the simple and uncontroversial changes that would help people prepare on their own for their retirement years, including:
Automatic enrollment About half of employees work for employers who provide 401(k) retirement savings plans. But only three-quarters of eligible employees participate, and of those, participation is steeply skewed toward high earners.
The evidence from research is overwhelming that participation increases significantly if employees are automatically enrolled in the 401(k), rather than being required to sign up, as is usually the case. (Employees would be free to opt out if they did not want to participate.) One typical study - by Brigitte Madrian, an economist at the Wharton School, and Dennis Shea, compensation and benefits specialist at Aetna - analyzed a Fortune 500 company that switched to automatic enrollment in early 1998. By mid-1999, overall participation increased to 86 percent from 36 percent. The jump was especially striking among low-income workers, with participation rising to 80 percent from 12 percent for people making less than $20,000 and to 83 percent from 24 percent for those making $20,000 to $30,000. Participation also soared among younger workers. Studies show that participation rates stay high once employees are enrolled.
Automatic enrollment overcomes procrastination, a natural response to something deemed painful, such as giving up some take-home pay to save for retirement. It also overcomes "status quo bias," which tends to keeps nonparticipants from opting into a plan once they've passed up a chance to do so.
Automatic allocation The next obstacle for would-be savers is the explosion of choices within 401(k)'s and other retirement plans. A typical plan now lets employees choose among 15 stock, bond and cash accounts. Too much choice leads to paralysis, a response that is especially common among low- and middle-income savers. As a result, employees in the lowest 25 percent of earners generally invest most of their accounts in low-yielding money market or bond funds. An easy solution is to offer employees an option to have their contributions automatically invested in balanced, prudently diversified, low-cost funds.
Automatic escalation Over all, only 5 percent of employees contribute the maximum allowed by their plans. Status quo bias makes it unlikely that an employee will change a contribution later. Loss aversion deters an employee from increasing the percentage even after a raise, because an increased payroll deduction may be perceived as a pay cut. The fix is to enroll employees in a program that automatically increases the percentage of pay whenever they get a raise.
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The Bush administration has put forth two fine ideas for increasing personal savings outside of Social Security, but has not pursued either to the fullest. One would let taxpayers instruct the Treasury to split their tax refunds, which average about $2,000 a year, between a checking account and a savings account. Alas, the administration has not enacted the proposal, even though it requires no new legislation.
The other positive initiative was enacted in 2001 and offers a matching tax credit for retirement savings by low- and middle-income taxpayers. Unfortunately, the credit suffers from several design flaws. For instance, only people who earn enough to have a tax liability qualify for the credit. That requirement eliminates 80 percent of the 60 million lowest-income filers. Expanding eligibility to that group would cost the government about $5 billion a year, bringing the total annual cost of the credit to a relatively small $7 billion.
For the most part, however, the administration's savings initiatives, such as the retirement savings account, are totally off the mark. Their main feature - lofty new upper limits on the amount of savings that can be tax-sheltered - has little or no effect on the vast majority of families and individuals. In 2001, the Government Accountability Office found that raising the contribution limit on 401(k) plans benefited fewer than 3 percent of participants, most of whom were making more than $75,000 a year.
Social Security privatization and tax incentives for the affluent have another major drawback that endangers everyone's retirement security. Neither would add to national savings - the sum of government and individual savings that is a key determinant of the nation's overall standard of living. Privatization would not add to national savings because every dollar that goes into a private account would be offset by the government borrowing needed to establish the private system. Tax incentives for the rich do not add to national savings because they simply induce wealthy people to shift current assets from taxable to tax-free accounts.
Put more simply, with privatization and continued high-end tax breaks, the few would get richer as the many fall behind. Preserving Social Security while increasing savings outside Social Security is a better way to achieve a prosperous retirement.

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American Casino The promise and perils of Bush's "ownership society"
by Robert J. Shiller
From: Atlantic Monthly
When they arrived in the New World, in 1620, the Pilgrims of Plymouth Colony tried communal ownership of the land. It didn't work: crops were not well cared for and the result was a severe food shortage. So in 1623 each family was given a private plot of land along with responsibility for maintaining it. This worked much better. As William Bradford, the second governor of Plymouth Colony, recounted in Of Plymouth Plantation, people worked harder when they had private plots, and the crop yield was much higher. The moral of this story—at least according to the proponents of private ownership who like to quote from it—is simple: people take better care of things they own individually than of things they hold in common.
The many advantages of private ownership have been recognized for millennia (Aristotle described some of them) and are supported by modern social science. For instance, a 1999 study published in the Journal of Urban Economics found that even after income, marital status, and education level are controlled for, people who own their own homes are more likely than those who don't to be good citizens (as gauged by membership in nonprofessional organizations, knowledge of local politics, voting in elections, and attempts to solve local problems). Basic economic theory holds that encouraging more people to own things—whether land, homes, or equity shares in private companies—produces better economic incentives, increased motivation to work creatively, a deeper sense of citizenship, and a stronger society.
Herein lies the philosophy behind George W. Bush's proposed "ownership society." Over the past few years President Bush has proposed to let people "own" their Social Security contributions, in the form of personal retirement accounts; "own" their health care, through portable health savings accounts; and own their homes in greater numbers, through bigger housing subsidies. Individually, each of these plans has something to recommend it; collectively, they could encourage saving (a worthy economic goal) and provide people with more choices (a worthy political one).
It's easy to forget, however, that such plans as those Bush proposes don't just encourage personal ownership—they also increase personal risk. And the Bush administration has chosen a particularly infelicitous moment to be piling additional financial risk onto individual citizens—because economic life in America is already becoming inherently riskier.
How so? For one thing, the job market is growing increasingly volatile. The information revolution is constantly accelerating, leading to rapid changes in business practices. (Globalization is one major consequence of the information revolution; the replacement of human beings by machines is another.) The speed of economic transformation means that career trajectories are less predictable than they used to be, while swings in fortune over the course of one's working life are greater. At the same time, technology seems to be contributing to an economic winner-take-all effect, in which a tiny fraction of the population earns most of the money—and a large fraction doesn't earn very much at all.
It's not just career trajectories that have become more unpredictable. Over the past decade or so American stocks, commodities, and housing markets have also become generally more volatile. The surge in the stock market from 1995 to 2000 marked the biggest five-year percentage increase since the rebound from the Crash of 1929. And over the past five years the average price of single-family homes has risen more in percentage terms than it has over any comparable period since the late 1940s, when veterans returning from World War II fueled a boom. The greater volatility over much of the past decade reflects Americans' growing appetite for speculative investments: stimulated by widespread financial reporting, many Americans worry more than they did before the recent booms about missing out on the opportunity to profit from rising markets; they jump in and out of the stock market with much greater abandon than before. For the foreseeable future this will continue to produce big, sudden swings in the prices of stocks, and perhaps of houses.
It is human nature to make assumptions about the future based on extrapolations from the past. Many homeowners, for example, have become so sure of continuing high returns that they've stopped saving entirely, and have started borrowing against recent home-value appreciation. (Personal saving rates have declined precipitously in recent years, and are now near zero nationwide.) In this climate of seemingly ever rising returns it is no wonder that enthusiasm for an ownership society has taken hold.
On the one hand, the Bush administration is smart to use government policy to encourage saving and investing. But on the other hand, the ownership society is likely to be a failure if it leaves individual Americans naked against risk.
What to do? First, we must remember that insurance is as crucial a concept as ownership. Insurance is hardly anti-capitalist; rather, it's integral to capitalism's smooth functioning, a device to mitigate the random fortune and "creative destruction" that might otherwise make a purely capitalist society unbearable. Consider Social Security. It was originally devised as an insurance scheme to protect people against the ups and downs of life, to alleviate poverty among children and the elderly. People differ in their ability to take care of the dependent generations; some are irresponsible or impoverished, or die before they have finished fulfilling their parental or filial responsibilities. Social Security was meant in part to take on some of the family's traditional function. In effect, Social Security transfers some risk from the family to the nation. Replacing much of Social Security with a system of individual accounts would be an abrogation of one of our most fundamental social covenants.
Many people have evidently concluded that by winning re-election, President Bush has won a mandate to create an ownership society, just as President Franklin D. Roosevelt did to create the New Deal in 1932 (when both the stock market and the wider economy were tanking). But Bush should be careful. If we get the ownership society wrong, growing inequality and social unrest are likely to follow. An ownership society should build on the social-insurance system we already have, not replace it.
For instance, in April the United Kingdom will begin making every one of its newborns a capitalist from birth, by setting up a personal trust fund of about $500 or more. Relatives are encouraged to add to the trust fund, which accumulates tax-free. Here in America the economists Shlomo Benartzi and Richard Thaler have constructed a "Save More Tomorrow" plan, based on the premise that people understand they should be saving more, but are bound by habit and often procrastinate. Under the plan participating employers merely ask their employees if they would like to commit to automatically saving a fraction of future pay increases, through payroll deduction. The first company to try the scheme found that nearly 80 percent of employees signed up, and retirement saving rates quadrupled within forty months. Both plans are attractive, because they actually increase saving, rather than merely encouraging a shift of existing savings toward risky investments. The second plan would cost the government nothing.
Americans, of course, are a famously sanguine people, and this is mostly a good thing. It accounts for our entrepreneurial spirit and for much of our economy's growth over the decades. But too much optimism can be dangerous: among other things, it can blind us to the risks of unalloyed exposure to markets, and make us entirely too willing to forswear insurance in pursuit of larger returns. The constellation of factors now in place—increased volatility in the job, housing, and stock markets; growing blindness to the risks of investing; and the administration's intention to expose more Americans to market risk through its ownership-society proposals—threatens to transform the United States into a nation of gamblers. And as anyone who has visited a casino knows, most gamblers lose.