December 17, 2004 OP-ED COLUMNIST Buying Into Failure By PAUL KRUGMAN As the Bush administration tries to persuade America to convert Social Security into a giant 401(k), we can learn a lot from other countries that have already gone down that road. Information about other countries' experience with privatization isn't hard to find. For example, the Century Foundation, at www.tcf.org, provides a wide range of links. Yet, aside from giving the Cato Institute and other organizations promoting Social Security privatization the space to present upbeat tales from Chile, the U.S. news media have provided their readers and viewers with little information about international experience. In particular, the public hasn't been let in on two open secrets: Privatization dissipates a large fraction of workers' contributions on fees to investment companies. It leaves many retirees in poverty. Decades of conservative marketing have convinced Americans that government programs always create bloated bureaucracies, while the private sector is always lean and efficient. But when it comes to retirement security, the opposite is true. More than 99 percent of Social Security's revenues go toward benefits, and less than 1 percent for overhead. In Chile's system, management fees are around 20 times as high. And that's a typical number for privatized systems. These fees cut sharply into the returns individuals can expect on their accounts. In Britain, which has had a privatized system since the days of Margaret Thatcher, alarm over the large fees charged by some investment companies eventually led government regulators to impose a "charge cap." Even so, fees continue to take a large bite out of British retirement savings. A reasonable prediction for the real rate of return on personal accounts in the U.S. is 4 percent or less. If we introduce a system with British-level management fees, net returns to workers will be reduced by more than a quarter. Add in deep cuts in guaranteed benefits and a big increase in risk, and we're looking at a "reform" that hurts everyone except the investment industry. Advocates insist that a privatized U.S. system can keep expenses much lower. It's true that costs will be low if investments are restricted to low-overhead index funds - that is, if government officials, not individuals, make the investment decisions. But if that's how the system works, the suggestions that workers will have control over their own money - two years ago, Cato renamed its Project on Social Security Privatization by replacing "privatization" with "choice" - are false advertising. And if there are rules restricting workers to low-expense investments, investment industry lobbyists will try to get those rules overturned. For the record, I don't think giving financial corporations a huge windfall is the main motive for privatization; it's mostly an ideological thing. But that windfall is a major reason Wall Street wants privatization, and everyone else should be very suspicious. Then there's the issue of poverty among the elderly. Privatizers who laud the Chilean system never mention that it has yet to deliver on its promise to reduce government spending. More than 20 years after the system was created, the government is still pouring in money. Why? Because, as a Federal Reserve study puts it, the Chilean government must "provide subsidies for workers failing to accumulate enough capital to provide a minimum pension." In other words, privatization would have condemned many retirees to dire poverty, and the government stepped back in to save them. The same thing is happening in Britain. Its Pensions Commission warns that those who think Mrs. Thatcher's privatization solved the pension problem are living in a "fool's paradise." A lot of additional government spending will be required to avoid the return of widespread poverty among the elderly - a problem that Britain, like the U.S., thought it had solved. Britain's experience is directly relevant to the Bush administration's plans. If current hints are an indication, the final plan will probably claim to save money in the future by reducing guaranteed Social Security benefits. These savings will be an illusion: 20 years from now, an American version of Britain's commission will warn that big additional government spending is needed to avert a looming surge in poverty among retirees. So the Bush administration wants to scrap a retirement system that works, and can be made financially sound for generations to come with modest reforms. Instead, it wants to buy into failure, emulating systems that, when tried elsewhere, have neither saved money nor protected the elderly from poverty. http://www.nytimes.com/2004/12/17/o...gin&hp=&oref=login&pagewanted=print&position=
Gifford, I have appreciated your posts on the social security system. The conservatives and core Republicans have always hated social securtiy. They voted against in 1935 I believe almost stright prty vote against.. They voted against Medicare in 1968? They know it is popular, but when they are feeling cocky and sort of incautious they start trying to eliminate it. As Krugman has shown, by trying to borrow all its money, run up the deficit and then try to claim they can't bail it out. Their tactics on this issue mirror their dishonesty on the Iraq War buildup or theiir dishnesty onother budge matters where they can reduce taxes, not decrease spending, but not run up dificits with the magic of "supply side". Usually they just do dishonest simplistic claims like: "the S and P return since 1920 has been 10.7%. Compound it by 40 yrs and every ordinary worker would be a multimillionaire at retirement except for social security. Of course they don't take into account, taxes, inflation, expenses to manage private accounts. They never explain how history has shown that most workers cant' save much either. They don't like to get into complications like not every workers pays in for 40 years and therefore some poor sob''s might just have their retirments accounts amount to not much at all if they put in during a fifteen year period of almost no return. Another favorite ploy is to ignore that roughly 80 to 90% of ss money taken in each year goes to this years retirees. They then take the relatively small amount of interest earned on the remnant which isn't spent as it comes in ( rougly 10 to 20%) as the return on the whole amount taken in that year!!. This yields return of about 1.0%. Voila!! They then say the morons as SS can't even eearn what cds earn. As Krugman says years of propaganda saying the government can't do anything right sets people up to believe these claims.
Social Security is the most successful government program in American history. It's not perfect, but it works pretty damn well. Privatizing might improve it, it might not. It will pour hundreds of billions of dollars into Wall Street -- not because the stocks warrant it, but because "privatization" says so. The economy grows, but in a very artificial way. Worse, we're stripped of any assurances for retirement -- the very reason Social Security exists. Granted, it will likely give the economy a short-term boost. Unfortunately, Social Security is a long-term endeavor. Investors like short-term gains (we're human, after all) and any hiccup in the economy could send the entire thing crumbling to the ground. Bush ran on the "Social Security will be bankrupt in 10 years" when he was running for Congress in the 1970s. Didn't happen. That's not to say it won't now, but I'm just not convinced this privatization crap won't just make the rich richer and screw the middle class out of a retirement they are working damn hard for. Like I said, privatization may work. Hell, it may improve Social Security in ways we can't imagine. But I'm having a hard time seeing the benefits.
I don't have problem with seeing the benefits, just how to pay for it and who manages the money. As long as the budget is balanced and professional money managers invest the money, privatization would be a great idea. Congress is currently cooking the books, using the SS surplus to understate the actual deficits. If the SS surplus were truly independent, the deficit would take a big one time hit. Giving the money to professional money managers would allow the surplus to grow significantly for most participants between now and their retirement ages. The federal government would then have less need to supplement later SS outflows. To many big IFs for Congress to actually to pull off. And even if they did, the temptation in later years for Congress to raid the SS private accounts to meet immediate budget concerns would be problematic (see how corporate America has raided its workers pension funds for a clue). All in all, not changing SS may be the Right Thing to do, especially since minor tweaks should keep SS afloat for decades to come. I remember reading somewhere (Concord Coalition?) that another solution to the problem would be tax the benefits more, based on income level. That would mean that moderate to wealthy SS recipients would not get their full benefit. Not great but at least it is progressive.
Studies have shown that Wall Street stands to benefit a great deal from every stitch in the social safety net that Bush cuts. They're in favor.
I watched it last week. The Grinch and A Charlie Brown Christmas are my two favorite Christmas shows. I have the music from A Charlie Brown Christmas on cd. It rocks.
not that i disagree with you but what would you prefer? SS money sitting in a bank? it wouldn't gather interest. cause the interest is via the federal bonds it buys. so if it just sits in a vault its not gaining any interest. so theoretically the idea is cool. its just when the dont tax and spend spend spend idiocy is adopted by the republicans it makes it look bad.
