It looks like privatized social security is a done deal, at least that is how it is being talked about on CNBC. Gregg Hymowitz made a comment the other day on Cavuto that was similar to something I wrote a while ago. He thinks that some money should go into the equity market but not in private accounts. First, I am shocked that I agree with him about anything.
I still think that private accounts will be a bad idea for most individuals. I am very surprised this doesn't get talked about more. The vast majority of people will mis-manage these account. There are a lot of brokers at big firms that mis-manage accounts the are entrusted to care for. I saw some statistic over the weekend that said 2/3 of social security recipients rely on their checks for most of their income. This is a disaster for society waiting to happen.
I have written before that if/when this happens it will make sense to be very conservative with this money. There has been some chatter that the government will help people that lose too much. I would not want to have to rely on that.
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4 comments:
There is an incredible amount of speculation in the market already. Unsophicated investors, the people who need SS the most, will not know what to do with their money.
I think mutual fund excesses, excesses in executive pay, and excesses in stealing of stockholder wealth through stock options demonstrate the rarity of altruism when it comes to OPM.
It's pretty hard to say what these private accounts will be. At least some conservative writers are suggesting a limited number of cheaply managed index funds.
But there is certainly interest and pressures from some who dream of all the profits they might reap for fancy managing.
Actually I think that putting some money into sticks might be a good investment. Maybe the current surplus? Let the debt be solely the responsibility of the general fund. Especially because Greenspan among others has suggested that the money borrowed from SS not be repaid. And of course if that happens, SS runs out of money in 10 years not 35.
I do worry about the loss of insurance. The scheme proposed so far leaves people with a fixed amount. Republicans argue that this benefits blacks and others with shorter life expectancies because they can pass on some of their contributions. But how about people who live to 90 or 95? What happens if their money runs out?
Overall I'm not sure where the Republicans are going with this. The majority I talk to (including Republicans) are uncertain or opposed. I think it's a lot like the Bush taxcuts, I think as Milton Friedman suggested these are just tax increases delayed with interest.
I fear that by pushing towards extremes, the administration is setting things for a reaction that pushes things out of kilter on the other side.
I feel as though the consequences of the tinkering are unexamined and when some people like Kudlow speak it reminds me of those old Soviet 5 year reports, the economy is moving on to ever more glorious highs...
Sort of an "alternative reality."
I do think that the kind of accounts proposed will give us a hint on how well the administration is holding onto reality. This 'manage your own money" rhetoric does sound disturbing, hopefully the proposal is more mundane. And while I'm not overly impressed by government management (though quality does vary significantly in different areas,) the claim that people know how to manage their money better seems to ignore the huge debt many people have gotten into.
It will all be interesting.
I heard Gregg Hymowitz also make the same comment, and was surprised, only because he seems to be accepting the political reality that it will happen, in one form or another.
In my simple mind, the issues of transition costs, or guaranteed security, or can people handle investing themselves all miss the point. The main point is this: Social Security right now is simply a wealth redistribution program. Everybody working right now is forced to give something to those retired now. Those of us now working, go along with it at least in part in the hope that when we retire, those working will send something our way. The problem is somewhere between 15 and 50 years hence, the ratio of workers/retired will be something like 2 or 3 to 1, and the system can't survive without a major cut in benefits.
What needs to be done is to actually make it a real defined contribution pension system, as it were, in which the present day contributions are assets invested in something outside of the government--equity, debt, whatever--but invested in something more than just the hope that those working can be taxed enough to pay for those retired. There are a lot of ways to structure it, but that is, in my view, what needs to be done--and it has been done, already, successfully, in several other developed nations.
Further, I also believe that it will in fact not prove to be advantageous to the high wage earner, because I have a sneaking suspicion that the transition costs will be paid for by raising the 90K contribution cap to something significantly higher. Making "the rich" pay "their fair share" will of course make it more politically palatable. I say this as one of "the rich"--I don't expect to personally make out any better under so-called privatization, but I expect that most people will.
Anyway, I don't like usually to get into anything remotely political, but I think this is an important topic that deserves to be discussed. Thanks for bringing it up.
Roger,
I don't think this one happens. AARP has now moved to oppose privatization. Also, as the younger investor obtains some choice in directing retirement assets, that generation will also inherit the 2 or 3 trillion in debt generated by this privatization. Not really a good deal at all!
Why doesn't someone explain to the public the difference between a defined benefit program, which Social Security is, and a defined contribution program, which Social Security privatization would exemplify. There ARE advantages of each.
Wouldn't just raising the income limit on taxation from $87,000 where it is now, say to $120,000, just about make the whole thing solvent? And what is the big deal about paying down bonds owned by the Social Security Trust. This isn't really about defaulting on Social Security for at least 30 years.
Bob
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