April 13, 2005
Of Stocks And Binds
so I found something I have a well-defined opinion about. Thank you Griegs
That something is the privatization of social security. Since this is what I do (Economics) and I have read a fair amount about it, I feel qualified to give my opinion....as if it mattered if I was qualified this is a blog. Anyway, my argument gets broken up into two parts: The hard facts and the mushy emotional arguments.
First, the hard facts. The fact is, markets go up and markets go down. The majority of the time, the more risk you take, the more you stand to gain. While the social security money would not go very much into the stock market (it'd mostly go into corporate and government bonds that have a lower risk) all of the money would be at risk of being lost to a market that is not completely predictable. Further, if social security is tied into the economy, it will give foreign countries more power over us as our economy becomes increasingly international. Read the book Debt of Honor by Tom Clancy if you want an example of a major economic attack on the U.S. This is more from my cynical side, but think about this. If your retirement is tied in, at least in part, to your company's stock, it provides corporate headquarters with something to hang over your head when you or your union asks for a raise. Asking your company to spend more money on you, thus lowering profit margins and indirectly their stock doesn't look so great when you factor in the money you could lose from your retirement. Also, who is going to watch over your money to make sure it is invested wisely? Not you. Not the President. Wall Street investors are going to be watching your money. There will need to be a lot more hired to watch the billions of dollars paid into social security. This costs even more money in salaries and handling fees to those people. Something else to keep in mind, although this is specific to Bush's current plan and not privitization in general is that under Bush's plan, you would lose benefits roughly equal to the amount you made through investing a portion of your social security money. The whole shift to privatization, no matter what, is going to cost the government a huge amount of money and it's not worth it.
Alright, here come the more sentimental, emotional arguments. First of all, social security has been around since the 1930's. It was designed as a fall-back to protect those that can't work, i.e. the elderly, the disabled, etc. A fall-back. It's not meant to be something you can make a lot of money on. It is designed so that you are guaranteed some sort of income no matter what. Why would we risk this money? Also, most analysts agree that the social security trust fund will last until sometime betwen 2030 and 2050. That's at least 25 years to find a solution. It's not the emergency the president is trying to make it out to be.
So I like to know both sides, let's look at the arguments for privatization. The main argument is that you stand to make more money by investing it. This could be true if they let you invest it how you see fit, but many people would blow it all with bad decisions. The system is designed to help those that need help, not give them a disadvantage. Another argument is that it will give you personal control over your money. But, how many people have the ability or the time to make all of their own investment decisions? Many people use some sort of consulting service to help them out. Again, just because someone can't afford an investment consultant doesn't mean that they should be at a disadvantage. Something else that is being pointed to as an advantage is that people will be able to pass a portion of their unused retirement money to their families when they die. First, you have to have money in order to pass it along. Second, this sounds to me to be completely opposite of the idea of a system that everyone pays into in order to help those that need help. This sounds like a way to keep money in the hands of people that have it already and forget about those that don't have any.
Alright, so we shouldn't privatize social security. But it will run out some time in the future. So what should we do? I think we need a very simple plan. Social security is paid for by the Federal Insurance Contributions Act (FICA) tax. Currently the tax is 15.3% and is paid half by the worker and half by the employer. However, the tax only applies to about the first $90,000 of income (the number changes slightly over time but not by very much) I say we raise that cap on the tax or scrap it all together. Why should people making large salaries have to pay less in taxes? They shouldn't. If anything, I think we should cut out the FICA tax for the first 10 thousand or so to help out the lower classes and let those more fortunate cover the rest, although this may be a bit more radical than some people would like. The point is, everyone pays income tax on their entire income and the majority of Americans pay the FICA tax on their entire income. Why can't the rest pay it who have the money to do so anyway?
In closing, Social Security Privatization is not the way to save social security. We have some time to figure it out. We just need to make sure that we choose our course of action wisely to prevent further problems. One false step could cost billions either to the government or to the people. This is not something to be taken lightly.