Recently I wrote a diary on liberalism and populism. I received a lot of comments, many of them informative. In particular, I was asked to define was I meant by populism. Here I give an example of a populist approach to the Social Security "crisis" issue.
Many people believe that if Social Security taxes were invested there would be no problem because retirement would no longer be "pay as you go". This is non true as a simple thought experiment shows. Imagine a worker who invests the social security tax (12.4% of his income) over a 30 year career buying stock priced at an average price of $100 a share. Over his 15 year retirement he plans to sell his stock at an average price of $200. Since he is selling the stock at twice the rate he bought it and the price is twice as high, he would expect to receive retirement income equivalent to 4x12.4% = nearly 50% of the salary he earned while working.
The key to his strategy is the expectation that the stock will double in price over the average 22 year period his funds are invested. This amounts to 3.3% real return (less than half the historical return on stocks). This sounds reasonable.
It's not. For this strategy to work there must be buyers for his stock who can afford to pay enough for his stock so he can get that 50% income. These buyers will be workers who are buying stock for their own retirement. Suppose there are only 2 workers per retiree (like there will be in a few decades)? In this case, demand for the retiree’s stock will amount to 2 times the 12.4% worker contributions. The retiree will only get 2x12.4% = 25% of his working income. That is, he will only get $100 for his stock (basically what he put into it). The price the retiree can get for his investment (his capital gains return) is directly affected by the number of workers per retiree. That is, investment-based retirement is "pay as you go" just like social security. Investments are not a way around the demographic issues causing the social security crisis.
Is this thought experiment valid? If capital gains returns really are limited on a pay as you go basis as the experiment suggests, then the real rate of price rise in the stock market would be constrained by the growth in ability to pay for stock. That is, the constant dollar stock marker index should rise as the same rate as GDP per person.
This is indeed the case. This graph shows GDP per person in black and the S&P500 index in green (both in 1996 dollars). Although the index moves around a lot, over the long run it shows the same 2% rate of rise as GDP per person.
http://my.net-link.net/...
Actually the situation is more complex and I deal with in this article:
http://www.safehaven.com/...
Social Security works better than private investments if your goal is to provide pensions for everyone. The reason is that the tax can collect a given percentage of future GDP, which the graph shows is a pretty predictable quantity. Investments collect based on the future value of the stock index, which moves around a lot as the graph shows.
For a while (like in the 1980’s and 1990’s) it looks as though saving and investing works better than Social Security. The opinion of the common man reflected these short term good times; young people had confidence that they didn’t need Social Security. It was an excellent time for the GOP to use populist arguments to try to destroy Social Security. Defenders of Social Security had no effective populist counter arguments. The most effective approach was a simple assertion that there was no crisis (i.e. a statement from authority--not a populist appeal to common sense). But the more fundamental argument is replacing Social Security with an investment-based system is insane. It is just as insane as doing health care the American way instead of the much better way everyone else does it.
Democratic activists need to know how our great Democratic programs work and why they work better than the shoddy product offered by the other side. Our programs aren’t just big hearted, they are hard headed. It is the other side that is soft-headed. They have a sentimental attachment to the private sector and free markets that has no connection with reality.
There’s a reason why the liberals took over in 1932. The conservatives running the country couldn’t find their ass with both hands. Has the Bush administration shown any greater ability in this department? If we win big next year, as I hope, we need to be ready with a program that makes the Republicans look like the incompetents they are. And to do that we need to show how things can be better. We cannot do this by making populist appeals to what people know, because so much of what they know (e.g. addressing greenhouse warming will cost a lot, private investments are superior to pay as you go, private health healthcare is better than government-run systems, etc) is nonsense.