(Cross posted from The Blog Roundup).
The debate for Social Security privatization is over.
Even aside from Dick Cheney's shocking admission (on Fox News, no less) that privatization will not solve the long term fiscal problems of Social Security, it's becoming increasingly clear that the basic premise of the proposed private accounts (that they will allow people to create better return on investment than in the current system) is built on faulty (and deliberately misleading) logic. Michael Kinsley has a compelling argument which nets it out:
(More below the fold...)
Kinsley's Proof That Social Security Privatization Won't Work by Michael Kinsley, LA Times
If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.
a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.
b) In other words, privatization means betting the nation's most important social program on a theory that cannot be true unless many people are convinced that it's false.
c) Even if the theory were true, initially, privatization would make it false. The money newly available for private investment would bid up the price of (and thus lower the return on) stocks, while the government would need to raise the interest on bonds in order to attract replacement money.
Read the whole piece (it's short and simple) to understand his entire argument, including why economic growth won't create more money for Social Security. What he's essentially saying is that for the proposed privatization scheme to work, a lot of investors would have to be completely stupid (to buy the bonds that Social Security private investors don't want to buy). That doesn't exactly sound like a sound basis for a long-term economic plan, now does it?
Aside from all that, even if you think that the average rate of return on people's private accounts would equal or exceed the current system, it's an average -- meaning that some people would do fine, some people would do worse, and a few would do really badly. Those people would inevitably be forced to live in abject poverty in their old age (and would very probably need to be bailed out by everyone else). Would you really want to bet your retirement that you're not going to be one of the unlucky ones?
- Trendar