Another irrefutable argument against privatizing Social Security.
The Meathead Proposition
February 13, 2005
Try to forgive my obsession, but here is another proof that President Bush's designs for Social Security cannot work. This one's not mine. I first heard it from the actor/director and liberal activist, Rob Reiner. Like the argument I have been hawking (see latimes.com/proof), this one doesn't merely suggest that Bush is making bad policy, it demonstrates with near-mathematical certainty that the idea he endorses cannot work. Period.
Bush might as well be proposing legislation that 2 plus 2 is 5. And if that happened, there would be no shortage of Republican pols prepared to endorse such a view; of experts to declare that it is a very difficult question and the answer may lie anywhere between 2.3 and 7.09; of moderate Washington sages to urge caution (with David Gergen suggesting that perhaps it would be useful to start with 4.1 and get to 5 on a timetable based on the best poll numbers available); of media to report both sides of the question; and of media critics to accuse the media of a subtle bias in favor of 2 plus 2 is 4.
The Meathead Proposition (in honor of Rob Reiner's most famous role) is this:
The case that there is a Social Security crisis and the proposal to address it through "personal retirement accounts" both depend on assumptions about the course of the economy over the next few decades. These assumptions are highly speculative. That's OK. What's not OK is to assume one thing when you're claiming there is a problem, and something different when you're claiming that you've got the solution.
Actually, President Bush last week abruptly gave up his claim that privatization will solve the problem of a looming shortfall in Social Security funds. The truth is that privatization schemes assume that the shortfall will be addressed — by borrowing trillions of dollars — as part of the "transition" to privatization. But Bush still claims that letting people keep and invest part of what they now pay into Social Security during their working years will leave them better off than if they just get the benefits they would be entitled to if the program didn't change.
How much better off depends on how much your government benefits will be reduced for every dollar you choose to keep and invest for yourself.
That is one of the little details the White House hasn't yet enlightened us about. But this new system as a whole — Social Security plus the private accounts — must somehow produce more money than Social Security alone, or there is no point.
My previous argument, in a nutshell, was that even if these private investments do better than the government bonds in which the current Social Security surplus is invested, this won't change the total amount being invested in the private economy, or increase the economic growth that comes from private investment, because the government will just have to go out and borrow elsewhere to replace the dollars it isn't able to borrow from Social Security. And that means that every time someone puts a Social Security dollar into a private account, someone else must be persuaded to take a dollar currently invested in the private economy and put it in government bonds.
To get his scheme enacted, Bush must persuade Americans of the exact opposite: that private-sector investment will make them better off than fuddy-duddy old government bonds. Basically, privatization schemes assume that the alleged inferiority of government bonds can be kept our little secret for the next few decades — just us folks in the Social Security system. And so a few trillion in government bonds (this is on top of the trillions we unloaded during the "transition") can be unloaded on all those two or three Americans who aren't in Social Security, plus maybe some hapless foreigners.
Privatization schemes assume that this will have no effect on how much interest the government will have to pay, or what kind of long-term return you can expect on investments in the private economy. For example, the right-wing Heritage Foundation, a major thumper for privatization, assumes that private accounts can earn a long-term, risk-free return of 4.7% after inflation, which it says is based on history.
But if free markets work the way they are supposed to — and I would like to hear the Heritage Foundation say that they do not — the effect of the government announcing that government bonds are a bad investment and pushing people to put their money elsewhere will be to make it more expensive for the government to borrow money. So even if private stocks and bonds are a better long-term investment than government bonds (after factoring in risk, and so on), they won't stay that way for long
Meanwhile, in their latest report, the Social Security trustees assume that growth in the nation's gross domestic product will slow from 4.4% to 1.8% in 2015 and will stay there for the next six decades. They predict productivity growth of 1.6% and average unemployment of 5.5%. From this and other data, the trustees predict that the trust fund will earn 3% a year (5.8% interest minus 2.8% inflation). This is their "intermediate" assumption, from which Bush concludes that shortfall will hit the fan in 2042.
These assumptions about the unknowable are not unreasonable. Nor are the assumptions of the Heritage Foundation. What is unreasonable is using both sets of assumptions at the same time. Can a conservative investment in stocks and bonds grow by 4.7% a year, for decades, while productivity is growing by 1.6% and the economy is growing by 1.8%? Theoretically possible, perhaps. But probable? On average? For everyone with a Social Security number?
If you start by assuming that one investment pays better than another, it's not very surprising (or persuasive) if this is also your conclusion. A dollar a year invested for the next 37 years (until 2042) at 3% interest produces $66. At 4.7%, it's $95. If the Heritage Foundation is right, there is no crisis to fix. And if the Social Security trustees are right, the Heritage fix won't work.
If Meathead can figure this out, why can't W?
Link: http://www.latimes.com/news/opinion/la- ... util-op-ed
Maybe because W is the lowest end moron on the planet?