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The Definitive Case Against Privatizing Social Security

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  • Strongly Liberal Democrat
    Dallas, TX
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    The People's Champ defends the People's Pension

    Warren Mosler: The Definitive Case Against Privatizing Social Security

    -Reposted in its entirety with permission from Mr. Mosler.

    The move to privatize Social Security is again rearing its ugly head at a series of town hall meetings sponsored by the Peterson gang of deficit terrorists. And one of the major discussions in Washington is whether or not to privatize Social Security. As you might be guessing by now, that entire discussion makes no sense whatsoever, so let me begin with that and then move on.

    The idea of privatization is that:

    Social Security taxes and benefits are reduced, and instead,

    The amount of the tax reduction is used to buy specified shares of stock. And

    Because the government is going to collect that much less in taxes the budget deficit will be that much higher, and so the government will have to sell that many more Treasury securities to 'pay for it all' (as they say).

    Got it?

    They take less each week from your pay check for social security and
    You get to use the funds they no longer take from you to buy stocks.
    You later will collect a bit less in Social Security payments when you retire, but
    You will own stocks that will hopefully become worth more than the Social Security payments you gave up.

    From the point of view of the individual it looks like an interesting trade off. The stocks you buy only have to go up modestly over time for you to be quite a bit ahead.

    Those who favor this plan say yes, it's a relatively large one time addition to the deficit, but the savings in Social Security payments down the road for the government pretty much makes up for that, and the payments going into the stock market will help the economy grow and prosper.

    Those against the proposal say the stock market is too risky for this type of thing, and point to the large drop in 2008 as an example. And if people lose in the stock market the government will be compelled to increase Social Security retirement payments to keep retirees out of poverty. Therefore, unless we want to risk a high percentage of our seniors falling below the poverty line, government is taking all the risk.

    They are both terribly mistaken. (Who would have thought!)

    The major flaw in this main stream dialogue is what is called a 'fallacy of composition.' The typical textbook example of a fallacy of composition is the football game where you can see better if you stand up, and then conclude that everyone would see better if everyone stood up.

    Wrong! If everyone stands up no one can see better, and everyone is standing up rather than sitting down. So all are worse off. They all are looking at what is called the micro level for the individual Social Security participants rather than looking at the macro level which includes the entire population.

    To understand what's fundamentally wrong at the macro (big picture, top down) level, you first have to understand that participating in Social Security is functionally the same as buying a government bond. Let me explain.

    With the current Social Security program you give the government your dollars now, and it gives you back dollars later. That is exactly what happens when you buy a government bond (yes, or put your money in a savings account). You give the government your dollars now and you get dollars back later plus any interest.

    Yes, one might turn out to be a better investment and give you a higher return, but apart from the rate of return, each is very much the same.(Now that you know this, you are way ahead of Congress, by the way.)

    In my coming book, The 7 Deadly Innocent Frauds of Economic Policy, I describe an encounter that I had with Steve Moore then head of economics at the CATO institute, now a CNBC regular, and a long time supporter of privatizing Social Security. Steve came down to Florida to speak about Social Security at one of my conferences. He gave his talk that went much like I just stated, by letting people put their money in the stock market rather than making Social Security payments, they will better off over time when they retire, and the one time increase in the government budget deficit will be both well worth it and probably 'paid down' over time in the expansion to follow, as all that money going into stocks will help the economy grow and prosper.

    At that point I led off the question and answer session:

    Warren: "Steve, giving the government money now in the form of Social Security taxes, and getting it back later is functionally the same as buying a government bond, where you give the government money now and it gives it back to you later. The only difference is the return seniors will get."

    Steve: "OK, but with government bonds you get a higher return than with Social Security which only pays your money back at 2% interest. Social Security is a bad investment for individuals."

    Warren: "OK, I'll get to the investment aspect later, but let me continue. Under your privatization proposal, the government would reduce Social Security payments and the employees would put that money into the stock market."

    Steve: "Yes, about $100 per month, and only into approved, high quality stocks."

    Warren: "OK, and the US Treasury would have to issue and sell additional securities to cover the reduced revenues."

    Steve: "Yes, and it would also be reducing Social Security payments down the road."

    Warren: "Right. So to continue with my point, the employees buying the stock buy them from someone else, so all the stocks do is change hands. No new money goes into the economy."

    Steve: "Right"

    Warren: "And the people who sold the stock then have the money from the sale which is the money that buys the government bonds."

    Steve: "Yes, you can think of it that way."

    Warren: "So what's happened is the employees stopped buying into Social Security, which we agree was functionally the same as buying a government bond, and instead bought stocks. And other people sold their stocks and bought the newly issued government bonds. So looking at it from the macro level, all that happened is some stocks changed hands, and some bonds changed hands. Total stocks outstanding and total bonds outstanding, if you count Social Security as a bond, remained about the same. And so this should have no influence on the economy, or total savings, or anything else apart from generating transactions costs?"

    Steve: "Yes, I suppose you can look at it that way, but I look at it as privatizing, and I believe people can invest their money better than government can."

    Warren: "Ok, but you agree the amount of stocks held by the public hasn't changed, so with this proposal nothing changes for the economy as a whole."

    Steve: "But it does change things for Social Security participants."

    Warren: "Yes, with exactly the opposite change for others. And none of this has even been discussed by Congress or any mainstream economist? It seems you have an ideological bias towards privatization rhetoric, rather than the substance of the proposal."

    Steve: "I like it because I believe in privatization. I believe that you can invest your money better than government can."

    With that I'll let Steve have the last word here. The proposal in no way changes the number of shares of stock, or which stocks the American public would hold for investment. So at the macro level it is not the case of allowing the nation to 'invest better than the government can.' And Steve knows that, but it doesn't matter, and he continues to peddle the same illogical story that he knows is illogical. And he gets no criticism from the media apart from the misguided discussion as to whether stocks are a better investment than Social Security, and whether the bonds the government has to sell will take away savings that could be used for investment, and whether the government risks its solvency by going even deeper into debt, and all the other such nonsense we've called innocent frauds.
  • Center Left
    Denton, TX
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    Interesting read. Thanks for the upload. My one criticism though goes like this: Warren's title is that this is the definitive argument against privatizing social security. I disagree, at least with the exert that you have provided. I think Warren more makes the point that there is no clear advantage to privatizing SS over just having the government run it. In the end, he seems to say, it all amounts to basically the same thing, just the rhetoric is different. But, it doesn't (at least to my mind) have much to say in light of which one is better, or how.

    I would like to read THOSE thoughts of Warrens, if you happen to have those or could point me in that direction, as I know from your previous posts that you are quite fond of the guy and cite him often.
  • Center Left
    Central, FL
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    It's easy for some people to suggest privatization at a time when the stock market is really high. What about when it crashes though ? Nothing like losing your 401k and social security at the same time. Keep the old folks off of the bridge.
  • Strongly Liberal Democrat
    Dallas, TX
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    On behalf of the General Assembly of Occupy Dallas, I invited Warren to come to Dallas and speak in June of 2012. We correspond regularly, and I administer a Facebook group featuring headline MMT all star economists and MMT supporters from around the world.

    The point that Warren makes on privatizing social security is that while some individuals may be better off as result of buying stocks that increase in value, instead of making payroll tax payments to Social Security and receiving SSI payouts in the future, there is no functional benefit for the US economy, and the transaction costs associated with privatization would add to Wall Street incomes.

    So for those that oppose privatization, it's not, per se, that the stock market is too 'risky', it's too costly. Whatever gains to be had for particular individuals, the transaction costs associated with privatization take money that would have been collected as payroll taxes, to osensibly fund future SSI payouts, and instead support Wall Street incomes. Meanwhile, since the stock of money is not changing, and all that's happening is ownership transfers, there is no economic expansion benefit, and instead of paying down the additional deficit spending increases due to the lack of payroll taxes collected, you end up with even larger government deficits to offset the income gains by those with a higher marginal propensity to save, or those savings demands end up leading to paradox of thrift style deflation that produces deficits. In other words, you either run the sized deficit needed to support expansion and employment, or you end up with those deficits as a result of deflation and the fall off of tax revenues.

    So it's not just a question of government taking on more risk in the event that the stock market crashes and we have to payout SSI benefits to keep people out of poverty, it's that the entire privatization scheme amounts to a gigantic handout to Wall Street financial interests, which inevitably require larger government deficits to support, contrary to the intent and the selling points of such a plan.

    Again, government deficits are not a problem, per se. The real limits are on the real side of the economy. So if we're not at full employment/full ouput there's always the "fiscal space" for government net-spending (government spending - taxes) to employ those resources w/o general "demand pull" - style inflation ("too many dollars chasing too few goods"). Regardless of fiscal policy, there's always a threat of "supply side"-style inflation resulting from regulatory issues and monopoly rent seeking interests, as evidenced by 70's style inflation, which nearly everyone on Earth associates (wrongly) with fiscal policy.

    Warren's Social Security proposals would be to remove the payroll tax, at least until we get to full employment/full output, while also increasing SSI benefits. SSI is a government fiscal transfer program. It's an earned benefit for working in this great country of ours, i.e. the People's Pension. Payroll taxes are not needed for revenues to fund payouts. The real cost of SSI is the real resources purchased by people with their SSI dollars. FDR called the payroll tax a "useful fiction" instituted for political, not economic purposes. Payroll taxes, just like all other taxes collected by the federal government (the currency issuer), regulate demand. The funds to pay our taxes and buy government securities come from government spending. The dollar is a tax credit. The currency is a simple public monopoly. Government debt is just a record of all the dollars ever created by government and not taxed away. Government deficit=non government surplus. Government debt=non government savings. The national debt is a national equity, not a national burden. It is simply what government has paid-in to the non-government, and it's that equity that supports the private credit structure. This doesn't mean we don't need taxes. Taxes anchor the currency, that is, b/c we have to pay our taxes in dollars, we work for the dollar, and the government can spend the dollar to provision the public sector. But the tax level is about controlling for inflation and social engineering.

    So for a given sized government and a given credit expansion, there's a rate of taxation that corresponds to full employment. Right now, given all the savings demands, we are WAY overtaxed per the size of government. So that means, depending on your politics, we need more government spending or a demand side tax cut. The regressive, flat payroll tax is the most obvious candidate of taxes to be removed to boost spending. It would be the largest tax cut in American history, and by fixing the real economy from the bottom up, it would do more to fix the banks than any of the top-down policies that have been implemented.

    All the hysteria about "entitlement spending" or out of control government spending is completely misplaced, and if history and the forecasting of economists who are actually paid to be right is any guide, demand leakages will continue to outpace the rate of fiscal policy expansion. Our inflation risks are entirely of the "supply side" variety, and the deficit hawks are not just absolutely oblivious to this, but sponsored by those rent-seeking interests. Across the board stupidity.

    I could go on and on and on.
  • Are you sure you want to delete this post?
    All analysis aside.

    Social Security is about just that. Thus a profit motive would undermine the very nature of the program.