"Clinton Leads Toward a Plan to Invest Some Soc. Sec. Taxes in Market"

Max Sawicky sawicky at epinet.org
Fri Dec 11 08:09:59 PST 1998

> . . .
> No. Social security in its present form has the lowest administrative
> costs in every objective study. The argument for change is that even with
> higher administrative costs, higher returns from investments in equities
> will more than make up for the higher administrative costs.


> The latter
> argument is challenged in a number of other studies that point out that
> privatization will lead to higher borrowing costs by the government (since
> demand for Treasury bonds will drop if social security funds go to Wall
> Street rather than Fed bonds) and to a variety of other costs of
> privatization.

Highly unlikely, since even the connection between overall Federal borrowing and interest rates is problematic.

The bigger cost items associated with individual accounts are the annual management/administrative fees, the conversion cost of annuitization, and the tax increases needed to finance transition. A low estimate for management fees is .5% of assets (every year, just like a wealth tax!). But if these are instead more like 1.5 (highly plausible) or 2.5 there is a huge implied bite out of the retirement nest egg. For tens of millions of low wage workers working for businesses who do their payroll with adding machines and paper records, rather than computers, these fees will be higher, both in absolute terms and as a share of assets.

Similarly, annuitization, which means converting a lump sum at retirement time into a stream of annual benefit payments, has been shown to take a big chunk out of benefits -- 20 to 30% -- as well. The tax increases are needed because one is moving from a pay-as-you-go system to a funded one, wholly or partially. Somebody's got to pay the extra. In this context, use of the current budget surpluses to finance transition (as in the Feldstein plan) should be understood as a tax increase, even if tax law is not changed. If not for the diversion of the surplus, Federal debt would be paid down and annual interest costs in the budget reduced, so there is a real cost to using the surplus; people tend to think of it as a free ride.

Note these are all more-or-less explicit costs, relative to the increased risk implied by privatization. Ergo, uneven distribution of the further costs of bad luck.

> . . .
> -I should add that according to some recent Peter Hart polls, it's the
> -security of an account with their name on it, rather than higher returns,
> -that gets people interested in privatization. So private accounts might
> -actually go down more easily than the kind of "partial privatization"
> -schemes you're talking about.

Quite right, until people understand the extra costs, as noted above.

> . . .
> Partial privatization where the funds go to specified mutual funds would
> keep the name on the account aspect of privatization, but would avoid the
> administrative costs of collecting FICA taxes each month from employers
> and dispersing it to 180 million different investment plans and options.

The mutual funds would still have to charge management costs, as noted above. Incidentally, the NFIB is screaming bloody murder about the possibility of small biz being obliged to make the deposits to these accounts. They want it in the form of IRA's only.

> . . .
> In reality, the Right is not most alarmed by the theoretical bankruptcy of
> social security fifty years from now, but is most alarmed at projected
> massive surpluses when, on paper, the federal government will have
> trillions of assets in the Social Security trust fund. It is a massive
> bulge that looks alarmingly like the government takeover of the national
> capital marketplace.

I'd say if the assets are government bonds, the right wouldn't care at all. They would care if surpluses were used to expand the public sector or hold private sector assets. that's one reason we got a PAYGO system in the first place. The bonds can't be used for anything as things stand, except to loan money to the rest of the Federal govt.

I'm skeptical about the use of government ownership of financial assets for social reform, for a number of reasons. As jks noted, if trade unions are timid about this, what should we expect from a broader constituency?


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