Abstracting from the benefits of access to low-risk assets, I would say the future payments and benefits tied thereto are not a cost. It would be their contributions and their returns, if any. The cost of converting I would define as the cost of redeeming the legacy debt, which is the benefits owed based on contributions already made. for somebody still paying in, he/she could be given a bond equal to the present value of their historic contributions to do with as he or she wished. The cost of those bonds is what I would define as the cost of converting. If the new system had some kind of poverty fall-back, that would be additional cost.
-----Original Message----- From: lbo-talk-bounces at lbo-talk.org [mailto:lbo-talk-bounces at lbo-talk.org] On Behalf Of Charles Peterson Sent: Saturday, August 09, 2008 2:10 AM To: lbo-talk at lbo-talk.org Subject: [lbo-talk] Social Security Privatization
Please help me with an argument I had with a friend last year about Social Security (USA) and Privatization.
I argued, per Krugman, that the cost of converting from the current system (a modified pay-as-you-go system with a supplemental trust fund) to a fully pre-funded privatized system would be about 15 Trillion dollars over about 50 years.
My friend then retorted that the 15 Trillion was "merely a difference in accounting." The 15 Trillion being paid in advance was merely the present (or near present) cost of later benefits.
I think there has got to be a lot more going on than that, even if it doesn't fit into the prevailing capitalist models and intuitions. The is not simply an argument about "fees" and "management costs" per se, it goes much deeper than that.
For one thing, the 15 Trillion conversion cost is never gotten back so long as the privatized system continues. Not in 100 years or 1,000,000 years. And as should be all too clear to any current observer, the 15 Trillion in "investment" (savings, actually) could all be lost in a single big burst, not entirely unlike (except in scale perhaps) the bursts we've seen in the past couple decades. And then you'd either have starving retirees or you'd have to go back to a very modest pay-as-you-go system. I know it's a common argument made that people can't count on social security benefits. But I believe the reverse is true, you really can't count on financial investments, they always have risks, but you can count on the fact that there will be working people in the future paying taxes, because if there aren't (as in a huge die-off, for example) then nothing matters anyway, and your "financial investments" aren't going to be worth anything either. So I think the bottom line is that a pay-as-you-go system is exactly the kind of system a nation (or world?) needs. It's based on the only thing you can be sure of.
I think the 15 Trillion conversion cost is simply lost to what you could call the "cost of financialization", of taking a social obligation and turning it into a monetized one. OK, in a broader sphere, the money isn't actually "lost". It's lining the pockets of banks, hedge funds, etc., and giving them even more power to control government and crush workers' wages, outsource, lobby for lax regulation so they can blow even bigger speculative bubbles, etc. And that's not even considering the fees and charges, it's just the nature of finance itself. Some people call that "necessary savings", something they (e.g. banker Pete Peterson, who apparently has a new movie out) claim we need more of.
If I understand correctly, Keynes argued that savings is not actually necessary from a social standpoint. It may be necessary for an individual to save, but not an entire society. So that 15 Trillion conversion cost is highly deflationary (especially to worker's wages), as well as empowering the some people to do bad things.
Charles Peterson San Antonio, TX
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