I recently had lunch with a good friend of mine, and Congress expert, from a public university in Florida (I can report his views on Jeb Bush on request). After a bit of gossip about which political scientists are at what universities etc, we started talking about social security reform.
He pointed out that if we raised the retirement age by one year it would put off the "crisis" by 17 years. At this I pointed out that the crisis is time dependent so delaying it is as good as eliminating it altogether! Think of this way. Social security is a "pay as you go" plan. That means that workers today pay for the retirements of pensioners today. The problem is that as the Baby Boomers retire, they will depend on Generation X to pay their retirement. Since there are about half as many Gen X'ers as Boomers, this is bad news for Social Security. But it is not a permanent problem! As the Boomers die and the Gen X'ers retire, the enormous Boomer Echo or Tidal Wave II will hit their peak earning years just as the number of pensioners declines sharply. So the bottom line is that the Bush administration is proposing a massive restructuring of social security that may destroy the program entirely in order to address a temporary problem caused by a fat spot in the population distribution (the Baby Boom) which will pass through the system in time. Why? I suggest it is about destroying social security for ideological reasons and very little else.
My other major beef with the social security issue is that Republicans like to claim that privatizing social security yields a "higher rate of return" than the social security trust fund. But there are a couple of problems with that. First, while it is true that the stock market is always higher today than it was 20 years ago, it is not always higher today than it was 5 or 10 years ago. What happens if you retire during a "market correction?" Also, that "higher rate of return" is not automatic or for free. The reason you get more money back at the end of an investment than you put in is because that is what compensates your for the RISK that you may not get your money back at all. Generally, the higher the rate of the return, the higher the risk. Misunderstanding this basic economic principal is what caused so many people to lose their fortunes in when the Dot-com bubble burst. People invested in "high return" internet startup investments without thinking that the the reason the returns were high was because the company was in serious danger of going bust. OK, no apply that to privatized social security accounts. Introducing risk into pension plans would be fine if you had enough money to distribute that risk across many types of investments. But if you are poor and can't distribute your investments, you are increasing your vulnerability to risk. Not a good basis for a retirement plan.
Bush probably doesn't understand the relationship between rate of return and risk for a few reasons. First, when his investments go belly up, his friends and his fathers friends bail him out... no risk! Second, empathy is not this President's strong suit. If he hasn't experienced it personally, he doesn't get it. Finally, this President is not known for his performance in the class room so even though he was almost certainly taught this principal in his Harvard MBA program, his grades indicate that he probably just slid through the class.
The Democrats are fighting hard to block the President but I haven't heard them mention the temporary nature of the looming short fall in social security. Also, I haven't heard any clear description of the relationship between "rate of return" and risk. There have been vague alarms raised about the riskiness of the stock market but no direct link between the "rate of return" and risk.
Wednesday, March 16, 2005
Posted by Raised By Republicans at 6:47 AM