Why shouldn't we privatize Social Security?
November 28, 2004 6:17 PM Subscribe
All the hand-wringing about privatizing Social Security makes me realize I'm in the dark on this one. I don't have a finance/economics background, so could someone explain this concept to me as if I were a ten-year old?
Why is privatizing SS so bad? I'm 31--once the baby boomers cash out their stash, my generation and those younger ain't gonna have jack.....so what's the harm in privatizing it? Or is that scenario not accurate? What can we do to SS besides privatize? I'm not defending privatization, I'm just looking for information.
Why is privatizing SS so bad? I'm 31--once the baby boomers cash out their stash, my generation and those younger ain't gonna have jack.....so what's the harm in privatizing it? Or is that scenario not accurate? What can we do to SS besides privatize? I'm not defending privatization, I'm just looking for information.
Also not an econ type, but...
My understanding of the way social security works is that the payments you and I make are actually what supply the money to make payments to today's retirees -- that money is how the government writes Social Security checks today. The theory being that when we retire in 40 years, our grandchildren's social security taxes will pay for our benefits, and on down the line.
The harm (again, as I understand it, I'm just a dumb journalist) is that if we stop paying a percentage of our social security taxes into the system, the current generation of retirees is left with the bill. Or, more likely, the government is left with trying to figure out how to continue paying social security benefits, to the tune of, give or take, about $2 trillion. Dollars.
The other danger, which is more relevant to you and I personally (other than what do we do with our grandparents when they can't afford food and medicine), has to do with accountability for the money that we take out of the Social Security pot. In theory, we're supposed to put that money into some sort of account that accrues interest, like stocks and/or bonds. But, what if the market you put all that money into tanks all of the sudden? Or what if you don't manage that money as well as you should and by the time you're ready to retire, it turns out you don't have enough of a nest egg? The dark scenario painted by critics of privitizing SS is that you'll have to turn, once again, to the government, costing taxpayers, once again, some untold trillions. Remember, Social Security in the United States was part of Roosevelt's New Deal to help the millions of workers without a retirement plan after the Great Depression.
As a young buck, generally to the left on the political spectrum, I, too, am pretty wishy washy about privitazing social security. The good liberal in me wants to make sure my parents' and grandparents' generations are well taken care of, but the filthy capitalist in me can't help but notice how much of my paycheck goes to Social Security every month. It's a tough call, with no easy answers, which is why most politicians have stayed far, far away.
Personally, I think a great step the government could take to helping out our generation would be to let the millions of 24- 35 year olds with lots of credit card debt write that debt off our income tax in exchange for setting up some kind of secured savings accounts.
posted by jimray at 6:45 PM on November 28, 2004
My understanding of the way social security works is that the payments you and I make are actually what supply the money to make payments to today's retirees -- that money is how the government writes Social Security checks today. The theory being that when we retire in 40 years, our grandchildren's social security taxes will pay for our benefits, and on down the line.
The harm (again, as I understand it, I'm just a dumb journalist) is that if we stop paying a percentage of our social security taxes into the system, the current generation of retirees is left with the bill. Or, more likely, the government is left with trying to figure out how to continue paying social security benefits, to the tune of, give or take, about $2 trillion. Dollars.
The other danger, which is more relevant to you and I personally (other than what do we do with our grandparents when they can't afford food and medicine), has to do with accountability for the money that we take out of the Social Security pot. In theory, we're supposed to put that money into some sort of account that accrues interest, like stocks and/or bonds. But, what if the market you put all that money into tanks all of the sudden? Or what if you don't manage that money as well as you should and by the time you're ready to retire, it turns out you don't have enough of a nest egg? The dark scenario painted by critics of privitizing SS is that you'll have to turn, once again, to the government, costing taxpayers, once again, some untold trillions. Remember, Social Security in the United States was part of Roosevelt's New Deal to help the millions of workers without a retirement plan after the Great Depression.
As a young buck, generally to the left on the political spectrum, I, too, am pretty wishy washy about privitazing social security. The good liberal in me wants to make sure my parents' and grandparents' generations are well taken care of, but the filthy capitalist in me can't help but notice how much of my paycheck goes to Social Security every month. It's a tough call, with no easy answers, which is why most politicians have stayed far, far away.
Personally, I think a great step the government could take to helping out our generation would be to let the millions of 24- 35 year olds with lots of credit card debt write that debt off our income tax in exchange for setting up some kind of secured savings accounts.
posted by jimray at 6:45 PM on November 28, 2004
The main objection I hear is that Social Security is Social--i.e., the point is exactly that it is not privatized, but is a public, social program.
Because of social security, everyone (theoretically) is guaranteed a minimum retirement income--so no matter what happens to you, bad investments, plant closings, medical emergencies, etc., you'll still get an income and not be thrown on your own devices entirely. The program was put into place with the idea that, though social security will be basically unnecessary for some people, it will be very necessary for those with absolutely no savings. As past generations of Americans know very well, sometimes something (like the Great Depression) can happen that is completely beyond your control and that wipes out your savings. It is like insurance: we pay into it so that we know we'll be taken care of at a minimal level. In not privatizing it, we determine that the consequences for those with no savings whatsoever are very great, whereas the damage from giving up possible investment income is quite small.
So, the main objection is that by privatizing social security, you're bringing risk back into a system that is designed exactly to avoid risk. If social security is privatized, then individuals assume more risk than they would have in a more public, social system. They can also make more money than they would otherwise--but that's beside the point.
The argument for it is the Ponzi scheme system as outlined above: i.e., privatized social security will limit output to input and so balance an inherently imbalanced system. And so really there are two ways the argument is framed: in terms of personal responsibility (i.e., "ownership society") and in terms of fiscal responsibility (i.e., "lockbox.")
posted by josh at 7:07 PM on November 28, 2004
Because of social security, everyone (theoretically) is guaranteed a minimum retirement income--so no matter what happens to you, bad investments, plant closings, medical emergencies, etc., you'll still get an income and not be thrown on your own devices entirely. The program was put into place with the idea that, though social security will be basically unnecessary for some people, it will be very necessary for those with absolutely no savings. As past generations of Americans know very well, sometimes something (like the Great Depression) can happen that is completely beyond your control and that wipes out your savings. It is like insurance: we pay into it so that we know we'll be taken care of at a minimal level. In not privatizing it, we determine that the consequences for those with no savings whatsoever are very great, whereas the damage from giving up possible investment income is quite small.
So, the main objection is that by privatizing social security, you're bringing risk back into a system that is designed exactly to avoid risk. If social security is privatized, then individuals assume more risk than they would have in a more public, social system. They can also make more money than they would otherwise--but that's beside the point.
The argument for it is the Ponzi scheme system as outlined above: i.e., privatized social security will limit output to input and so balance an inherently imbalanced system. And so really there are two ways the argument is framed: in terms of personal responsibility (i.e., "ownership society") and in terms of fiscal responsibility (i.e., "lockbox.")
posted by josh at 7:07 PM on November 28, 2004
Exactly when does this demographic crunch (the ratio of payers into the system to recipients) cause the program to go kaput?
I'm 21 and I'd like to be able to invest a small portion but I understand how those who paid in over the course of their entire lives wouldn't appreciate that.
posted by TetrisKid at 7:13 PM on November 28, 2004
I'm 21 and I'd like to be able to invest a small portion but I understand how those who paid in over the course of their entire lives wouldn't appreciate that.
posted by TetrisKid at 7:13 PM on November 28, 2004
A small addition to what everybody else said. Experience suggests that many of the supposed benefits of the private as opposed to the public sector (efficiency through competition, etc.) vanish when the privatized industry is such an important public service that the government simply cannot allow it to fail. A private company which knows (or has a very strong, reasonable belief) that the government will be forced to bail it out if it screws up, will be more likely to screw up. To some extent, this can lead to negligent private companies effectively having the government over a barrel, as the government's hand is forced both by a public need and the fear of electoral reprisals.
posted by flashboy at 8:11 PM on November 28, 2004
posted by flashboy at 8:11 PM on November 28, 2004
In The truth vs. the myths about Social Security, a Newsday columnist today argues that it's not a crisis, that a few tweaks would ensure it would work into the next century, and that it does a better job of protecting lower-income workers -- in other words, the things you'll never hear from conservatives who want government out of the pension business.
posted by pmurray63 at 8:30 PM on November 28, 2004
posted by pmurray63 at 8:30 PM on November 28, 2004
Frankly, I can't see how any private service can be competitive against public service.
A private company must make a profit. In particular, it must make enough profit to keep investors happy.
A public service doesn't need to make any profits. It just needs to cover expenses. Right off the bat, it should be significantly less costly to the consumer than the same service offered privately.
I think the prime example is in British Columbia. Our basic automobile insurance provider is a public corporation that is under direct government control wrt profit-capping (they returned money to the consumer a few years back, having made a killing on the Internet bubble); wrt service (no bias against age/sex/car type); wrt coverage; etc. As a result, auto insurance costs in BC are among the lowest available in North America.
posted by five fresh fish at 9:45 PM on November 28, 2004
A private company must make a profit. In particular, it must make enough profit to keep investors happy.
A public service doesn't need to make any profits. It just needs to cover expenses. Right off the bat, it should be significantly less costly to the consumer than the same service offered privately.
I think the prime example is in British Columbia. Our basic automobile insurance provider is a public corporation that is under direct government control wrt profit-capping (they returned money to the consumer a few years back, having made a killing on the Internet bubble); wrt service (no bias against age/sex/car type); wrt coverage; etc. As a result, auto insurance costs in BC are among the lowest available in North America.
posted by five fresh fish at 9:45 PM on November 28, 2004
Regarding SS's "ponzi scheme" nature -- I sometimes suspect the problem isn't simply the number of payees into the system vs benificiaries. It's not hard to come to the conclusion that even a 3:1 ratio could support some form of the system. Unless the trend is that the average worker putting money into the system has wages that are decreasing, while the average beneficiary is drawing a steady or increasing benefit.
posted by weston at 9:50 PM on November 28, 2004
posted by weston at 9:50 PM on November 28, 2004
Isn't part of the problem also that Social Security funds are also used for non-Social Security programs, so the elimination of SS would result in these programs' elimination as well?
Not that I'm for funds being used for other than their intended purpose, but the elimination of this free money basket might explain why some lawmakers are against it.
posted by Anonymous at 10:57 PM on November 28, 2004
Not that I'm for funds being used for other than their intended purpose, but the elimination of this free money basket might explain why some lawmakers are against it.
posted by Anonymous at 10:57 PM on November 28, 2004
A public service doesn't need to make any profits. It just needs to cover expenses. Right off the bat, it should be significantly less costly to the consumer than the same service offered privately.
Profit for the private company compensates for the level of risk associated with the investment made by the company. A public service will still face risks associated with the service it provides, the difference being that if it goes tits up then its the public purse which covers the losses. Thus the distinction comes down to the ability of the public vs private institution to best manage risk. If the private company is better at innovating to reduce the risk then they can be a better ((generally) ie cheaper) service provider. Examples include the electricity transmission and distribution networks of the UK. However, I would accept there are areas where public is the better service provider, most notably where cost is not the only criteria for service provision.
posted by biffa at 5:57 AM on November 29, 2004
Profit for the private company compensates for the level of risk associated with the investment made by the company. A public service will still face risks associated with the service it provides, the difference being that if it goes tits up then its the public purse which covers the losses. Thus the distinction comes down to the ability of the public vs private institution to best manage risk. If the private company is better at innovating to reduce the risk then they can be a better ((generally) ie cheaper) service provider. Examples include the electricity transmission and distribution networks of the UK. However, I would accept there are areas where public is the better service provider, most notably where cost is not the only criteria for service provision.
posted by biffa at 5:57 AM on November 29, 2004
Social Securityalso provides benefits for poeople who are disabled. If it is privatized, that will vanish. There is some percentage of SSI disability payments to clever slackers, but it's mostly people who are seriously mentally or physically disabled. It's not a lot of money to live on, but it is a real life line.
posted by theora55 at 7:06 AM on November 29, 2004
posted by theora55 at 7:06 AM on November 29, 2004
a 21 year old male driving a porsche pays the same in insurance as a 60 year female driving a civic? Now that's a government service I can admire :)
Nope. Right off the top the insurance on a 100K car is going to be more than a 30K car. Plus the maximum safe driving discount kicks in at 10 years (50% + one no penalty accident) so the 21 year old will be paying more if they are both accident free. Plus the 21 year old male is more likely to be going to or from work or school so they'll pay more for that.
BC's system is all about assessing risk based on Driving Record and actual risk. If two drivers both have 5 years of accident free driving why should companies be able to charge one of them more just because they are 21 or male or unmarried?
BC does have different rates for different areas. People in Vancouver pay more than than the residents of the wilds of the north because they make more claims. They also change more if you use your vehicle more (pleasure use vs to and from work vs to and from work over 15km each way)
I'm a big fan of public insurance for two reasons. First it saved me a big swack of money. I got into the 10 yrs accident free zone when I turned 26 and even 1 yr accident free gives you a 10% discount on a rate that isn't inflated in the first place.
Second it is easy. You can go to any agent and have plates, registration and insurance in less than 10 minutes. It takes an easy couple, three hours to do the same here in Alberta where we have private insurance.
Make no mistake, like any insurance company ICBC bends you over if you ever have to make a claim but at least they don't waste your time up front. And if you do make a claim you pay a 30% surcharge for each claim.
posted by Mitheral at 9:13 AM on November 29, 2004
Nope. Right off the top the insurance on a 100K car is going to be more than a 30K car. Plus the maximum safe driving discount kicks in at 10 years (50% + one no penalty accident) so the 21 year old will be paying more if they are both accident free. Plus the 21 year old male is more likely to be going to or from work or school so they'll pay more for that.
BC's system is all about assessing risk based on Driving Record and actual risk. If two drivers both have 5 years of accident free driving why should companies be able to charge one of them more just because they are 21 or male or unmarried?
BC does have different rates for different areas. People in Vancouver pay more than than the residents of the wilds of the north because they make more claims. They also change more if you use your vehicle more (pleasure use vs to and from work vs to and from work over 15km each way)
I'm a big fan of public insurance for two reasons. First it saved me a big swack of money. I got into the 10 yrs accident free zone when I turned 26 and even 1 yr accident free gives you a 10% discount on a rate that isn't inflated in the first place.
Second it is easy. You can go to any agent and have plates, registration and insurance in less than 10 minutes. It takes an easy couple, three hours to do the same here in Alberta where we have private insurance.
Make no mistake, like any insurance company ICBC bends you over if you ever have to make a claim but at least they don't waste your time up front. And if you do make a claim you pay a 30% surcharge for each claim.
posted by Mitheral at 9:13 AM on November 29, 2004
Grrr. Damn browser crashed. So here's the short form:
What counts in BC is this: where you drive, how much you drive (pleasure versus business/school), your safe driving discount (up to 40% off, with first-accident forgiveness for long-time safe drivers), and how much the car is expected to cost ICBC if it is in a collision and requires repairs.
Note the latter is less to do with vehicle make/power/etc as it is to do with cost of parts. Insurance rates for Accords went up when they started using those damn stupid uni-lense taillights, which cost well over $1000 to replace.
I'd be paying about C$2500 insurance on the Porsche and $1280 on the Accord. Mid-thirties male with 16 years accident-free driving. What would it cost you?
posted by five fresh fish at 11:07 AM on November 29, 2004
So you can see that although the Porsche costs 3.5x as much to purchase (C$115k) and is driven by a young man, it costs less than 2x as much to insure as an Accord (C$33k) driven by an older lady. Sex, age, race and, for the most part, type of car: wholly irrelevent.Insurance Corporation of British Columbia Rate Quote Results Using 2004 PolicyProcessed on Monday, November 29, 2004 Rate Class: 002 VEHICLE DRIVEN TO OR FROM OR PART WAY TO OR FROM WORK OR SCHOOL A ONE WAY DISTANCE IN EXCESS OF 15KM AND ALSO FOR PLEASURE USE. VEHICLE MAY ALSO BE USED ON NOT MORE THAN 6 DAYS IN A CALENDAR MONTH FOR BUSINESS USE OR COMMERCIAL USE Territory: L Thompson / Okanagan Areas Vehicle Description: 2004 Porsche 911 Carrera 2 Cabriolet CRS Level: 0 Coverages Fees and Premiums: BaseBasic Third Party Liability 912Extension Third Party Liability $2,000,000 223Collision (rate group 23) $300 2782Comprehensive (rate group 26) $300 1569Limited Depreciation Collision (model year #1) 280 Limited Depreciation Comprehensive/Specified Perils (model year #1) 97 Promissory Note:Term of loan - 11 Months Interest Rate - 8.25% Monthly Payment - $517.00 Number of Monthly payments - 12 Interest Charge - $228.00 Administration Fee - $15.00 Fees: 97 Total Premiums: $6203 This rate quote is an estimate only and may vary. The actual cost of your insurance and licence may be greater or lesser depending on ICBC's then current insurance and licence fees for your vehicle.
Insurance Corporation of British Columbia Rate Quote Results Using 2004 PolicyProcessed on Monday, November 29, 2004 Rate Class: 002 VEHICLE DRIVEN TO OR FROM OR PART WAY TO OR FROM WORK OR SCHOOL A ONE WAY DISTANCE IN EXCESS OF 15KM AND ALSO FOR PLEASURE USE. VEHICLE MAY ALSO BE USED ON NOT MORE THAN 6 DAYS IN A CALENDAR MONTH FOR BUSINESS USE OR COMMERCIAL USE Territory: L Thompson / Okanagan Areas Vehicle Description: 2004 Honda Accord EX & EX(i) Sedan & Coupe CRS Level: 0 Coverages Fees and Premiums: BaseBasic Third Party Liability 912Extension Third Party Liability $2,000,000 223Collision (rate group 16) $300 1169Comprehensive (rate group 16) $300 573Limited Depreciation Collision (model year #1) 75Limited Depreciation Comprehensive/Specified Perils (model year #1) 18 Promissory Note: Term of loan - 11 Months Interest Rate - 8.25% Monthly Payment - $267.00 Number of Monthly payments - 12 Interest Charge - $118.00 Administration Fee - $15.00 Fees: 97 Total Premiums: $3200 This rate quote is an estimate only and may vary. The actual cost of your insurance and licence may be greater or lesser depending on ICBC's then current insurance and licence fees for your vehicle.
What counts in BC is this: where you drive, how much you drive (pleasure versus business/school), your safe driving discount (up to 40% off, with first-accident forgiveness for long-time safe drivers), and how much the car is expected to cost ICBC if it is in a collision and requires repairs.
Note the latter is less to do with vehicle make/power/etc as it is to do with cost of parts. Insurance rates for Accords went up when they started using those damn stupid uni-lense taillights, which cost well over $1000 to replace.
I'd be paying about C$2500 insurance on the Porsche and $1280 on the Accord. Mid-thirties male with 16 years accident-free driving. What would it cost you?
posted by five fresh fish at 11:07 AM on November 29, 2004
This thread is closed to new comments.
posted by PrinceValium at 6:38 PM on November 28, 2004