Some things do make sense . . . like raising the annual IRA limit from $2,000 to $5,000 and the 401k limit from about $10,500 to $15,000, as have recently been proposed. Why? Because these hikes give people the incentive to shift behavior from consumption to saving. In the long run, saving more for retirement builds greater retirement assets. Obviously.
But what would be the effect of siphoning 2% – nearly a third – of the employee’s share of Social Security tax to private accounts?
The first effect would be to take a huge bite out of the funds we currently set aside to pay benefits to the tens of millions of people who are already retired or soon to be retired. The system was going to run out of funds in 2038, if I remember the latest estimate right (I may not) . . . and so now it would run out much sooner. Big problem.
The Bush solution is simply to make up that 2% out of ‘general revenues’ – instead of funding Social Security benefits with Social Security taxes, we’d fund them partly with general tax revenues.
That in and of itself, it seems to me, does not make us richer. In fact, because I don’t trust the 10-year budget-surplus projections, it makes me nervous.
Nor do I see why it would lead to more national saving. The 2% we would have saved collectively, through the Social Security trust fund, would now be saved in 150 million separate little investment accounts. Some people, seeing these accounts, might even wind up saving less – why sacrifice to set aside extra savings when they’re already doing this, they might wonder. (So before, you had Social Security and your IRA. Now, you might wind up with this new version of Social Security – but nothing more.)
The magic bullet, of course, is the assumption that, left to their own devices, 150 million amateur money managers could efficiently and effectively manage these accounts better than Uncle Sam.
There are problems with this.
One is that some people may screw up. John McCain was on TV suggesting that to protect against that, there should probably be a guarantee that, however badly you did investing the money, Uncle Sam would make sure you got at least as much as you would have gotten from traditional Social Security benefits.
But that’s a problem, too. First of all, it could be costly. Second, it would send a signal to 150 million people to take lots of risk. If you’re lucky, it will pay off. If you’re not, no problem – Uncle Sam to the rescue.
To the extent a portion of the nation’s Social Security funds should be invested in stocks (and I’ll get to that in a second), it’s not at all clear to me that the best way to do it is to split the money over 150 million separate managers, most of them novices. Would it not save an awful lot of administration and paperwork and commissions and fees simply to have this money invested in one massive market-weighted global index fund?
Or is the idea that, on average, the 150 million amateur investors would – even after the costs of administration and fees – do better than the index averages? (If so, who would be doing worse? In any pursuit, it’s hard for ‘most people’ to be above average.)
But whether the money were invested in stocks efficiently, without appreciable fees, commissions or paperwork . . . or inefficiently, with 150 million amateur managers . . . the larger question is: would shifting this 2% of the Social Security tax into stocks really make us collectively richer?
If so, it would presumably be because the current capital structure in the U.S. suffers from a lack of equity capital. Starved for equity, we do not start or expand businesses as we might, and thus stunt our future prosperity.
But does that really describe the last decade or two? I don’t think so. There are already plenty of incentives for equity capital (such as not taxing appreciation until a sale is made, and then giving it favorable tax treatment) . . . and there is a ton of money in 401k plans and elsewhere that could easily be shifted from bonds to stocks if people thought it made sense to do so.
Siphoning off the 2% that’s currently, in effect, lent to Uncle Sam at a modest rate for future Social Security payments, simply leaves Uncle Sam – you and me – with a need to replace it at a higher rate. Or else cut benefits. Or else raise taxes. How does any of this make us richer or our retirements more secure?
Social Security privatization purports to be a free lunch. I don’t buy it.
Quote of the Day
That I'm their competition.~Famed hedge fund manager Michael Steinhardt, when asked the most important thing an investor could learn from him.
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