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06/17/05
On Social Security Reform
Filed under: Politics and Economics
Posted by: site admin @ 5:26 am

I am deeply concerned about current discussions about Social Security reform. From what I understand, the President’s focus is on converting some portion of Social Security from a guaranteed benefit to a guaranteed contribution program – similar to what is being done with most private pensions. According to the outline of the President’s plan on whitehouse.gov,

“Any proposal will include limitations on the risk of investments permitted in personal accounts and will include low-risk, low-cost options like broad index funds similar to those currently available to Federal employees. “

This plan, as I understand it, is the same plan I used to advocate 20 years ago – note the emphasis on “used to advocate”. I’ve recently been doing some thinking on this subject and believe something important is being missed here. No one seems to be discussing why Social Security came into existence in the first place.

If I remember my history correctly, Social Security came into existence because of a collapse in the “ownership society” of the 1920’s. We learned that it is possible for MANY in our society to end up on the losing end of investments. We learned that without a safety net, this can lead to grinding poverty (and social unrest).

I am concerned that the “reforms” proposed by the President will put us at risk of repeating that experience. This is because “low-risk” is not the same as “no-risk”. If there is any risk at all, then we know that some percentage of the population will come out on the losing end of the risk equation. When that happens, those people will clamor for some type of relief and we will be back to pressures that led to the creation of Social Security in the first place. If we assume that the distribution of successful investors will remain essentially the same under these changes to Social Security as it is now for other forms of investing, we may find that size of the group clamoring for a defined benefit plan in the future to be quite large. Only this time around, we will have the additional problem of having created a class war between those who successfully invest and those who don’t. Consequently, I do not believe that any change to the Social Security program that causes its beneficiaries to shoulder ANY risk of loss will be successful in the long run.

This is not to say that changes cannot be made. It seems to me that by simply creating accounts for recipients that include only guaranteed investments such as Federal bonds can be done easily. Investing in Federal bonds should be particularly easy – since that is essentially what the current Social Security system purports to do anyway. Further, these accounts can be directly administered by the Social Security Administration, eliminating the “low-cost” referred to in the President’s plan. If those bonds are actually allocated on an individual basis, with actual ownership transferred to those accounts, it would eliminate the possibility of dipping into the Social Security Trust Fund (as Congress currently does), as well as provide long term ownership for the beneficiaries (who could then pass them down as an inheritance).

I believe that some changes need to be made. I also believe that those changes must be tempered with the knowledge of what originally led to the creation of Social Security. Those who do not learn from the past are doomed to repeat it.

Addendum: The current attempt to privatize Social Security is an attempt to move away from a defined benefit plan towards a defined contribution plan for retirement. This is the equivalent to what employers have done by switching to 401Ks, etc. The fundamental flaw here is that the Federal government simply doesn’t have the same level of impunity from the masses that employers do. Employers can do pretty much anything they want to their employees that isn’t illegal until they start driving so many employees away that they can no longer do business. The Federal government, on the other hand, can’t avoid voters. It simply won’t fly for that reason - regardless of whether or not it’s fiscally responsible.

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