I reeceived the following e-mail raising questions about my recent Mises.org critique of “forced savings” as a solution to the mess that is Social Security. My response follows.Professor Westley,
I’m writing in regard to your article entitled “Robbing Peter to Pay
Peter” at Mises.org.
Let me start by saying that I fully agree with you that the *best* way of dealing with SS would be to get rid of it completely. However, I’m curious as to what you see as preferable, the present situation, or some privatization plan such as Paul Ryan’s legislation, H.R. 4581. At present, we have forced forfeiture. I see forced savings as an improvement over that.
Let me also say that I agree with you that there are financial risks to stock market participation that the GOP and friends have perhaps been reluctant to discuss. I can understand why this would be a concern, as public consensus seems to hold that privatization would mean forced stock market investing. However, I’m aware of no privatization proposal which would require anyone to participate solely in the stock market as opposed to other choices such as bonds or money market accounts. This is not to indicate that I don’t appreciate the importance of risk analysis. But while those in favor of privatization have offered at least some discussion of the risks of their proposals, I have yet to see any opponents of privatization begin discuss the political risks associated with the present system. Currently, I’m forced to invest my payroll taxes in a series of nonmarketable debt instruments issued by an agency that explicitly reserves the right to adjudicate any disagreements I may have. That seems far riskier to me than any of the investment options suggested in most privatization proposals.
Finally, a hypothetical question. Suppose that the privatization effort is successful and the implementation includes the options to remain in the present system or choose forced savings in the stock market, bond market or money market. Would you remain in the present system?
My response:
My position is that this is replacing one bad system with another. Both systems have their merits and demerits–but both share the strong possibility to continue to grow the State. Someone e-mailed me from Australia saying that there is a similar “forced saving” system in place there, and it is viewed as another justification for government to regulate the private sector, given how everyone depends on continued profitability of the private sector in order to have a secure retirement. Do we really want to go there because it seems relatively better than Social Security?
Another point. I heard Cheney this morning say that privatization is meant to buttress SS, not replace it. The idea that SS is going down so let’s switch over to a privatized system is not shared by the political class. I believe that the “crisis” is that the money flowing in from the baby boomers is going to end, and that Congress will be facing a new budget constraint. Many of the responsibilities that the federal government has assumed over the last 100 years may revert to the states, resulting a “forced federalism”. The future of Social Security is not a crisis for most everyone else. In fact, from a libertarian perspective, this is quite a good development.
But you ask a good question. Would I stay in the current system if it were replaced by a privatized one? I would certainly get out of the old system as much as possible, but I am not sure where I would put my money. Probably try to ride some of the bubbles, or invest in gold? As of now, the Washington does not intend to let SS go away.
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Privatization can’t work because the money that is put into a private account is immediately offset by borrowing money (transition dollars) in the marketplace to sustain benefits to current retirees. Therefore, no increase in national savings. No increase in national savings = no new investment from privatization.
I’m not sure what you mean.
1. Replacing a bad system with an equally bad one.
2. Replacing a bad system with a worse one.
3. Replacing a bad system with an initially less bad one.
Whether it “seems” better ought to be irrelevant. If it didn’t “seem” better it would not be proposed. If it is actually worse (e.g. like the drug benefit where the costs skyrocketed after it was passed) that is an argument against it, but it would stand alone.
As far as “investment”, as long as I could go into a short fund (BEARX, RYVNX), or gold or commodities, I could hedge my retirement.
Assumption:
1) In the current market environment, there is a correlation between sophistication and $ invested
2) The pre SS-privitization price of a stock, represents the fair-market value of a stock based on the weighted opinion A[1] of semi-sophisticated investors.
3) Joe-sixpack (the average american) is less sophisticated than the average investor in the current market.
4) Joe-sixpack more likely to invest in consumer-brands and be influenced by advertising rather than the average investor is today.
Theory:
SS privitization will result in joe-sixpack suddenly throwing money into the stock market. This influx of money will create a bubble for heavily advertised consumer brands.
Thoughts?
My thoughts are that insiders are already scooping up “branded” stocks for the big dump-off that will happen once J-6-P starts diverting SS forced savings into the bloated stock market.
Like producers do with a new Broadway show, large market manipulators will gauge the “first day box office take” from privatized SS to use as an estimate for “how long the show will run.” The date they come up with for “peak attendance” will be the date they trigger the crash.
I hope to be off-Broadway at the time watching the grand return of the “Gold and Silver Revue.” Not that I have any money with which I can invest…
First, if people are forced to buy specific stocks then this demand will run up the asking price and not any underlying value so it becomes a true pyramid scheme.
Second, say all workers under age 40 are required to byu into the new system. 25 years later the origional people will start cashing in their shares which will run down the asking price and it is SS all over again unless we have a increasing work force paying in.
Don’t forget that this is a political solution. That means that if anything happens to (gasp!) decrease the balance of funds, the politicians will step in to “help” (regulate) more so that the new pyramid scheme doesn’t “fail due to the excesses of unbridled capitalism”.
Oh, and raise taxes to pay for the new bureaucracy.
Let’s put this in raw libertarian terminology: Forced savings is just more force. No net good can come of it, because it is based on coercion.
“a service charge for coercion”
That is what George Sokolsky called the 10% of the taxes that the Federal Government kept, while remitting 90% back to the states that were compelled to conform to a standard of minimum requirements for administering Social Security set by the Federal Government.
Listen to George Sokolsky argue against the newly enacted Social Security Act from December 19, 1935:
http://www.ssa.gov/history/1935radiodebate.html
download “Remarks By George Sokolsky”
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