Privatized, Good and Hard
A peculiar and dangerous feature of the Social Security privatization movement is how it proposes to create a new forced saving program to run parallel with the old one, rather than simply trusting people to manage their own money. The privatizers rarely discuss this openly but it's pretty clear why they want to do this: they do not trust the free market to manage people's savings habits. But in Today's WSJ we see a frank discussion of this by Edward Prescott (2004 Nobel Prize). His justification for forced savings seems to assume the existence of a publicly provided safey net. It runs this way:
Why mandatory accounts? Because without mandatory savings accounts we will not solve the time inconsistency problem of people under-saving and becoming a welfare burden.Readers of this page will recall that I have made this proposal in a previous essay, but readers may also recall a letter that questioned an assumption I made about consumer behavior. In effect, the reader asked how, on the one hand, I consider people so irrational that they have to be forced to save, and, on the other hand, I consider people rational enough to manage their own retirement accounts.
But this question reveals a misunderstanding of the time inconsistency problem. The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational -- they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age -- even if they don't save a nickel -- then what is their incentive to save that nickel? Wouldn't it be rational to spend that nickel instead?
So, indeed, people are acting rationally when they choose not to save. We have rational people making choices based on the rules. The trick is to get the rules right. A mandatory retirement system, properly designed, would establish effective rules. I have given additional thought to those rules, and won't take the time here to describe a new program, but suffice to say that such a proposal might involve graduated input to a retirement program that would offer investment choices. The reason for graduated input is because young workers often need their limited resources to "get started" in their adult lives; that is, they may need to make investments in human capital, like education or families, or to finance a home or a car.
Comments (9)
Yet more proof that government intervention begets government intervention begets...
Published: December 29, 2004 2:04 PM
Call me addlepated, but am I the only one who sees a problem with the federal government determining what my investment choices are allowed to be?
Are these choices subject to change every time an administration turns over? Can I invest in China? or gold? When RFK Jr hits the White House, will I be limited to socially conscious funds?
If every there was a recipe for corruption and malinvestment, this has to be it. I mean, does our most recent nobel laureate not see this, or am I missing something here?
Published: December 29, 2004 4:34 PM
Government intervention begets unintended consequences, which begets more intervention and unintended consequences, as this is proof, but I just wonder what the eventual counter intervention will be to investment by gunpoint.
My guess is that if the government is in control of the investment planning of a monumentally larger portion of securities like it would be in one way or another under the forced investment plans, a new level of economic tinkering and fraud will become the rule of the day. This new level of ill effects will then need even more government control to save us from ourselves
Now considering what we have now, coercive savings policies might be one notch less Orwellian than the current Bismarck system we have, but it is still statist nonsense unbefitting a free people.
God help us.
Published: December 30, 2004 12:32 PM
I just read some good comments here about privitization of social security. There is nothing "free" about being forced to give your money to a Wall Street Investment company, and allowing them to charge typical management fees. This is just corporate welfare. And even if we could justify some corporate welfare, Wall Street is not the place to do it. We're already tremendoulsy overinvested. We're at 77% percent industrial capacity utilization at present. Our means of production are already underutilized. Capital is supposed to increase industrial capacity. Why force taxpayers to increase capital to American industry when it can't even use all the industrial capacity it has now? We're already supplying more corporate welfare via 401Ks and IRAs than industry can use. How is more going to help?
Also, where are the $2 trillion dollars in transition fees going to come from? Cutting benefits? Increasing the retirement age? Heaven forbid if they raised the caps. Or eliminated the caps?? That suggestion might be considered TREASON! The overindulged rich would scream bloody murder if that was even mentioned.
Privitization is not about retirement. It's about corporations tapping in to people's retirement funds for an additional source of money. It's about the government forcing taxpayers to take huge risks with their retirement for the benefit of rich investors. Haven't enough people lost their retirement through corporate misconduct? Didn't people lose enough of their retirement when the stockmarket crashed. CEOs and management aren't taking any risk. If the fund goes bad, they just take their multimillion-dollar salaries out and file corporate bankruptcy. And they'll hire an Enron lawyer to defend them against any wrongdoing. And win.
Privitization is not being proposed for the benefit of preserving retirement funds. It's being proposed because it will supply another giveaway program to corporate America. Privitization is not an attempt to fix a problem. As Paul Krugman might say, it's a solution in search of a problem.
If it was really about retirement, how about investing in gold. It would definitely retain some of its value. And would probably increase. It has increased in value 76% during the Bush autocracy. But it wouldn't provide much corporate welfare. Corporations couldn't squander it on salaries and bonuses, and then declare bankruptcy. That's the problem. Because privitization is an investment scam, not a retirement plan.
Mike
http://unlawflcombatnt.blogspot.com/
Published: December 31, 2004 8:19 PM
I have another suggestion about "savings". How about legislation limiting some of the questionable marketing practices of credit card companies and loan companies. How about something relatively benign, like forbidding them to advertise on TV? Or forbidding them to send unsolicited mail to your home? Or forcing them to write disclaimers and other notices that are no longer than 500 words? Then we could legitimately blame consumers for not reading their agreements.
I'm not actually advocating decreased credit card use as a policy. Money spent from borrowing is a major reason why our economy hasn't collapsed. It's kept consumer spending from decreasing, in spite of decreasing consumer income. Our economy desperately needs consumer spending to stay afloat. Reducing borrowing at this point would sink us.
I do think some of the blame for excessive spending and insufficient savings should fall on advertisors. We have a multi-billion dollar advertising industry. People get college degrees in marketing and advertising. They are trained at selling. Their success depends on getting consumers to part with their money. They have been extensively trained at getting consumers to buy things they don't need or can't afford. Can we hold consumers completely responsible for the success of marketers? I think some credit (or blame) should go to marketers themselves, and the corporations that hire them.
I do have a better suggestion to increase savings. Why don't we try to increase take-home pay for the lower 80% of taxpayers. Why don't we roll back the tax cuts to the top 2% and give that money back to the lower 80%. It would increase consumer spending. It would increase demand for goods and services. It would increase the hiring of people to produce those goods and services. It would eventually increase savings some. And guess who else would benefit? Corporate America. They would sell more goods and increase their profits. And those profits would provide them with ample investment capital.
Corporations used to depend on profits from sales for capital. Now they depend on tax cuts, direct government handouts, and taxpayer handouts from 401Ks and IRA. Oh, I almost forgot. Labor cost reductions through hiring of cheap foreign labor, with the government-provided insurance and loans to facilitate the process.
Whatever happened to the good old days real "free enterprise"? The days when free enterprise meant little government assistance? When CEO's only made 40 times the salary of the average worker, instead of 400 times the average. When capitalists took their investment money from their company profits, instead of taxpayer handouts? By successful business operation, instead of successful lobbying for government handouts. We now live in a "welfare" state - a CORPORATE welfare state.
Bush likes to speak of "no child left behind." But he practices "no corporation left behind."
Mike
http://unlawflcombatnt.blogspot.com/
Published: December 31, 2004 9:16 PM
Mike: The view of the cause--more or less a conspiracy to defraud--cannot be proven nor is (in my view) even a likely explanation. On the other hand, the result is inevitably of the very same sort.
In the market, instances of misbehavior or incompetent management affect only some; moreover, those so affected are protected, to some extent, both by the ordinary safeguards of the law (civil and criminal) and by the general desire of most operators to prosper through satisfactory service.
These incentives (and disincentives) are, by and large, absent under bureaucratic management. This separation (and the fact that the contributor is no longer a "consumer" who can award or withhold his custom as he sees fit) not only virtually assures that the system will be run to suit other guidelines than would have been preferred by those various contributors but that a great deal of mulcting will actually be able to be conducted legally through such ordinary means as payroll and expense padding; no one can "pull out" and the disaffected have only the vague and ineffective recourse of political activity to protect their interests (and we all know how effective that method proves).
Even further, when collapse or its immenence becomes more widely evident, politicians of the present blame the situation (quite accurately!) on politicians of the past, demographic irregularities (such as the "baby boom" or rising longevity rates), and on "unexpected" burdens caused by new program entitlements. Then, they establish current reputations by promoting new schemes to do the same thing(s) all over again, secure in the knowledge that, when, eventually, "push comes to shove" again, they'll be comfortably retired or dead when the politicians of the future "face the music," blame it on those of the past, and start the cycle once again.
It's NOT a conspiracy; but it IS an inherent flaw (and not the only one of its kind) in democracy.
Published: January 1, 2005 10:18 AM
Recent wire stories about the wonderful privatized pension system in Chile admit that half the people don't make enough to be a part of the system. They will either work until they die or will be forced to go on welfare when they can't work.
I have never seen it disputed that 25% of the current retired people - people who have lived through the best economic times in the history of the world for working people - are dependant upon SS for 100% of their income and that 33% substantially depend upon SS.
I theorize that these people are the American equivalent of the half of Chilian people who are not on the voluntary pensions system. Personal saving is NOT a matter of tax rate or income but of up bringing, just as tithing to a church is NOT a matter of income or tax rate.
Second, if a person is one of the half of all credit card holders who carries an average $8,000 balance or is one of the third of all new car buyers who owes more on his old car than it is worth, I theorize that this person is to ignorant to manage a retirement account.
I have seen no evidence that the average Libertarian is better at managing money than the average American. If you all get what you wish, the odds are one out of four of you that you will end up on welfare.
Published: January 9, 2005 2:39 PM
I am already that poor, but I refuse to accept government welfare. I choose to go hungry instead, and always manage to scrape together whatever funds I can to make rent every month.
The radical in me has led to such poverty--something about "not playing the game by the established rules" and all that. Nevertheless, all I worry about now is that my decades-old business ideas--dismissed as "idiotic" at first but now being "discovered" for the genius they are--will be credited to someone else who is a johnny-come-lately parasite of my art & innovation.
Published: February 9, 2005 3:19 PM
mandatory? who says it's mandatory. cite references.
Published: April 12, 2005 6:30 PM