Should We Privatize Social Security?

Should Social Security be privatized? It’s a concept that is often popular with Republicans and generally opposed by Democrats. Though I have talked to well intentioned people who firmly believe in the idea, I am troubled by it for several reasons.

The first is the principal encompassed by the phrase “follow the money.” Who stands to benefit most from an idea like this? Though potentially retirees could be better off, the only ones who are sure to benefit are the people who manage the money. Their fees are guaranteed no matter whether the investments go up or down. On top of that, the fees can really eat into returns. Wall Street is itching to get its hands on that money.

The second point is that there is no guarantee. No matter what you think of the paltry amount that social security distributes to retirees every month, at least it is a guaranteed sum. When you look at your retirement earnings projected in your My Social Security account, you can count on what they are telling you. That number is backed by the full faith and credit of the United states Government.

The third point is that there’s no guarantee. Assume that you and your neighbor are the same age and invested in the stocks for 40 years. Now your neighbor decides, for what ever reason that he is going to retire in 2007 and moves all of his money into safe investments. You decided to hang on for a couple of years, but are forced to retire in 2009. At that time the value of your investments is about half of what your neighbor’s was.

Irrespective of how well you have done in absolute terms, he has twice as much retirement cash as you do. Because he got lucky. (I say lucky, because timing the market is a fools errand.) Now imagine that it is not just you and your neighbor, but all of society going through this. You could cut the tension with a knife.

And remember, during all of this the guys managing the money have been making boat loads of cash. They are actually doing better than both of you.

The fourth point is, where did you get your education in money management? The guys who live and breathe this stuff can tell you in great detail where and how you should invest, and what you should invest in. It seems simple, or at least fascinating, to them.

If you have ever worked for a company that has a 401k plan, you are aware of the materials that explain all of the investment options that are available. They actually do a pretty good job of explaining, with four color graphs and charts and everything.

Now be honest, after you look at all of those options and explanations and the graphs and charts and everything, what does it feel like when it comes time to actually make a decision about where your money is going? I’ll tell you, for a lot of people it feels like throwing darts.

Here’s another point on the same vein. It’s the natural tendency of some people to gamble. That tendency is bound to be magnified by two things, one is that the money never hits your pocket and whatever happens is years in the future. For many people this will never seem like real money. The same urge that promotes people to spend significant amounts on lottery tickets and pull tabs will be at work here.

The second time is when a person is approaching retirement and the realities of how well their accounts have done over time set in. If it seems that the payouts will not be satisfactory, there will be a natural tendency to take an all or nothing stance – to take risks with high return investments in order to increase the accounts net worth. In many cases the results will be predictable.

The fact is that many people just are not competent to make even basic decisions regarding investments.

The final point is, it’s not guaranteed.

When Mr. Smith or Miss Jones screws up their retirement savings by doing ill-advised things, it’s pretty easy to not have sympathy for them. In that case it would be much like the guy who inherited a small fortune from a relative and pissed through it in a couple of years. Bad results from bad decisions.

But imagine something happening to a class of investments, or perhaps all investments at the same time. What are you going to do when millions of people are facing their retirement years with nothing? Is society going to let those people live on the streets until they die? Are we going to see charity run soup kitchens serving line around the block of destitute people scraps they can scrounge? Will we tolerate the return of Hoovervilles?

The truth is that there will be winners and losers, some of the winners will do very well and some of the losers will need to be taken care of anyway. Only the funds to take care of those people will not be from dedicated retirement accounts. That money will have to be raised other ways.

It’s the best and worst of both worlds. The people who are fortunate with their retirement investments will do very well. The people who manage the money will do even better. The he average person (that’s you and me) will likely be also-rans. And if we are really unlucky we will be living like folk did before there was Social Security, and by all accounts that was no way to sail off into the sunset.

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