We are getting old. There is simply no way to sugarcoat that. Our country is getting older and the ratio of seniors to workers is increasing. In fact, last year, our childbirth rate edged below replacement level.
I state that at the beginning of the post because that reality seems to escape every pundit who wants to talk about Social Security. They seem to think there is some crazy scheme that will alter the reality that we will have too many seniors drawing on too few workers in our future. No matter how retirement is handled, this is going to have an impact. It’s going to mean slower growth in the stock market, slower growth in investments and less relative revenue for government retirement plans.
This is reality.
We are also not saving enough for retirement. The WaPo claimed that the average 401K had $30,000; Fidelity claims $77,000 on average with $143,000 for over-55’s. That not enough to sustain retirement for almost anyone. Savings rates were approaching zero before the recession and are still in low single digits.
This is also reality.
Bizarrely, the response to this reality and the President’s new offer to use chained CPI to keep Social Security under (some) control is — I shit you not — a proposal to expand Social Security.
The major proposal in the report is to add a brand new benefit to Social Security, called Part B, which would provide a flat $11,699 per year to all retired workers. This would come on top of regular Social Security, which would also be protected from any further cuts [in 401k or defined benefit plans].
The net effect is that the new Social Security program would replace a far bigger chunk of a worker’s lifetime earnings than the current program does
So how much would this cost in taxes? Quite a bit. At the moment, Social Security is expected to experience a funding shortfall by 2033. Congress will need to raise taxes by between 1 and 1.5 percent of GDP just to maintain current benefits. On top of that, the expanded benefits proposed by New America would cost an estimated 3.7 percent of GDP. The net cost: About 5 percent of GDP.
Only an idiot would ignore that Social Security is already running a primary deficit and its “solvency” through 2033 comes from a trust fund that consists of nothing but IOU’s. Only an idiot would ignore the problem that massive retirement guarantees have created in Europe — plunging fertility rates, slow growth, waves of early retirement, even less personal savings. And only the heir to the throne of the kingdom of idiots would propose tripling this problem.
Even if you ignore the political aspects, you’re talking about a massive tax hike which the government will, as it has done with Social Security, loan to itself and spend, leaving us in an even worse situation. Instead of having a Social Security Trust fund with $5 trillion fictitious dollars in it, we’ll have one with $10 trillion. I haven’t seen a proposal this stupid since Algore said he would shore up Social Security with the money we were borrowing from it.
Now this is supposed to be the part of the post where I endorse privatizing social security. And I used to support that idea. However, I’ve moved away from favoring that for several reasons.
First, the projections that privatizing Social Security will lead to better retirement benefits are based on, in my opinion, very optimistic predictions of what the stock market will do for the next century. Yes, the residents of Galveston have done well with a privatized system. The United States is not Galveston. Small programs never scale up like that and the growth rate we would need to sustain Galveston level returns would eclipse anything we have experience in the last five decades. As I said at the beginning, we are getting old. That’s going to slow our growth everywhere. Privatizing might gain you a little bit but it will not magically generate trillions in wealth.
Second, I think privatization misses the point of Social Security. It’s not supposed to be a retirement system; it’s supposed to be a safety net. It’s supposed to make sure that seniors do not end up poor simply because they are too old to work. Indeed, this is one of the reasons I support cutting it back. Private investments can never be safety net. There is intrinsic risk in investment that can never be removed. If even a small fraction of seniors lose money, how long will it take for Congress to make good their losses? Ten seconds? You may remember Congress’s instafold a few years ago when the seniors screamed because they were not getting a cost-of-living increase in Social Security (for the simple reason that the cost of living was not increasing). It will be the bank bailout all over again — private gains and socialized losses.
(And frankly there are a vast number of investment agencies and consultants that prey on seniors and gobble their money in investment fees. I’ve been helping retired relatives fight off these jackals for years. It’s disgraceful.)
But the biggest reason I opposed privatization is that it simply gives too much power to the government. If anyone seriously believes that the government will allow Social Security funds to be invested without putting some controls on them, I have a bridge to sell them. It will be only a matter of time until investments are restricted to “buy American” or companies are debarred from getting Social Security money unless they have enough women on the board.
So I’m moved away from privatization … of Social Security. But I still think that private retirement accounts — IRA’s, 401k’s, 403b’s — are the way we should be going. We simply can not afford a massive guaranteed federal retirement system, even if such a thing were a good idea.
Look, I’m willing to acknowledge the research that 401k’s have not goosed the savings rate as it was hoped they would (although the liberal claim that his costs the government money is ridiculous since 401k’s are taxed when they are cashed out). Maybe we should go with the idea of making them “opt out” instead of “opt in”. Maybe we should make them mandatory for businesses that contract with government. Maybe we have to improve the incentives. I don’t know.
But private retirement accounts are more of answer than further socialization. We are getting old. But we are not the first country to do so. Europe has gotten older faster and their guaranteed retirement systems have been a debacle. Do we really want to imitate their bad example?