Sunday, January 16, 2005

Looting Social Security: A must-read from Paul Krugman 

Gee, you'd think material like this would be in the New York Times or something. I mean, the news [cough] section. Maybe The World's Greatest Newspaper (not!) could print this up in booklet form and hand it to the [cough] reporters who are [cough, cough] covering the Social Security [cough, hack, COUGH] crisis?

Here's a sampling from The Reality-Based One:

Those who are pushing privatization say that our financial markets are one of our greatest strengths -- that private investment will work better in the long run than government-managed accounts with lower rates of return.

There are two problems with that. First, the fees charged on private accounts will be a significant drain on returns. In a typical portfolio, we're probably looking at a return of four percent. But fees are likely to take at least one percent, like they do in Britain. So now we're down to a return of three percent or less on private accounts. And since Bush wants to borrow $2 trillion to pay for the transition, we're talking about borrowing at interest rates of three percent to establish private accounts that will yield three percent -- with a lot of additional risk. So it's a lose-lose proposition, except for the mutual-fund industry.

The second problem with the market is that some people -- probably many people -- will end up getting much less than they would have under the current system, depending on which funds they pick and how the market does. A lot of people will hit age sixty-five with very little in their private account -- and that means a big return of poverty among the elderly, which is exactly what's happening in Britain right now. As a result, the government will have to step back in and rescue people. We'll have more suffering and bigger bills. People will ask: Where did all that money go? The answer will be: It basically went into mutual-fund fees.

But what if stocks do well? Isn't it possible that privatization would work?

The only possible way that stock returns can be high enough to make privatization work is if the U.S. economy grows at three to four percent a year for the next fifty years. But Social Security's own trustees expect the economy's growth rate to slow to 1.8 percent. If that happens -- if their own assumptions are correct -- then privatization would be a disaster. And if that doesn't happen -- if the economy continues to grow at a steady rate -- then the trust fund is good for the rest of the century, and we don't need privatization.
(via ROlling Stone)

Read the whole thing.

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