Ask Auntie Pinko
January 21, 2005
By Auntie Pinko
Everyone is all abuzz about the possible dismantling of Social
Security. I know there are definitely two schools of thought and
yes, Iím confused. What is your take on President Bush's proposed
plan regarding private investment accounts?
Like so many of the questions asked by my curious, intelligent
readers, this one required Auntie to spend some time doing a little
research, as I am emphatically not an authority on Social
Security, or economics. The conclusion this helped me draw is that
you're underestimating by a large factor when you limit the number
of "schools of thought" to only two. The number appeared
to Auntie to be more like a dozen, each with a host of bewildering
and generally arcane evidence to bolster its position.
Since I lack the specialized knowledge to rigorously assess the
many formulae and charts and equations that make up the various
primary hypotheses, I had to fall back on two things: the character
and credibility of those advancing each argument, and my own experience,
common sense, and self-interest.
Like any good sleuth, I began with that most sleuth-like of questions:
Cui bono? That is, who benefits (and how much) from the particular
course of action being recommended by each? Since Social Security
has been a political football for more than thirty years, now, it's
virtually impossible to detach any specific argument from the political
self-interests of officials seeking election or re-election. So
I set those considerations aside, and examined other possible interests.
As with the likely motives in a good whodunit, the one that sticks
out furthest is MONEY. Lots and lots and lots of money. There
is a flabbergastingly huge pile of money involved in securing the
future of Americans as they age, and wherever there is money, there
will gather financial vultures: Con men, scam artists, quick-buck
schemers, and financial manipulators, legal, shady, and downright
illegal, of all degrees from small-time spammers to global corporations.
I looked at the present Social Security system: Who is getting
rich off of the current system? Well, it's making a very nice living
for a vast legion of bureaucrats, but few of them are actually waxing
wealthy on the proceeds. Certainly those who purvey consumer
goods and services to older Americans benefit from the fact that
almost all older Americans (or their caretakers) have at least some
discretionary cash flow. Doubtless there are a host of small-time
insurance and health-care fraudsters, Ponzi schemers, and other
pond scum preying on the elderly for the same reason.
In other words, while there are those who benefit from the current
system, it isn't set up to make any one group of people reliably
The same thing cannot be said, however, for a system based primarily
on private investment accounts. It doesn't take a genius to see
who has a strongly-vested incentive to make this change, based on
the very real prospect of exploiting an opportunity to accrue really
big bucks - and it isn't the retirees. Look around the downtown
of any city of any size. Where are the most lavishly opulent offices?
Which buildings and businesses have the largest numbers of sleekly-tailored,
Rolex-wearing, Italian leather briefcase-toting individuals descending
from luxury cars to carry out their daily work activities?
If you answered, "banks, brokerages, investment counselors,
and finance lawyers," congratulations, you came to the same
conclusion I reached.
Now, just because switching to a system of private investment
accounts will slowly redirect the management rakeoff from America's
retirement funds from a legion of publicly-employed bureaucrats
to a comparatively small contingent of private entrepreneurs doesn't
automatically disqualify it from being a possible solution to the
problem of keeping the elderly population from becoming a social
and economic disaster that could potentially devastate our nationís
After all, it's possible that this change could reduce
the total size of that management rakeoff, by putting it in the
"more efficient" private sector to manage, thus leaving
more money in the kitty to invest. Bureaucracies, after all, are
pretty inefficient - slow, unresponsive, and often requiring two
or three people to do the work that could be accomplished by one
highly-motivated person in the private sector. Sometimes, too, they
get careless and lose things, let opportunities slip, enable petty
fraud, and so on.
This is counterbalanced, though, by two things: First, by employing
so many people at middle-class salaries and wages, they distribute
the management expenses very broadly and efficiently back into the
private sector economy. Second, aside from personnel costs, their
overhead is comparatively low: advertising and promotion costs are
minimal, square footage costs are comparatively modest, and executive
compensation and benefits never come close to the levels routinely
found in the private sector.
Still, if we assume that the private investment account managers
are all of them competent, highly motivated, efficient, and, above
all, scrupulously honest, even the additional non-personnel overheads
might not inflate the management costs much beyond what we see now.
What happens the first time some inept or dishonest fund manager
blows a couple hundred million from the private investment accounts
in some highly-publicized mishap? Would you care to give odds, Amy,
on the cost of the additional public bureaucracy that will be required
to watchdog the private investment management industry? And the
costs to our already overworked legislative system to examine and
regulate the industry, and then to constantly re-examine, de-regulate,
re-re-examine, and re-regulate it in yet another endless and bitter
adversarial cycle? It makes Auntie tired just to think of it.
However, none of these reflections addresses the core issue of
whether or not the current system can be made to function sufficiently
well to accomplish its intended purpose, or whether it should be
either supplemented or replaced by other systems. Or even whether
its purpose should remain on our public agenda at all. Let's get
back to that.
Let's start with the basic function and value of a publicly-assured
retirement income system. If you examine the poverty rates among
the elderly prior to the institution of Social Security (and that
was in an era when private thrift was much higher than today, and
the values of financial independence and self-reliance were broadly
and deeply engrained) and compare it with the current rate, it's
clear that the system does accomplish that result. But how important
is that result?
Aside from the "mother-in-law insurance" issue (if grandma
has enough to live on, she won't have to move in with you) the societal
cost of large numbers of elderly poor will be staggering. Donít
take Auntie's word for it, do your own research on the Internet.
Even if you discount those mushy arguments based on compassion,
itís not something we want to see. It will quickly rival and possibly
even exceed the costs of the current system - and it will fall (at
least initially) on a much smaller population proportion of adults
in their peak earning years - who are also facing the social costs
of raising and educating children and keeping them healthy at the
same time. Ouch.
So yes, in Auntie's opinion, we need a publicly-assured retirement
income system. But I'm also aware of the many flaws and problems
of the current system. I have no magic bullets. The answer that
appeals to my common sense involves two things: compromise, and
flexibility. Compromise, in that everyone will have to make some
sacrifices. This may mean balancing a higher payroll tax ceiling
with a change in benefit-eligibility age to sixty-seven or sixty-eight.
I don't think that's unreasonable, given the increase in life expectancy
and vigor among older Americans since the initial rollout of the
It might mean creating a supplemental system that will make private
retirement investment easier for everyone, and offer additional
incentives for both employers and employees to participate. Currently,
many of us are quite bewildered by the acronym soup of IRAs, SEPs,
Keoughs, etc., and the many layers of rules and requirements attached
thereto. Simplifying that system and making it more accessible might
enable scaling Social Security benefit levels to means and asset
requirements, too, if it is done right. Flexibility, combined with
simplicity, is the key. Simplicity is the great advantage of the
current system, an advantage which canít be lost if any modifications
are to be truly functional.
This is probably more answer than you bargained for, Amy, but
itís an immensely complex question - and an important one! Thanks
for asking Auntie Pinko!
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