Social Security or Calamity? (Part 2 of 4)

Posted on October 29, 2008 by Lily

It is times like these where the great proverb, knowledge is power, rings truer than ever. Not power over others, rather the power to guide our own destinies. The decisions we make today about where to put our money and who to trust to deliver knowledge to our kids on important subjects like business management classes, science tutoring, language arts classes and learning arts and crafts, depends also on the knowledge we have and share with others.

In Part 1 of “Social Security or Calamity?”, the vulnerability of the Social Security system in America was exposed by its condition of insolvency for future generations, and possibly even the generation of baby boomers preparing to enter retirement today. In this post I will discuss just one of a few solutions to the Social Security crisis. The other solutions and grand conclusion will come in the next two posts.

Privatization

“I don’t understand why the government should tell me how much money I should save for the future, but not tell me how much of my money I can spend for food. And I believe that the current Social Security system is in certain ways fundamentally unjust.” From a 2001 interview with reporter Bill Steigerwald, Milton Friedman expresses his frustration and concern about America’s welfare programs. Friedman gives an anecdote for why he feels that Social Security is not only an economic failure, but also a moral one; “here’s a young man, a man of 35 or 40 who has AIDS and is told that he has got five or 10 years to live at the most. And the government comes along and says, ‘You’ve got to put aside 13 percent or something like that of your income to save for your old age.’ That seems to me to be cruel and unjust.”

Cartoon: Jim Day | Las Vegas Review-Journal

Privatization of Social Security proposes a transition of the current system to Private Retirement Accounts (PRA).  Like an IRA, a PRA allows the individual to make decisions on how to invest their money.  The argument is that payroll taxes should be invested in real financial assets; not government promises to raise future taxes.  The PRA would earn higher interest (8.5%) than non-marketable Treasury securities (2.5%).  Over a 25 year period, a $1,000.00 contribution to the PRA would earn the retiree $6,013.00 more than that same contribution to the pay-as-you-go system.

The major concerns with transitioning to the PRA system are the high cost of starting and managing the new systems (approximately $2 trillion), the windfall profits that Wall Street could earn from managing the investments, the problem of continuing to provide benefits for soon to be and current retirees, and the presupposition that the general public will make the best possible investment decisions for themselves.  Partial privatization is an approach that controls several of these concerns.  Some economists say partial privatization is the only way to phase in complete privatization and save our nation’s retirement system.  Part 3 of this four part post discusses this in more detail.

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  • Admiral Grandissimo Paethus III

    “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” said Greenspan.

    It seems like a bad time to hold up privatization as a solid idea. In general, I don’t believe this can be left ‘up to the individual’ because:

    1. If the ‘individual’ screws up (perhaps because ‘the individual’ is not an MBA or maybe because he/she is), we still end up with an elderly person with real needs. So what is the backup plan?

    2. There is no good evidence that the collective ‘individual’ decisions will amount to a collective good.

    3. The 20th century is not a good indicator for what will happen in the 21st. Market and global trends so far may not be useful predictors due to technological shifts, and a depleting environment. Therefore, there is no guarantee that the stock market will be a profitable investment before the critical date hits us.

    The last point really is a kind of trump card, I don’t see an easy way around the chaos and darkness that will come.

    But on a more positive note, I do think that it is in our hands to make the problem more tractable:

    - Consume less. How do we move a nation(s) to consume less? Enjoy less luxury? And won’t that shrink the overall economy? not necessarily…

    - Rebuild. See that is where people and business should be spending and making money: rebuild housing that maximize energy utilization, minimize footprint, and are better suited for working from home. rebuild cities, so that commute goes down dramatically, so that people are close to food sources. Better education, so that people make better decisions and eat healthier and exercise proactively to reduce medical bills and cancer rates. And on and on.

    - Rethink. We haven’t had a major referendum on what it means to be a human and a human society in a long time. What are we trying to do here? Is there an ‘end-game’? What comes after us? Religion needs to go, because it is not just an opiate, it is more like PCP and it is a real threat to our survival. Artificial intelligence and robots need to become a focus, but not with our current models because it will just add fuel to the fire. Imagine robots with an irrational belief in a god that tells them to turn humans into christmas decorations? oh wait, that is the whole premise of bsg.

    Keep em coming, Salar. This is a great topic, sorry if I went a bit off-it.

  • http://www.teachstreet.com Salar

    Thanks for the comment.

    I appreciate all your feedback and insight.

    I think you will agree more with partial-privatization as a real option to solving this problem. That is the next post in line.

  • Pingback: Social Security or Calamity? (Part 3 of 4) | TeachStreet Blog

  • Tony

    Admiral, great comment. Although I am curious about a couple points you made.

    How are the “Market and Global trends” and “Technological shifts” we are seeing now any different than generations past? While it is obvious that the technologies we are dealing with are much more advanced, is the impact of AI or an organic processor any more impactful on society than the advent of the combustion engine or the first transistor?

    The transistor was arguably one of the most impactful inventions in human history, paving the road for almost every piece of modern equipment in the world today….. and the stock market not only remained a profitable investment through that paradigm shift, but (arguably) exponential value was created due to the added efficiency of this technology.

    Cheers!

  • Admiralissimo Vatos MXXII

    What I meant is that for most of the 20th century we had a relatively stable environment, and what appeared like manageable and almost linear technological change.
    In historical context, the change was not linear at all, but for people living through those decades, advances came gradually enough. For example, the computer took around fifty years to become mainstream.

    Now we see technological revolutions and shifts happening in a decade, half a decade, sometimes in a couple of years.
    Look at a screenshot from Quake 2:
    http://www.xlr8yourmac.com/games/quake2/rage128ss3.JPG

    and one from Crysis:
    http://ve3dmedia.ign.com/ve3d/image/article/745/745255/new-crysis-dx10-screenshot-20061110001326035.jpg

    which represent just ten years of commercial video game graphics improvements.

    The exponential change is hard to notice because actually humans are very good at adapting to new conditions rapidly. Our flexibility and fast learning curve has made us the dominant species. What we lack, unfortunately, is the capacity for anticipating the side effects and consequences of our advancement.

    My prediction is that in years to come:

    1. The environment will throw more chaotic wrenches into our economy and plans. We simply will not be able to undo 100 years of industrial impact fast enough.

    2. Once we start having ‘digital beings’, all bets are off. These will cause global controversy because they will put into question religion, constitutional rights, and even humanity’s place in evolution: are we destined to be the dominant space race? or are the ‘robots’?

    For me the answer is clear: humans cannot and will not evolve fast enough to be a viable space faring organism. The level of technology necessary to maintain humans alive in space and to make nearby planets inhabitable is so much greater than enabling digital beings, which could be solar and nuclear powered, to live long and prosper.

    I know this all must seem far off topic, but I actually believe that within our generation and the next, these issues will come to a head. There will be digital organisms that challenge our notions of human predestination. There will be catastrophic ecological collapse and climate change, which will highlight more than ever how fragile we are.

    Social Security is about planning for the future. But we will not be good planners if we do not account for the exponential trends taking place.