Social Security Reform

One topic which is opined and bloviated about currently is Social Security Reform. President George W. Bush wants to enable private accounts where an individual's payments into the Social Security System are collected into a private account pending his retirement.

It sounds almost like a good idea. An investment account held by the Federal Government rather than a brokerage house. It is too bad the idea won't work - and it makes me wonder if the whole point isn't to force the system to fail.

Payroll taxes are not an investment. In other words, the system is very low risk and essentially no return. The social Security Administration keeps track of who pays what amounts into the system, and who gets what amount of benefits. The average worker will pay in about what a 20 year long retirement will pay back (in constant dollars). Many payees don't make it into retirement, much less enjoy a 20 year long one - so a large portion of the participants get less in total benefits than they paid into the system.

As is rehashed in seemingly every story on he subject, Social Security is a pay-as-you-go system. Today's workers pay into the system money that is used to pay out benefits to today's' retirees. Until the "reform" of nearly 20 years ago, it was a system in balance - payments into the system, less operating costs, equaled payments out.

Proponents of Private Investment Accounts claim the stock market has a history of increasing value over the long term. They further promise that if each worker had a private account in the stock market, everyone would earn a little extra money for their retirement. This is the big lie.

The first question, which most opposing pundits ask, is how do we pay the transition cost from our pay-as-you-go system to an investment account system. The answer to this question is as obvious as it is politically unpalatable - the only choices are debt or reduced benefits or a combination. It seems like the Bush Administration will choose debt as their answer - which in the long run will more than wipe out any gains made by the investments. So we can leave this question and move on.

As you may have guessed and definitely should know, investments carry associated risk. When risk is present, some portion of the people involved will lose money. In the Private Accounts scenario, these people will simply be left with less than their starting amount (contributions). A simple bell curve will show that probably 60% of the participants will be in this "loser" pool. And, worse, after you take inflation and broker's fees into account the number will rise to 75% or so.

To me, this question is much larger and much more important than the former question. When we as a nation figure out that only a few are getting served as promised, what will we do?