January 06, 2005

Private Retirement Accounts

The battle over Social Security is well and truly engaged. Democrats have a chance to stand up for something that matters to lots and lots of Americans. As Ron Brownstein reported in the LA Times yesterday, the good news is that the DLC and the Third-Wave, both centrist Democratic organizations, have decided to come out against the President's plan. Josh Marshall rightly says, we should give kudos to these groups because they are key in making Bush rue the day he touched the 3rd rail of politics. 1

So why is it so important to fight Bush on Social Security? As Josh said, Social Security is a program that people like. It is proof that a big government program works for its citizens. And it belies the cold-hearted philosophy expressed by Grover Norquist and other conservatives that government should leave human service programs to the market because the market knows best. Bush and Rove (who really do want to bring back the days of William McKinley) know that if they can pull this off, then they will have destroyed the greatest legacy (and reason-for-being) of the Democratic Party.

Karl Rove's fingerprints are all over this push. As I noted before, Rove believes that the right-wing has such a strong hand that they do not have to compromise at all. They believe that they can frighten Americans into letting them fix the program and tiny details like slashing the benefits won't be a problem at all for Americans. In a leaked memo, Rove's deputy, Peter Wehner, lays out the strategy and reasons quite plainly and says that ...

a battle over Social Security is winnable for the first time in six decades and could transform the political landscape.

..."We have it within our grasp to move away from dependency on government and toward giving greater power and responsibility to individuals," said Wehner, the director of White House Strategic Initiatives. He called the Democratic Party the "party of obstruction and opposition. It is the Party of the Past."

The right-wing has been targetting Social Security for decades and during the past two decades have spent lots of energy telling people that Social Security was going to go broke. In 1995, a famous Frank Luntz poll was taken that said more people believed in UFOs than that Social Security would be there when they retired. (The survey I linked here was in response to Luntz' poll and corrected a number of the misimpressions that Luntz' poll created. Nevertheless, Luntz' results are still widely believed.)

At the same time, the economic philosophy in the United States was becoming increasingly enamored with believing the market could solve public problems better than the government. A number of countries, including Chile and Great Britain, put into place private pension programs based on the theories of Milton Friedman and the free marketeers. And all the while the right-wing think tanks produced study after study that showed that the only way we could "fix" Social Security was by allowing individuals to invest their Social Security funds into the stock market. What many experts promoted were replacing Social Security (a shared insurance program) with individual accounts that would operate like the 401k's which had become the primary mechanism for American workers to build retirement funds.

Many people thought that allowing individuals to invest their own retirement funds in the stock market would solve the demographic problem where fewer workers would be available to "support" the elderly. One such person was Joe Nocera, currently executive editor for Fortune Magazine. In 1994, Nocera wrote A Piece of the Action: How the Middle Class Joined the Moneyed Class where he was quite bullish on the prospect of middle class Americans getting a chance to build wealth by investing their 401k's in the stock market.

Recently Joe Nocera was on NPR reflecting that his optimism was misplaced and that it appears individuals who invest their own 401k's have results that are considerably worse than most pension managers during a bear market. He talked about a report by Watson Wyatt which showed that individuals are worse off than they would be with a defined pension plan. This report also showed that individuals working in small companies with less choices for investing their 401k's had worse results than individuals who worked at larger companies. Nocera says that he believes a big part of the problem is that investing wisely takes a certain "cast of mind and a cast-iron stomach". Most people are too emotional about their money to make wise decisions and furthermore, it takes a lot of time and you have to pay a lot of attention to your investments to do it well.2 Nocera continues to believe that there needs to be fixes for Social Security, but he thinks that the best fix would be to means test benefits in order to preserve the program for the long term.

1Bush deserves to be badly shocked touching this program, especially since just like with the Iraq war, his motives for pushing for this change are so suspect. He and Rove are so arrogant -- they are proposing a "fix" that will badly hurt anyone that relies on their good intentions.

2 As a news junkie, I know that one thing that is frustrating is how few people take the time or have the time to pay attention to the news even to be able to make intelligent voting decisions. And we know that even our elected politicians don't seem to have as good of a grasp of the facts as most of us lowly bloggers. Well, I can say that I feel just as unmotivated at spending time trying to manage my 401k investments. I pick a recommended investment mix (60% stocks, 40% bonds) and then forget about it. I just don't want to spend the time on that activity. And who believes that ordinary Americans would do much better on making wise decisions on their retirement investments than they do with their elected politicians? Privatizing Social Security would mean most Americans would be much worse off than they would be under the current program.

Posted by Mary at January 6, 2005 01:12 AM | Economy | Technorati links |

We have to realize that this is what's known as a "slippery slope" idea. Think about it this way: as wages go up faster than inflation, so does the revenue generated by payroll taxes. Thus today's workers have put more into the social security program than our current seniors, and our children will be putting even more into the program. Yet with the change in benefit formulas, they won't be getting more out of it -- at least not from the non-privatized part of it. Future generations will not be getting the SS program they're paying for, and when they start retiring they'll notice they're getting more from their private accounts than their public accounts even though they put less into them, which will make full privatization seem like a good idea while the government runs off with the SS surplus.

Posted by: Eric L at January 6, 2005 06:41 PM

If conservatives want to take us back to McKinley's time, then they better figure out a way to return a majority of the population to the thousands of small farms which enabled people to live off the land without social programs. Letting the marketplace replace social programs today is simply social Darwinism dressed up in the clothes of severe tax reductions, deregulation, income tax, tort, and social security reform, to mention only a few.

Posted by: Mike Brown at January 7, 2005 12:26 PM