Privatizing Social Security

One of the constant ideas that gets floated by GOP partisans and fans of “the free market” is the privatization of Social Security. The arguments are familiar and well worn. The government should not be in the business of money management, private organizations can get investors a better rate of return, SS money was confiscated from people and they should get it back etc. etc.
I will tell you exactly what will happen if SS is privatized.
People will get those self-directed IRAs (or whatever shiny new name they acquire). They will initially marvel at their stunning rates of return, as all of the fund management companies compete for business and inflate their rates of return to attract the investors, many of whom will not be, shall we say, very sophisticated.. All will look wonderful, as they imagine a very comfortable retirement.
Then a recession will occur. Recessions always occur. They occur because as a species we always over-extend ourselves, especially if we are using somebody else’s money.
Suddenly those previously starry-eyed investors will notice their portfolio value sinking like the proverbial stone. If they are really unlucky they might find that their money management has been entrusted to a graduate of the Enron School of Creative Accounting, or the Bernard Madoff School of Creative Investing.
This will cause, as is written in the Bible, much weeping, wailing and gnashing of teeth.
At this point, politicians will suddenly discover the virtues of government intervention, as the retirement funds are bailed out in some way by government. This is because there are more and more elderly electors out there, and older and retired people have all the time in the world to organize and make politician’s lives miserable.
The net effect will be yet another cycle of that dysfunctional game long played in Western democracies – the privatization of profit and the socialization of losses.
Think of it as another instance of the Savings and Loan fiasco, but with numbers at least 10 times bigger. Whatever the final bill turns out to be, it will be at least an order of magnitude larger than the initial estimate. Bail-outs work like that. As soon as people see the prospect of what they think is “free money” (i.e. somebody else’s money) they become extremely creative at whistling up losses and financial privations.


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