Ask Auntie Pinko

January 21, 2005
By Auntie Pinko

Dear Auntie Pinko,

Everyone is all abuzz about the possible dismantling of Social Security. I know there are definitely two schools of thought and yes, I’m confused. What is your take on President Bush's proposed plan regarding private investment accounts?

Amy,
Canton, Ohio

Dear Amy,

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 wealthy.

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 nation’s economy.

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.

But…

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. Don’t take Auntie's word for it, do your own research on the Internet. Even if you discount those mushy arguments based on compassion, it’s 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 current system.

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 can’t be lost if any modifications are to be truly functional.

This is probably more answer than you bargained for, Amy, but it’s an immensely complex question - and an important one! Thanks for asking Auntie Pinko!

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