Political and miscellaneous commentary by Orat.

Friday, March 11, 2005

Social Security “Privatization”

(Note: It should be pointed out that the remote possibility exists that some in Congress will promote Social Security “Privatization” that actually involves tax-payers being able to freely invest their Social Security money in truly private accounts that they truly own and over which they will have full control. This would undoubtedly be a positive development. However, as stated above, the possibility that such a bill will pass both houses is indeed remote. With that in mind, the following commentary should be taken and understood in the context of the variations of “privatization” that are more likely to emerge. It is these far less “private” variations that are the subject of the following blog.)

An “ownership society”?

    When President Bush tells us that he wants to see an “ownership society”, how can we disagree? After all, doesn’t it make plain horse sense that the nation would be better off if everyone owned their own home, car, property, etc? Don’t people act more responsibly with things they own themselves? Of course! All of this is true.

    But when we hear this term “ownership society” applied to Social Security “Privatization”, what are we really talking about?

    The current fairytales being peddled in conservative circles tell of a fantastic world where each taxpayer will actually own a personal, private investment account in place of the current Social Security arrangement. According to the legend, this private account will be under complete control of the person who owns it, all the money they pay in will go only into their private account, and the federal government will be powerless to deprive them of the earnings or to otherwise interfere with it.

    Such a reform that places this level of independence, self-reliance, freedom, etc, into the hands of the individual is the stuff dreams are made of… literally. Those who actually think this is what is planned are dreaming.

Behind the buzz

    As with most mythology, the myth is much more fantastic than the reality. Social Security “Privatization” is no exception. The reality is that, in the best case, this “Privatization” scheme will mean personal investment accounts that are subject to government regulation, meaning you only get from them what the government says you get with no guarantees that you’ll actually get back even a fraction of what you paid in. After all, if they can pass a law tomorrow lowering your Social Security benefits, they can pass legislation taking back your “personal” investment account so long as Social Security is in their hands. What the government giveth, the government can taketh away. So there is no guarantee that this investment will ultimately make it back into your hands when you retire.* (Remember, this is the best case!) In the worst case, the only major change is one for the worse by putting Social Security revenues into the stock market allegedly to earn a better return for the government on the money, leaving the benefits to be doled out the same as they are at present – that is, at the government’s sole discretion.

    Why would I say that investing the money in the stock market would be a change for the worse? I hear protests saying, “But wouldn’t this mean a huge shot in the arm for the economy by dropping a mountain of capital into productive circulation?” It may mean that, yes. But it means much more. It means that the government would have controlling interests in the economy. Let’s elaborate on this point.

Politicizing the portfolio – the feds set the menu

    First of all, it ought to go without saying that federal bureaucrats, not wanting to be held responsible for massive losses, are going to pass guidelines requiring that Social Security funds only be invested into approved firms. If you thought the government was going to be an “equal opportunity investor”, you’re in for a wake-up call. This means the feds will have to establish a list of approved stocks, and they will likely go as far as micromanaging how much is invested in which companies, all depending on whose version of the measure eventually passes both houses. But in either case, it won’t be up to the tax payer to choose how they want their money invested. In the best case, look for the government to give you a list of investment options you get to choose from. In the worst case, it will be entirely out of your hands, as will be the profits earned from the investments.

    Even assuming the best case, we have a list of government-approved stocks. And don’t you know that every company out there will be fighting their hardest to get a piece of the massive government cash cow being offered? This puts the federal government in the stock market’s driver’s seat as probably the single largest investor in the market. In addition to being in position to greatly steer the market, the federal government could potentially become a majority share holder in many corporations, effectively bringing that corporation under direct control of the government. i.e. Fascism.

From stock market to favor market

    In addition to federal bureaucrats having great influence over the market in general and even possible direct control through majority share holdings, they would also be in position to elicit favors from corporations in exchange for the privilege of having their company added to the list of approved stocks. The prospect of getting millions upon millions of tax-payer money by being added to the approved list would likely drive corporations to do just about anything to be approved. And when something’s in high demand, it asks a high price. Subsequently, look for bureaucrats to ask for some big favors in exchange, some of them under-the-table. If you liked Enron, you ain’t seen nothin’ yet!

    No longer would the stock market trade merely in stocks, it would then trade in government favors and political power. The potential for this to incubate corruption both in big business, as well as in government, is virtually unlimited. The more favors the bureaucrat has to offer, the more “product” he has to “sell” to the highest bidder. The more favors there are for the businessman to “buy”, the more he’ll try to “buy” the bureaucrat. If we want politicians to stop selling out to special interests, then we need to give them nothing to sell. If we want big businesses to stop buying politicians, we need to give them nothing to buy. That which the politician would sell, and that which the businessman would buy is, in a word, power. This is why the limitation of government power and influence must be curtailed.

The “compelling interest” of the “public good”

    Given a few years of this entanglement of the stock market with the government, and the security of Social Security will be seen by many to be imperiled by the regular ups and downs of the stock market. Reactionaries (of which Washington has no shortage) will quickly call for government action at the first sign of a bear market. Now that the government’s Social Security program has a vested interest in the stock market’s performance, many in Congress will argue that the government now has a “compelling interest” in tightly regulating the market in an attempt to avoid losses in the Social Security accounts. Thus we will have welcomed in a giant Trojan Horse -- a Trojan Horse that will bring with it even more government-business entanglement and corruption.

There’s no going back

    After this amount of capital is invested in the stock market, there will likely be no going back. Once invested, any withdrawal of Social Security funds from the market would constitute an unprecedented sell-off and would likely signal a massive depression. So should we change our minds about this all being a good idea, it will be extremely difficult, perhaps even dangerous, to turn back. Any planned withdrawal would have to be conducted with extreme care and would have to be very gradual.

    But even at that, it is unlikely that bureaucrats, after having tasted such power and influence over the nation’s economy, will agree to hand over the reigns. And likewise, the special interests that stand to benefit from having their sweetheart politician in the position to dole out favors and competitive advantages are going to be reluctant support the phasing out of the very program which makes those favors possible. Thus it will be a self-perpetuating behemoth.

Market Nationalization

    Rather than actually privatizing anything, Social Security “privatization” would likely lead to an unprecedented nationalization of our economy. The nation’s economic center of gravity would shift drastically toward Washington and the individual tax payer would have little or nothing more to show for it. In short, Social Security “privatization” would be anything but private.

___________________
* In 1960 the Supreme Court ruled in Flemming v. Nestor that Social Security is a payroll tax, and as such, tax payers are not entitled to any guaranteed benefits.

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