Saturday, November 10, 2007

Social Security "Privatization" Explained

The popular debate over Social Security is a total mess. Republicans throw out various coded talking points about the "Social Security crisis" or the "need to reform" Social Security. But these memes have always felt like linguistic Trojan Horses to me -- the polite words that mask more sinister aims to transfer wealth from the poor to the rich. The stenographers in the traditional media dutifully report these memes without explanation. Which leaves Democrats in the position of either denying "the crisis," opposing "reform" (and heck what kind of crazy person opposes reform) or bizarrely repeating Republican talking points. (Note to Senator Obama -- you are seriously pissing off the entire progressive wing of the Democratic Party.)

So today I started doing homework on Austan Goolsbee, who is Senator Obama's chief economic adviser. I expected to hate the dude (because after all, Obama's talking points on Social Security right now are awful). But I stumbled across this paper by Goolsbee, which, fairly succinctly explains what's behind Republican efforts to privatize Social Security.

Creating individual accounts in the social security system would lead to a massive increase in payments of financial fees to private financial management companies. Under Plan II of the President's Commission to Strengthen Social Security (CSSS), the net present value of such payments would be $940 billion.

These expenses amount to more than 25% of the existing deficit in social security over the same period. Rather than using the money to close the social security gap, the plan would transfer this money to private financial managers and mutual fund companies. If the government were to offset the cost of these fees by raising the retirement age, the age would need to rise by about 6 months – just to cover the administrative costs of the individual accounts, not even the accounts themselves.

The fees would be the largest windfall gain in American financial history. The $940 billion payment to financial companies would be an increase more than 8 times larger than the decrease in revenue from the 2000-2002 collapse of the bubble. The net present value (NPV) of the fees amounts to about one-quarter of the NPV of the revenue of the entire financial sector for the next 75 years.

For a worker at the average income level, the fees in privately managed accounts are likely to reduce the ultimate retirement value of their individual accounts by 20 percent for the intermediate case.

So let me just rephrase what he's saying:

Republicans want to privatize social security because financial services companies will make $940 billion (that billion with a "b") dollars off of it.

Said differently, Social Security privatization is a white collar, inside job bank robbery where financial services firms want to steal $940 billion dollars (or 20% of the value of all retirement funds) from the elderly in our country.

Social Security is not in crisis.

Rather, the only crisis Social Security faces is the threat of a bank robbery by financial services firms aided and abetted by Republicans (and idiot Democrats who didn't get the memo that this is a bank robbery) who want to rob from the elderly and give to the rich.

So then here's my question. Austan Goolsbee makes a fairly powerful case for what's really going on in the social security debate (at least from my initial read). So why are Senator Obama's recent talking points on social security so misguided?

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