Democrat Party economist Robert Rubin re-opens Social Security privatization debate with proposal for "individual accounts"
Jeebus, Bob, couldn't you have waited 'til Wednesday?
You know when an Op-Ed starts out by inveighing against "polarizing dichotomies", the big wienie's gonna come. Here it is:
In addition to restoring a sound fiscal regime, we could improve our personal savings rate and expand retirement security by establishing some kind of individualized account separate from Social Security, financed by an appropriate revenue measure.
But why touch Social Security at all? From a public policy perspective, there's no need to. As the late, great Molly Ivins -- who has a hell of a lot more credibility these days than a Goldman Sachs alum like Rubin could have -- opined:
Q: Can we at least agree that we have a problem? A: No.
The argument in favor of "no" has two parts. One involves the incredible shrinking doom date. As Kevin Drum [Hi, Kevin!] of Washington Monthly points out, the Social Security trustees, always operating on a properly gloomy forecast, have been predicting disaster for the system for years, but the projected point at which it will go bust keeps moving.
In 1994, the system was supposed to go bust in 2029, a mere 35 years from the date of prediction. Now, it's supposed to go bust in 2042, 38 years down the road.
According to the Congressional Budget Office, using a more realistic model, the trust fund will run out in 2052, and even then it will cover 81 percent of the promised benefits. To fully fund this shortfall would require additional revenue of 0.54 percent of GDP, less than we are currently spending in Iraq. Or, as Paul Krugman noted in The New York Times, about one quarter of the revenue lost each year by President Bush's tax cuts, "roughly equal to the fraction of those cuts that goes to people with incomes of $500,000 a year."
What problem is Rubin solving here, exactly?
Every child among us knows that "individualized account" is focus-grouped code for the Village's dream of gutting Social Security and latching onto a new revenue stream from the commissions on the individual accounts. And gawd knows Wall Street needs a new revenue stream.
How, at this point is anything private going to provide more "security" than Social Security? It won't.
And the dog that didn't bark in the Op-Ed?
So, as usual with finance guys like Paulson, Rubin, et al, it's all about the fees. Not us.
Oh, and the last paragraph is priceless:
We have no choice but to move beyond such false dichotomies and toward a balanced pragmatism whose goal is broadly shared prosperity and increased economic security.
See? No shock at all. You won't feel a thing. It's balanced pragmatism. With a big fat infestment banker's thumb right on the scales.
NOTE Rubin's sketchy scheme is not a carve out or a clawback, where Social Security revenues are diverted to individual accounts; that's why he says "appropriate revenue measures. Rather, like Medicare Part D, it's a private system in parallel to a public one. That undermines the social contract behind the system:
inally, let's remember the central idea behind the Social Security system: to provide social insurance. Both words matter. High-wage earners like me would undoubtedly be better off under the Bush proposal, and even better off under full privatization. After all, universal social insurance forces us to remain in the same pool with, and partially subsidize, those who are less fortunate. Social Security's benefit formula offers a better rate of return to lower-wage individuals.
From a self-interested point of view, that's a bad deal for us high-income people. Were Vanguard or Fidelity to offer me a mutual fund like that, I wouldn't buy any. But people like me cannot opt out of Social Security, and frankly, I don't want to. Universal social insurance is one of those precious ties that bind our society together. Privatization, whether partial or total, would weaken that tie.
A Letter to the Editor amplifies Blinder's point:
I am pleased that Alan S. Blinder calls our attention to the ''social'' aspect of Social Security (Op-Ed, May 26).
The rate of return on our investment in the system is not the proper way to evaluate it. The success of the program, after all, is in its universality and the societal ties between the young and the old, and the rich and the poor, that it embodies. An important part of our ''investment'' in Social Security is our investment in these ties.
Suppose we set up two systems, as Rubin suggests: The social system we have now, and an "individualized", privatized one beside it. Can anyone believe that a percentage of the fees that the brokers take for handling the privatized accounts won't be used to lobby to make the public system weaker, and the private system stronger? Welcome to the machine.
And here's Krugman on how those fees would work:
The plan of Kotlikoff and Burns for personal accounts is useful as an example of what would be necessary to keep fees minimal: it calls for a system in which workers have no control at all over how their personal accounts are invested. Instead, all accounts would be placed in a global index fund administered by the government: "a single computer, situated in the Social Security Administration, would be programmed to buy and sell securities." In essence, the government, not individuals, would be doing the investing, and the personal accounts would simply be an accounting device. The administrative costs of running this system would be very low.
* * *
But it's very unlikely, if Social Security is privatized, that the system will look like that. For one thing, the advertising for privatization stresses "choice." In fact, in 2002 the Cato Institute quietly renamed its Project on Social Security Privatization the Project on Social Security Choice (focus groups said that "privatization" had negative connotations). It's hard to see how to reconcile that advertising with a system in which a computer programmed by bureaucrats does all the choosing. Also, as a matter of political reality, the investment management industry isn't going to accept the idea that a huge pool of money and potential profits is off-limits. Investment companies gave lavishly to the inaugural celebrations, and are major contributors to the lobbying organizations that have been set up to push privatization. They aren't spending that money simply because they think privatization is in the public interest.
Suppose that we end up with a system like that of Britain or Chile, in which mutual funds compete to attract private accounts. In that case, there's every reason to believe that fees will take a large bite. In 2003, the average "expense ratio" on US stock funds-- the ratio of all the various fees charged by management to the amount invested --was 1.5 percent. In Britain, providers' charges used to take more than 2 percent off the return of the average retirement account; new regulations have reduced that, but only to about 1.1 percent. Put fees of that magnitude plus a realistic rate of return on stocks into a typical numerical model of privatization, like the one in the CBO report on plan 2, and privatization quickly turns into a sure-fire losing proposition: the government borrows to establish private accounts that if anything yield an expected rate of return lower than the rate the government pays on its bonds; yet those accounts introduce a major new element of risk.
Just what we want! More risk.
UPDATE The increasingly valuable James Galbraith called his shot on this one back in 2006. In The Guardian, of course:
Rubin is the leading light of an initiative called The Hamilton Project ...
Deficit-fetishism also underscores and bolsters a longstanding insider campaign to cut and partially privatize the Social Security System. The Hamilton Project strategy document doesn't mention Social Security by name. But it is riddled with codewords about the "long-term entitlement problem" which, it avers, can only be solved by a "bipartisan commission" acting on well-known options, behind closed doors.
The Hamilton Project's promise to deal with these issues by "bi-partisan consensus" behind closed doors is a promise to exclude the voices of labour, the elderly, the poor, and loudmouths like me. I will resist. The correct policy toward Social Security is, and remains, what the late Robert Eisner always recommended: leave it alone.
There you go. Unity has to be good for something.
UPDATE Re-reading the Op-Ed, it's an oh-so-reasonable attempt to prevent the Overton Window from moving more than a fraction of an inch left. What they're offering is the anodyne of fiscal stimulus and public works (as opposed to military) Keynesianism. And no doubt opening the door to privatizing Social Security will be presented as some sort of "compromise" to get what any sane ruling class would recognize as a simple baseline. The giveaway is that Rubin advocates returning top rates on the income tax to what they were under the C.. . Cl... Clin.... Clinton administration -- where top rates ought to be returned to where they were in the Eisenhower administration, and single payer bootstrapped with them. (I say bootstrapped because single payer pays for itself in efficiencies. No fees.)
UPDATE Called my shot:
1. Social Security. Explicitly take privatization off the table. The “retirement security” language on your site gives me the creeps, because it sounds like creeping privatization, which I am sure that at least some of your advisors advocate.
And Hipparchia calls hers:
we’re all going to be propping up the stock market — playground of the wealthy — with our measly mite, unless we actively opt out. this from a man who opposes individual mandates on health insurance.