Reply #22: The problem in a nutshell [View All]

[quaker bill]

First, the only way to create "private accounts" and continue to pay benefits is to borrow money +/- 2 trillion dollars.

Second, lack of diversification. People who have their own private accounts, (401K's) are already in stocks and bonds. As any prospectus will tell you, such investments have a downside risk. A self-insured annuity such as social security provides diversification to reduce the overall risk in your retirement plan. Bottom line, if the market falls, both your own plan and your social security benefit will fall at the same time.

Third, market manipulation. Under the plan, a fixed amount of the GDP will be invested into the stock market every month, rain or shine. Taken individually this can be called "dollar cost averaging" and can actually have benefits. Done on this scale, it removes an important free market mechanism from stock price dynamics. Currently, if companies are not managed well, or the prices in the market seem inflated, people stop buying. This controls prices and ties market performance, at least occasionally, to price/earnings ratios or generally good corporate governance. under this plan, a substantial chunk of money will be looking for a home in the market every month. It will have to go somewhere regardless of the investment climate. This defeats an important price control mechanism in a free market.

Fourth, Market manipulation. Think the ENRON side of the equation here. A large pile of taxpayers money is looking for a home in the market every month. As a corporate director, why not gin up the books so a good portion of it comes your way?

Fifth, the Gray Whale syndrome. The plans offered limit options for asset reallocation. Why? If for no other reason, the last thing they want is for say 50 million people to be able to pull all of their retirement money out of Walmart shares in a week. This would give far too much power over corporations to the workers. It will never be allowed to happen. Secondly as a Gray Whale is a very large animal that cannot move quickly (reallocation limits) or get out of the water (market) entirely, it is easy to harpoon.

Sixth, winners and losers. The republicans have no problem at all with winners and losers. Some will choose well and in certain environments, benefit from "private accounts". Others will choose poorly and do far worse. The bottom line is that the benefits of social security will become less dependable and some will end up far poorer as a result. In that we generally are not the type of people to let the unfortunate starve in the streets, we will end up financing some other mechanism to care for those who do not do as well. Further, the plan will by its' very nature expand income disparity at retirement. Compound interest is a lovely thing, in the rosy scenario, where everyone does about equally well interest wise, the differential between the size of the contribution based on income scale will be vastly expanded by the final results. In short, the best case is that the rich do far better than the poor simply because they contribute more and earlier.

Finally, the They don't trust you syndrome. Republicans do not trust you with your own money. Anyone can open a stock and bond trading account tomorrow. If the repugs trusted you with your money, they would give it to you, to invest as you choose.

The point of social security is "security". It is a self-funded annuity intended to provide a basic level of security if your other retirement plans do not work out. It will no longer function in this manner under the republican proposal.