@Cycloptichorn,
Cycloptichorn wrote:
Okay, Okie the economist
Tell us: What would be the distorting effect upon the market of creating 200 million individual retirement accounts, all invested in the stock and bond market? Who is going to be paid to manage these accounts? How much are they going to charge? What happens if there is a market crash - does that money just evaporate?
You don't know the answer to any of those questions, but just assume that everything would be fine and that we wouldn't see any negative effects due to this at all. It's a ridiculous position to take.
Social Security has plenty of money. It's not broke. Your line about the 'mattress' betrays a great ignorance of how the SS system works, and also about inflation, I must say.
Cycloptichorn
Well there are probably nearly 200 million IRA accounts out there now, and it hasn't caused Vanguard, Fidelity and others much of a strain. I think the net effect on money markets of the privatization of public pensions would be a reduction in government taxing & borrowing (fewer bond sales) and an increase in money flowing into a mix of equities & bonds via commercial channels. In short, not as much of a net change as you imply.
I do agree with you about the risks and uncertainties associated with market investments, and, as well, about government's potential to cushion these fluctuations, essentially through its sovereign debt & borrowing. However, when government debt gets much larger than GDP, its real potential to soften market fluctuations on public pensions through government debt evaporates fairly quickly - as we are seeing in some European countries. Indeed this is happening here - and that is the essential driver behind the issue we are debating.
If our public debt (including entitlement liabilities) was below (say) 60% of GDP and we didn't have chronic and rising deficits; and our economy was operating at closer to full capacity, then I believe we wouldn't be having this conversation at all. We would then have the ready option to continue public pensions by raising taxes if needed and/or increasing sovereign debt (by issuing more bonds). Unfortunately unemployment is high; we are having difficulty with price competition in international markets; and our sovereign debt burden is already high and growing fast. In these conditions, reliance on the government's presumed ability to cushion market fluctuations, however desirable it may seem, is only an illusion. In effect we will have merely doubled down on an already bad bet and set ourselves up for a catastrophe. These things, once started, unfold quickly - as the citizens of Greece discovered last year. Our situation isn't that dire or urgent, but it is serious enough for us to get past the illusions that have for too long clouded this argument.
The fact that the Social Security account may be OK for the next twenty years or so isn't the key issue. That depends on the governments overall debt from all sources. The catastrophe is all the same from wherever it arises.
