A ponzi scheme is certainly an apt description of what is going on. In addition, note the comingling of funds. This is a common practice used by assorted con artists and embezzlers. If a private pension fund managed money like the feds, they would be thrown in jail.

Privatization is certainly the key. The problem is, both Dems and Repubs are moving in the opposite direction. Cradle to grave bennies is clearly the goal of our federal government. Government monopolies in pension/healthcare/education is the goal and they have been extremely effective in implementing the solution. What happens to this country when the corporate socialist government provides you cradle to grave bennies, the corporate psuedo-capitalists give you your McJob? We'll be a happy bunch of lemmings won't we?

The problem with doing away with social security and privatizing retirement is that we keep learning more and more about the number of thieves to whom we've entrusted our private investment portfolios. This past week it's been mutual funds—the bedrock of the small investor. Show me a squeaky-clean investment community and I'll show you a public with more confidence in privatization.

A continuing laissez faire approach will ensure continuing public skepticism. Despite the polls supporting "the idea" of privatization, social security is still the third rail of politics. Imagine the demagoguing opportunities if Wall Street isn't cleaned up. Reform has to happen everywhere.

There are certainly many things that are correct in what the Missus has to say particularly the notion that the payroll tax funds are being used to mask the deficit. There are number of alarming errors as well. First of all the idea that privatization fixes any of this is fiction at best. The fact is that if the demographic ratio of works to retirees is upside down, as she suggests although I'm not sure about her numbers, then a privet system will have exactly the same problems as SS. The capitol markets will have more sellers then buyers and the price of securities will collapse as the ratio of sellers to buyers.

I have never heard this addressed in any of the "analysis" of the problem. They always refer to the historical returns of the capitol which would irrelevant if the markets suddenly had to absorb an additional half a trillion dollars or so from some kind of privatized scheme. They also assume a static base of workers never once figuring that any deficit of labor in the US not filled by birth rate will be made up by immigration. In addition, there is typically no discussion of the fact that any income received by Boomers cashing in their 401K's will yield taxable income to offset the dire predictions by Chicken Littles like the Missus.

Now having said all of that, and there is much more to be said on the subject, the nit pickers out there can give it a rest because I just threw out a couple of the counter argument, here is the kicker; the reason a privatizing scheme will never see the light of day is because politicians on both sides of the isle like the deficit masking features of the payroll tax. If the problem is that there is no lock box then the first thing that needs to be done is create the lock box, pay all the outstanding IOU's and insist that the "leadership" not spend it. That way we can get a better idea of what the deficit is and make adjustments to spending (or god help us tax increases). Next, we have to look at benefits and retirement age. If people ar living longer then we need to look at it being raised to a life expectancy that mirrors the actuarial parameters of the original programs. Then after all that is done I have no problem looking at a privatization plan. But I'll tell you what, no privatization plan is going to be, your on your own. There are too many interests in the financial world salivating to get their hands on that money. To many special interests who will take full advantage of money = speech fraud in order to make sure that any privatization plan includes the government selection "approved investments". What will end up happening is a privatization plan more socialist then anything a liberal could ever cook up. The government will essentially be the biggest fund manager on the face of the planet.

But all that aside I would love to here how you all think a privatization plan might work.

Ralph and Rick,

The most important thing about SS privatisation is the fact that it will allow the average man to become independently wealthy.

Keep that in mind - independent wealth; money that you owe to no one and you can use any way you want...enough money so that if you do work, its entirely your choice to do so, and you can quit any time you want.

Do you realise the power that this gives to a person?

Now, I'm not talking about vast, Bill Gates style wealth; just a sufficient amount of wealth to pay for a house, car, common expenses and a bit extra for some enjoyment. A fund large enough to, say, provide 30-70k per year, depending on what part of the country you live in. If a person could start to place his SS money into a private 401k at the age of 18, then its very likely that he would have enough wealth by 55 to give work a miss - even earlier if he also contributed beyond the SS money witheld from his paycheck.

You can have the most monstrous control by large corporations and unresponsive bureaucracies imaginable - but if you have enough of your own wealth to not have to participate, then the power of these corporations and bureaucracies is gone.

Rick, while the current Ponzi scheme requires enough workers paying taxes to fully support the current retirees and the bureaucratic system distributing money, a privatized system would only require an rate of increase in investment at least equal to the rate at which retired workers (and others) are withdrawing. While it's true that there is a point at which an out of work population would cause that system to fail, that is well beyond the point of failure of the current bureaucratic system.

Further, a privatized system is to a degree self-correcting in that as the markets fall people will retire later, and new investment will be more effective. This doesn't mean privatization is perfect, the system was nationalized in the first place because the previously purely private solution had broken down, and Social Security was one of several government programs designed to bring the economy back from the disaster. These programs worked by borrowing against the future, which is the only reason they were affordable then. But privatization is inherintly more stable and less prone to corruption than any bureaucratic solution could be.

Even folks back in the '30s recognized that Roosevelt was riding a demographic wave - he built into SS the assumption that there would be more current workers paying in than retired ones collecting benefits. But he also assumed that SS would be SUPPLEMENTARY to a citizen's 'life savings' (which in his day were common because the gummint had barely begun to promise all to everyone, and folks tried to keep something laid by).

The crooks are the various Congresses since FDR (mostly Democratic), to whom it became more and more apparent that the demographic curve was cresting and falling, leaving less active workers to support more retired ones. What did these noble legislatures do? Promise more to everyone, gibber about 'lock boxes' and other obfuscations, and use SS as a semantic third rail to electrocute their political enemies - instead of taking some action to inject the real world into the discussion.

Inasmuch as the entire point of the Social Security program was to deprive ordinary people of direct control of their own savings -- it was regarded by New Deal socialists as one of FDR's masterstrokes, in that it delivered a major blow to independent investment, created a huge new class of government dependents, and funded a significant fraction of the New Deal, yet could be represented as just one more "compassionate social program" -- for any gaggle of politicians anywhere to support privatization would be a miracle of the first order.

Miracles do happen. But you don't bet the rent on them.

My view?

Social Security was a promise. We abrogated that promise by putting its funds into the general fund instead of setting it aside. So now we've spent most of what's there. We're going to have to find a way to pay it back.

We need a system where we wean people off the teat. Yes, it will require taxes to do that. However, the best thing to do is avoid raising the payroll tax. We should simply allow people to put part of the payroll tax into private accounts if they want to, and use the general income tax to make up the difference for current retirees.

This may require an overall increase in taxes. I'm fine with that, if it's done properly. It's back money that we owe, that we've been borrowing for decades. We need to pay it back.

The way the current system is structured, anyone getting Social Security is getting a welfare check. Fix the system, and it goes back to what it was originally intended to be: a genuine retirement pension system.

I see it taking a few decades to transition out of the current system. We'll have to use part of the general revenue fund to make it happen. But it's the right thing to do.

Mark,

Your details free platitudes about the power of personal wealth building your math just doesn't work. You assuming that a post SS privatizing world operates the same way the investment market does now. Just because there has been a historical market return does not in any way, shape, or form, guarantee it will continue to do so. Particularly with a half a trillion dollars being dumped into it, can you spell over valued?

We had the laissez faire utopia you describe and it resulted in an overwhelming majority of seniors living at below the poverty line. If you want to argue that the pendulum has swung too far the other way fine but to make it sound like privatization will work "just like magic" is a crock. But you know what I'm an open minded kind of fellow, give me the plan, spell it out. Tell me exactly how a SS privatization plan might work. You don’t have to come up with a detailed proposal nor even on that will get passed, just give me an outline of how such a plan would work. All of the ones I have seen suffer from false assumptions and overly optimistic projections of economic activity. I challenge any of you to point me to an actual plan with at least a few details of how this would work so I can at least see something more then rhetoric that sounds like Ayn Rand after she sponged one too many off her pals at the bar.

Rick, while the current Ponzi scheme requires enough workers paying taxes to fully support the current retirees and the bureaucratic system distributing money, a privatized system would only require an rate of increase in investment at least equal to the rate at which retired workers (and others) are withdrawing.

This is not correct; it would require a rate of investment sufficient to hold the value of the securities pulse enough to yield a rate of return to make it attractive for investors. If you're telling me that the ratio of workers to retirees will be less then 4 to 1, or whatever the current scare scenario that the privatization cheerleaders are talking about (without ever considering net immigration), then you will have a tough time convincing me that there will be enough income being generated to do that. A full 25% of the population is pulling money out of the market wholesale to live on while the working people are putting a few percentage points 10% in at best. If the retirees are pulling out a quarter to half of their working income that means that the economy will shrink, profits will be lower and returns will be stingy.

Somebody show me the math that makes the privatization idea any less of a Ponzi scheme.

"We had the laissez faire utopia you describe and it resulted in an overwhelming majority of seniors living at below the poverty line. "

We had a Depression that resulted in the overwhelming majority of everyone living at or below the poverty line.

Even before the Depression, everyone lived below today's poverty line. But we were improving our lot across the board, building wealth and technological advancement, and this was proceeding merrily along even in the "bad old days" of the "laissez-faire utopia". There was never any reason to believe that that trend, left unchanged by any progressive policies, would not have left America's present day population at least as wealthy as it is in our history.

"This is not correct; it would require a rate of investment sufficient to hold the value of the securities pulse enough to yield a rate of return to make it attractive for investors. If you're telling me that the ratio of workers to retirees will be less then 4 to 1, or whatever the current scare scenario that the privatization cheerleaders are talking about (without ever considering net immigration), then you will have a tough time convincing me that there will be enough income being generated to do that. A full 25% of the population is pulling money out of the market wholesale to live on while the working people are putting a few percentage points 10% in at best. If the retirees are pulling out a quarter to half of their working income that means that the economy will shrink, profits will be lower and returns will be stingy."

If current prices are depressed by retiree profit taking, that will induce more investment by younger workers, and also induce some older workers to delay their retirement.

Not only that, but investment profits don't represent a straight transfer of wealth the way Social Security does. When you invest, your investment generates a profit by raising overall productivity - when you reap those profits, you're taking a cut of the increased current production that your past investments made possible.

"We need a system where we wean people off the teat. Yes, it will require taxes to do that. However, the best thing to do is avoid raising the payroll tax. We should simply allow people to put part of the payroll tax into private accounts if they want to, and use the general income tax to make up the difference for current retirees."

Or better yet, reduce the payroll tax and leave current workers complete freedom to apply that money as they see fit. If you give the government the right to draw up a list of approved investments for (say) 2% of every worker's income, they've got an enormous carrot and stick to apply to every enterprise that is, or might become, part of that list.

I don't know that it provides a model for the US, but didn't Chile under Pinochet privatize its social insurance a few decades ago? I think they gave one or two cohorts the choice of staying with the government pension agencies or shifting their money to designated private fund managers, and then over the course of a few years completed the transfer.

Let's just hope that if social security "reform" gets rolling, it doesn't end up like Japan's. There used to be National Health and the National Pension and a bunch of other agencies. Now we (full-time workers) have Social Insurance, a mega-bureaucracy that darkens the sun over MHW headquarters. The lead story in this morning's Nikkei was that the government will be increasing our social insurance payments to 20% of income (half from you, half from your company) over the next several years. The government, we were reassured, is also going to kick in more. They'll just fire up the magic money wand, one presumes, rather than raising taxes.

Sean: Yes, Chile privatized its Social Security system a couple of decades ago, and has done fabulously well with it from everything I've read. Yes, some were allowed to stay in the old system, but almost no one took that option.

The Chileans were also creative in that they did require a certain portion of those funds be invested in domestic businesses, but only a portion. The result is that now practically everyone in Chile participates in their economy--and they have managed to become one of the most prosperous countries in the world, with a standard of living unrivaled by anyone in the hemisphere except for the US and Canada.

Ric: I'm particularly partial to the plan outlined here. Yes, it's from those bad old drunken Randites, the Cato people, but the approach looks quite solid to me.

Ken: Once again, any plan to simply abolish the current system is a recipe for political failure. Besides, from a public policy perspective, there's reason to force people to be responsible and save for their old ages--otherwise, they'll just wind up on the welfare dole anyway. I see no problem with making it a requirement that responsible citizens provide for their own retirement, so that they are not as much of a burden on the taxpayer in their dotage. I don't particularly favor letting people do whatever they want with the money, either; a system of regulated, managed private accounts is the best strategy, along the lines of how IRAs work now.

By the way, there's also a pretty good overview of Chile's stunningly successful privatization program here, and it's very worth reading.

What's most impressive is that Chile has gone from a very poor third-world Latin American country to a small economic powerhouse, with a booming middle class, a steadily shrinking poverty rate, and a steadily growing economy, up from almost nothing in only about 30 years. There's little doubt that a huge part of that is the massive expansion of free enterprise that has been stimulated, in large part, by putting retirement funds into the working economy rather than simply transferring money through government redistribution.

Rick,

You're correct that the sudden transferring of half a trillion dollars into the stock market would cause an immense over-valuing of stocks - but no one is contemplating doing that. However we fix the SS system, it will have to be something done incrementally over at least three decades.

My personal little plan for the mechanics of it is to break it down into sections. People at or above age X will continue to pay into SS as they do now and will be assured, come what may, 100% of their projected SS benefits until death. Group two, people between ages W and X will continue to contribute 3/4 of what they do now and will be assured 3/4 of their SS benefits until death; three contributes 1/2 and gets 1/3; four contributes 1/4 and gets nothing (this is the generation which gets it in the shorts a bit; but as my reckoning is that I'll be part of it, its ok - at any rate, under current projections people in my bracket lose at least 1/3 of their benefits a few years after retirement); group five contributes nothing.

For the money which people don't contribute to SS, it still gets with-held and placed into their 401K account; either the one they have via their employer, or their own individual plan if their employer does not provide such. The money must go in - it can't be taken out prior to a set age.

The details are not in this short sketch, because to get the details we'll need a large study of current and projected demographics, projected economic growth and a huge amount of other data to be able to rationally decide what age groups fit into which catagory - and we may find that we instead of five groupings, we need a dozen, or three or who knows until all the facts are ascertained. The main point of this part of it is to end the plan whereby people put money in, and only get out upon mandatory retirement and have no control over where the money goes between the time of contribution and payment.

Now, as to your contention that past performance is no guarantee of future results - correct; but in the past 200 years, the average annual rate of return has been 8%. Sure, there are years when your portfolio loses 20% of its value, but there are also years where it gains 20% - the average is 8%, ad infinitum. You start putting your money into a 401k at 18 and start to take it out at 55 then in the intervening 37 years you will have earned 8%, even if in the 37th year your portfolio dropped 20%. You can still quibble if you want - but in the long run, we're all dead; ie, you can't work your life presuming that the worst will happen...after all, for the private funds to be wiped out it would take a catastrophe of such magnitude that the entire US economy would be wiped out, in which case Uncle Sam isn't going to have any money for you, either.

The economic effect, however, of this money being placed into private accounts would be phenominal. The money you invest does not go into some rich guy's mattress...its used to start new business, develope new products, call whole new industries into existence. In short, the return on investment will make wealth creation grow much faster than it would have had we kept the money into useless government bonds, doled out niggardly to people past age 65.

In the end, you either believe in your nation or you don't - you either think that the sky's the limit, or that we've reached the limits. But even if you think we've reached the limits and only a government-run program can keep us from aged poverty, then I still don't see what your point is? Why live in a world like that?

Mark,

So the 401 k's will have the same restrictions and regulations that are in place now? Think about this hard, the government will now have the power to direct this money into "approved" funds. I thought you all wanted to reduce the power of government not give it a big wet kiss. Groups like the Cato institute have cautioned against privatization that rely on capitol markets plans that this for exactly this reason

You still will have to address the situation with the boomers retiring during this whole transition period. Are we talking tax hikes? Without them you're going to be way short on a number of different scores.

The deficit will go up for no other reason then the true costs will be exposed, the debt service will go up and payroll taxes will be massively reduced. All the while boomers will be pulling money out of the market and fewer workers will be contributing (if your actuaries are correct, if there not then there is no problem to fix.) All and all I'm not say this idea is a bad one, I'm not very confident about the ability of the capitol markets to deliver. The fact is that while markets are not a zero sum game they are also not bandwidth on demand, the government mandating the flow of all of this money into the capitol markets is a distortion of that market. It's actually more socialists then social security. I would be intrusted in seeing this idea being developed a bit more though.

One of the things I have thought about is the creation of quasi-public institutions like credit unions that would provide health insurance and pensions for their members. The government regulates them to a degree, like CU's but they operate on a charter that is solely to leverage the number of their membership to serve that membership. People would have the ability to move between institutions without any penalties after a certain vestment period if so there would be some market dynamic. It would get the government out of both ventures, people would have an advocate looking out for their interests and the vultures would be held at bay to a greater extent.

You have some intresting ideas though.

Rick,

Thanks for the fair comment - and as I said, the details remain to be worked out.

It could require a raise in taxes to provide money for the people who will get SS benefits - no matter how you slice it, it isn't going to be easy. We just can't keep going in the current plan - soon we'll be nearly one worker for each retiree and at that point the current SS plan is unsustainable.

As a bit of explanation; the only mandatory part of it would be the government insisting that the money go into a retirement account - what precise mix of funds a person chooses (I have three different funds in my 401k, for instance) will be a matter of personal choice. I once upon a time considered just allowing people to do completely whatever they want - but this means the improvident wouldn't save at all, and we'd still end up having to support them with our tax dollars when they get old.

Mark: You nailed it on the last point. Anyone who advocates simply doing away with the system, cashing out everyone above a certain age and letting everyone else go on a "do as thou wilt" system is simply not thinking. What this means is that some people will never save for retirement, and will wind up on food stamps and rent subsidies and so on until they die, once they reach the point where they can no longer work.

This will happen, and no amount of wishing for Ayn Rand's paradise will stop that. As harsh as it seems, there is a fundamental need to force people to put aside money for retirement, whether they want to or not--and the uber-libertarians will just have to deal with it.

Rick: I could easily endorse your plan to set up semi-private organizations to do exactly what you just said. I can see several competing groups like TIAA/CREF as being representative of how we do things.

I do think you exaggerate the possible boom/bust of putting such funds into the private market, because if regulated properly, we aren't going to have a situation where people suddenly put a trillion dollars into the stock market and then suddenly try to withdraw it all. If implemented properly, it's going to be a lot more gradualist than that.

Yes, it's going to require nasty old government regulation (insert Darth Vader music here) to make it happen. People who kneejerk-reject government regulation are foolish. We've learned a lot about financial markets and responsible funds management over the last 50-60 years, and there is definitely a need for government oversight and regulation.

However, I will stand very firm in my belief that, whatever system we have, there must be consumer options, and opportunities for competition. If we were to (to pick a ridiculous example) put the TIAA folks entirely in charge of managing everyone's retirement funds, that would be a recipe for disaster. So would putting it all in the hands of a government agency. But if we had a half-dozen (or more!) private outfits competing with each other with government oversight we could do great things--not just for retirees, but also for the economy in general.

Dean,
sure but by the same token the 1 to 1 ration of workers to retirees is just not going to happen, it can't. Growth demands consumers in the full bloom of consumering. If the 1 to 1 ration happens as Mark fears the US economy will be in the toilet. Will anyone address why this demographic shift is a forgone conclusion because 80% of the argument for ditching SS seems to turn on it and I personally think it's a crock. It seems to be based on birthrates and dosen't consider that we can inpoert all the workers we will ever need, unless there is suddenlly a shortage of people wantnig to live in the US that I haven't heard about.

Actually, the best alternative to saving Social Security may be abandoning and Income Tax withholding scheme altogether. Switching to a consumption tax such as the Fair Tax, ending withholding will increase revenues to Social Security, as it will to other entitlement programs leaving them more solvent. Then, we must trust our politicians to not spend all THAT money, too. But then again, that is just how we got to where we are today… trusting politicians with our money.