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[Gattigap]

Originally posted by SlaveNoMore
No lockbox? How unoriginal.

Fair point. If nothing else, GWB's Soc Sec plan has flair. It's part of the "ownership society," in which you would have the opportunity to lose your social security in the stock market.

From Kinsley:

Social Security. Here, the "ownership society" solution is a simple mathematical fraud. The concept: Government lets you keep some portion of the taxes you now pay into the Social Security trust fund, you invest those dollars and end up with more than you would have in the form of government benefits, and then (the rarely mentioned third step) your Social Security benefits are cut because you're doing so well. Basically, the idea is that profits on private investments will close the gap between projected Social Security revenues and payments.

The problem is this: The money in the Social Security trust fund is invested in government bonds. This money helps to finance the deficit. Every dollar of Social Security tax revenue that gets siphoned away to private retirement accounts would require the government to borrow one more dollar from the private sector in some other way. Of course, the government could also spend less, but (as with tax simplification) it could also just spend less and not bother with Social Security privatization. Privatization by itself doesn't add to the total pool of capital in the economy or reduce the amount claimed by the government.

So where will the extra money for Social Security come from? From greater economic growth? Nothing about Social Security privatization even theoretically increases economic growth. Millions of small investors, many with no experience, are suddenly making decisions previously made by professionals. Will this make the economy more efficient, or less so?

If Social Security privatization won't make the economy any larger, or reduce the amount claimed by the government, how can it produce extra cash to close the Social Security revenue gap? Only by taking money out of the capital pool for private investment. This is what privatization enthusiasts actually assume.

They say that investing Social Security funds in stocks will raise more money because stocks pay a better long-run return than government bonds. If they are right, such a bonanza used for Social Security benefits would mean less money invested in the private economy — and slower growth, a poorer future. Which wouldn't be good.

But they can't be right. Their theory assumes that morons would step in and buy government bonds, even as stocks, with their higher returns, were being snapped up by Social Security recipients. Free market theory (which I thought these folks believed in) says supply and demand would make sure that the returns would soon be about the same. And Social Security would be back where it started.