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The FREE eBook can be read online at http://www.socialsecuritybullshit.com but the first chapters are reprinted below. 1. Introduction - Family Values and Paris Hilton Economist: This McDonald's sure seems busy for being in the middle of nowhere. Cowboy: President Bush is having a town meeting on Social Security privatization. Supporters and some demonstrators are here. Economist: They handed me some brochures on privatization when I walked in. Unfortunately, it's mostly sound bites and, while not outright lies, bullshit. Cowboy: They handed me some brochures also. Some of it is obviously bullshit, wrapping oneself in the flag, family values and call the other side names, but I can't tell if the economics is bullshit or not. Economist: Look at this nice picture of a happy, smiling family in this privatization brochure - parents, children, and grandma - all happy to have their Social Security privatized. Cowboy: They look like they just received huge checks from their private accounts. Economist: But people investing in private accounts will not receive Social Security checks for decades. Cowboy: In Texas, being so happy about money that one might earn in 2040 is counting your eggs before they hatch, but they are probably just models in the photograph. Economist: If Social Security is privatized, some people will profit immediately. Cowboy: Let me guess, one is Wall Street. Economist: Wall Street will earn money from handling everyone's retirement money. But to be fair, most supporters of privatization, privateers as I like to call them, realize this and include these brokerage costs in their estimates. Cowboy: Who else will immediately profit from privatization? Economist: If people start investing Social Security money in stocks, such as Hilton Hotel stock, what do you think will happen to the price of Hilton Hotel stock? Cowboy: The price of Hilton Hotel stock will rise. Economist: And who owns Hilton Hotel stock? Cowboy: Paris Hilton, the Hilton Family, corporate executives, and other investors. Economist: As the price of stock rises, Paris Hilton and other millionaires will benefit immediately. They should put a picture of Paris Hilton on their privatization brochures. Cowboy: Will Paris Hilton buy our stock back at a higher price in 20 years when we retire? Economist: It's highly unlikely that millionaires will fund Social Security by selling stock low and buying stock high. But it's a rather long and complex question. Cowboy: But if millionaires and Wall Street are going to profit immediately, aren't the rest of us going to have less? Economist: It definitely means less for the rest of us - unless the economic pie grows. But there are also more costs of a privatized Social Security.
2. Free money for families and claim the moral high ground of family values. Economist: This looks interesting for its audacity. This foundation says that it's a 'violation of family values' if you can die at 64 and your family gets nothing from all the Social Security payments you made all your life. Cowboy: Well, if I die at 64, my family gets my land. I would guess that most people would leave their house and other assets to their family if they die at 64. Those without assets or those with young children should buy life insurance. Economist: But wouldn't it be nice if you could give all your Social Security to your family if you died at 64? Cowboy: Yes, it would be nice if my family got an extra few hundred thousand dollars if I died before my 65th birthday. But wait, who is going to pay the extra hundreds of thousands of dollars to my family - the hundred thousand dollars that would go to other beneficiaries? It sounds like the foundation is trying to sell me a free lunch. Aren't conservatives usually against free handouts? Economist: I think the foundation would argue that it's not a government handout, since it would be a return of your Social Security money - but that still leaves less money in the system for others. Economist: If you die at 65, aside from being dead, you are also out of luck in that you paid Social Security all your life. But what if we live to 95? Cowboy: We are here eating lunch at McDonalds so I don't know if we will live to 95, but if we do, we will get years of Social Security checks. Economist: The goal of Social Security is not to provide inheritances to younger generations. Economist: But this added inheritance 'life insurance' plan is not even a good life insurance plan, since a family with a younger father, say 30 years old, needs more to get his children through school, and there is unlikely to be much money saved while working in his twenties. While if a person dies at 64, he has probably already supported his family. Cowboy: Doesn't the private market already sell life insurance? Economist: Yes, the private, free market does have a competitive life insurance market - but that is not stopping privateers from offering free insurance. Economist: Introducing phrases like 'violation of family values' is logical fallacy known as appeals to emotion. Cowboy: Let me get this straight, Wall Street gets money for stock brokering, the Paris Hiltons of the world are going to get money from the increase in stock prices, and the families of everyone who dies before 65 will inherit money. Where is this money going to come from? Economist: It's going to come from the 'magic' of compound interest, and we are all going to get rich in the stock market. (Laughing) But, seriously, I am getting there.
3. Transition Costs - Paying Double Economist: In addition to Paris Hilton, other millionaires, Wall Street, and families that inherit, there are also the transition costs of paying today's retirees, in addition to saving for your own retirement. Cowboy: But here it says that the transition costs are offset but the reduction in future obligations. Economist: Technically it's true that if you and our generation pay double, the government will no longer have to pay the next generation - but you still have to pay double. Doesn't that make you happy, that you can pay double, and the government will thank you for lowering the government's future obligation to retirees in 2150? Cowboy: I don't care that much about retirees in 2150. How can I get out of paying double? Economist: Most privatization plans will borrow trillions for the transition to avoid paying double. Cowboy: But won't I end up paying interest on the money? Economist: Yes, if you don't pay double immediately, you, society can pay the interest and pay it off slowly. Either way, there are transition costs if you switch systems. Economist: But if we continue with a pay-as-you go system, we never have to pay it off completely. In effect, we will continue to owe every 65-year-old. They eventually pass away but are replaced by new retirees. Cowboy: But if we switch to a private system? Economist: If we switch to a private system, we have to pay off all the current people who have contributed to the old system and save for our own retirement. Cowboy: Let me get this right, if we continue with the pay-as-you-go system we never have to pay the transition cost? Economist: In effect we roll over the obligation from one generation to the next.
4. The cost of risk Economist: There is another cost - which could informally be called the cost of risk - which privateers have largely ignored, but the risk is the most vocally expressed complaint about privatization. Cowboy: I don't like risk, but what does risk cost me? Economist: You don't get a bill in the mail for risk, but people are willing to pay to avoid risk. Suppose there were two possible retirement plans: Plan A: $1000 per month guaranteed. Plan B: $800 per month if the stock market is low when you retire (50% of time) or $1200 per month if the stock market is high when you retire (other 50% of time). Cowboy: I would take the guaranteed $1000 per month. Living with $200 less, only $800 per month, would be a lot harder and not compensated by the chance of $200 extra. Economist: The economic reason for taking the less risky option is being 'risk adverse' because of the 'law of decreasing marginal utility of income.' Cowboy: OK, if you say so, but it's been a few years since I was in college. Economist: Suppose I changed the plans to: Plan A: $1000 per month guaranteed. Plan B: $800 per month if the stock market is low when you retire (50% of time) or $1300 per month if the stock market is high when you retire (other 50% of time). which is the same as before except $1,300 per month is the good result. Cowboy: I might take the gamble for $1300, but it would be a close, hard decision. I would definitely take it for $1400. Economist: Lets say it's $1300. You get $800 if the market is low and $1300 if the market is high, an expected value of $1050, but you would be just as happy with $1,000 for sure. Cowboy: They sound the same but someone is paying $50 more. Somebody must be paying $50? Economist: In order to make you as happy as you would be with a sure $1,000, you need an expected risky return of $1050 - which the market would have to pay you just to put you back to your original utility or happiness.
5. African-Americans and the cost of annuities - The insurance company's cut. Cowboy: Here it says that African Americans are cheated by the Social Security. Economist: It's true that African Americans die sooner after retirement and receive less money after retirement than a similar white person who made the same Social Security contributions while working. But African Americans benefit from the slight progressiveness of Social Security and benefit from disability and survivorship benefits. I haven't looked at the studies in detail, but others have argued that African Americans receive a better deal overall. Cowboy: Shouldn't we try to equalize healthcare so African Americans live longer? Economist: Yes, I am not a medical doctor, but there could be genetic differences, which we can't change. For example, women live longer than men. Cowboy: Should African Americans get more every month when they retire because they are likely to die sooner? Economist: Private insurance companies will provide African Americans with larger monthly payments, since on average African Americans will collect fewer payments by dieing faster, which brings up a good point: When people retire at age 65, they have to buy an annuity to receive monthly payments the rest of their lives. Cowboy: Isn't an insurance company going to take its cut? Economist: An insurance company is going to take its cut, and there are expenses in selling the annuities. I have seen figures that it costs private insurance companies 15% to 20%, but with a larger government program - it may be possible to get this down to 12%. Twelve percent is what Cato uses for their estimates. Cowboy: Twelve percent is a huge cut of my retirement! Twelve percent is a huge cut of anyone's retirement! Economist: An insurance or other company selling annuities has to invest in bonds, do the actuary work, and take the risk that people live longer than expected. There are real costs. Economist: This is why white males often earn low returns with Social Security: males don't live as long as females. Cowboy: Aren't private insurance companies going to give less per month to women since women live longer? Economist: In a free market actuarial system, white women will receive less per month. Did you every see the number of women compared to men in a retirement home? Cowboy: I don't see privateers emphasizing that women will receive less in these brochures.
6. What if we don't require people to buy annuities? Economist: If we don't require people to buy annuities when they reach 65 and retire, many people will outlive their savings - and public welfare will end up paying. Cowboy: But what if some people have enough money, say $2,000,000 in the bank and won't be a burden to the rest of us? Economist: A person with $2,000,000 in the bank should not become a burden to us - assuming they don't gamble it away in Vegas or on risky stocks, but there are other reasons for making everyone buy an annuity. Economist: Suppose you were sick when you retire at 65, and the doctor told you five years was the most you had to live. Would you buy an annuity? Cowboy: No, I would live off my savings for five years and leave the rest to my family. Economist: Right, you would do this avoid leaving your money to an insurance company. But if everyone who was likely to die soon did this? Cowboy: Only the very healthy people would buy annuities. Economist: In economics, this is known as 'adverse selection.' Economist: But what if you were sick and the government made you buy an annuity? Cowboy: I would go to the insurance company, bring my medical reports, and say, I am sick and going to die. You will have to pay me less, so I want to pay you less. Economist: Exactly, insurance companies will start screening people and profiling people. Health insurance companies want healthy clients who have lower medical bills. In contrast, annuity companies want unhealthy clients because they can stop making the monthly payments when the client dies. Cowboy: It sounds a bit macabre to me. Economist: We could require a one-rate for everyone, which would eliminate this costly screening and profiling. Cowboy: Isn't that what Social Security already does? Economist: There is also another problem with inheritability and requiring everyone to buy an annuity at 65.
7. Throw Yourself From the Train at 64 and your family can inherit. Read the entire eBook for free today at http://www.socialsecuritybullshit.com
Copyright 2006 by Steve Baba.
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