A Wall Street conspiracy to kill Social Security?

March 26, 2010

Finally, a Wall Street conspiracy theory without Goldman Sachs at its heart. This one posits that bond rater Moody’s wants to ding the U.S. credit rating so panicky politicos will privatize Social Security. That would sent big bucks to the firm’s big bank clients. If only it were true.

This bit of speculation comes from Dean Baker, a respected Washington think-tank economist, albeit with a liberal bent. Baker suggests that Moody’s increased debt warning of late “could be a reflection of the Wall Street agenda to cut” America’s social insurance safety net. Shifting government pensions into the private sector could entail billions, if not trillions, of retirement dollars flowing into personal portfolios managed by investment firms.

Like most conspiracy theories, this one reveals more about the storyteller than about reality. Baker, like other left-of-center economists such as New York Times columnist Paul Krugman, think Washington too concerned with deficits given the anemic economy. And they lump President Barack Obama into that camp, too. They fret this New Frugality — somewhat laughable give trillion dollar deficits — will be further fed by Obama’s new deficit commission. And they especially worry the panel will recommend trimming back Social Security to preserve its solvency. Add in displeasure that financial reform isn’t tougher on the major players in the financial meltdown, and a juicy tale of corporate collusion emerges.

A better theory: Raters have been intentionally insouciant so as not to incur the wrath of Congress as it fashions new regulations for the firms. U.S. debt-to-GDP may hit 90 percent by 2020, according to the Congressional Budget Office. The CBO also says that Social Security, which accounts for 16 percent of the government’s $46 trillion in long-term liabilities, will in 2010 for the first time pay out more in benefits it takes in from taxes.  That is six year earlier than predicted. The slow economy is the near-term cause. But the event marks a key milestone in the program’s long descent toward insolvency. Benefit cuts and tax hikes seem inevitable. But those will lower an already paltry rate of return, especially for younger workers.

Letting Americans shift at least some of their government-directed savings into the real economy would generate a bigger nest egg.  This is done in Chile and Sweden, for instance. Yes, stocks are risky. But the market ultimately reflect the real economy. If it booms, so will portfolios. And if doesn’t, Social Security is in even deeper trouble. If there isn’t a conspiracy, someone should hatch one.

33 comments

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“the CBO also says that Social Security, which accounts for 16 percent of the government’s $46 billion in long-term liabilities,”

Don’t you mean 46 trillion in long term liabilities?

That aside, I do agree that something will have to be done with SS. In fact, it should be modeled more along the lines of a 401k. It could be managed, you could borrow against it, change your investment risk preference, and easily monitor its performance. It would give people more control, but unfortunately, most people wouldnt know what to do with more control.

In reality, while it seems like a good idea on paper, and maybe a hybrid system could be created, most Americans are not savvy enough to properly take advantage of it. It also would be vulnerable to market shocks, which while they may be temporary, would send people into a furor. It could also be raided and manipulated by the managers.

No matter what, something must be done. While Krugman constantly calls foul when it comes to deficit reduction, it will have to be done some day, the sooner the better.

Just add it to the list.

Posted by greg | Report as abusive

I heard on CNBC yesterday that a .5% increase in the social security tax would fund the program for the next 75 years

The war against so-called “entitlements” (i.e., social insurance or any kind) is, in fact, a Wall Street developed and led effort.

Greenspan engineered the deal where regressive payroll taxes went up and the surplus was used to mask deficit spending for the past 25 years. It was such a great job that Reagan rewarded him with the chairmanship of the Fed, where he did even more damage.

Pethokoukis cites Chile as a successful example of a privatized pension system. Better do some more research — there are millions that dutifully contributed to private plans that face destitution in old age. This has been widely reported in the MSM.

The opponents of social insurance NEVER address the elephant in the room — the costs of maintaining an empire. If the US would reduce the fully-allocated “defense” spending to the OECD average (x-US), the concern of social insurance would not be an issue.

Posted by Gregg | Report as abusive

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Yeah Gregg, that’s it lets cut defense spending so we can be like Europe unable to defend ourselves or our interests. Needless to say many of your conveniences that make your libtard life more enjoyable came from DOD research like microwaves, cell phones, computers, many trauma surgery techniques, lasers in your CD players, etc and so one. We are not an empire. Empires colonize. America has no colonized any other part of the world. Nice progressive twist on logic and words by calling us an Empire. And also reporting anything from MSM media that is in the tank for progressivism is taken with a grain of salt. And not only that but the spending on Defense is minute compared to the spending on welfare and social programs for people who are too stupid and lazy to fend for themselves. I am sick and tired of paying for losers and a ponzi scheme like SSI.

Posted by deathtoNobleKin&hisCommieIlk | Report as abusive

Social Security funding is in far, far better shape than Wall Street. That alone should tell you something. Question is, will it?

Posted by The Bell | Report as abusive

First, SS is a geneneral revenue tax like any other. The government must return every dollar taken in instantly to the economy, lest the money supply fall. The government cannot save. Future benefits will be paid out of future taxes, end of story. If the demographics don’t balance, raise the retirement age until they do.

Second, the whole nation can’t save, either. You need buyers for all that stock that retirees are selling. If there aren’t enough workers in the future, there won’t be enough buyers for the retirees’ stock, and the return on investment will fall.

That in turn raises the retirement age, just as with Social Security, until the demographics balance.

What SS has as an advantage is that it’s an inflation indexed annuity, insurance against outliving your savings. Inflation isn’t an insurable event in the private market (everybody’s policy blows up at once).

As for better return in the private market, the tax revenue would have to be replaced by something else, so you won’t be better off.

Unless you reduce govt spending, which is the point from the beginning.

“Letting Americans shift at least some of their government-directed savings into the real economy would generate a bigger nest egg.”

Hardly. Without negative investment (ie: shorting), all of this redirected capital would just cause another bubble.

Posted by JHE | Report as abusive

“The opponents of social insurance NEVER address the elephant in the room — the costs of maintaining an empire. If the US would reduce the fully-allocated “defense” spending to the OECD average (x-US), the concern of social insurance would not be an issue”

That’s exactly what France did in the 1930s. That worked out really well for them, didn’t it? I guess that’s why Defense is considered a Core function of our government and giving away welfare checks each month isn’t. BTW, Medicare and Social Security dwarf the Defense budgt.

Posted by JHE | Report as abusive

Who would have thought that an article on a Ponzi scheme would attract so many statist defenders and anti-militarists?

See Greece? That’s the USA in a few years.

Of course, it will be the same ones who argue that we need Social Security so badly that will be doing the rioting when the rest of us are broke and there’s no one else to tax.

The entitlements are a scheme in the order of Bernie Madoff.

Posted by Austrian School | Report as abusive

All that humans need is a roof over their head, food for their belly and a place to dump their waste. Finding a path to all that exists in life will easily flow from their innocence. A little too simplistic; but a starting point. An overly generous Social Security can always be slowly be brought into financial balance. MJA

Posted by Michael Abramovich | Report as abusive

Didn’t Bush propose something like this??
newshound

I am about to retire in the next few years, and I would love to see Social Security die with a stake through its heart for future generations. I do need it because the government has taken my money for a lifetime, but I despise being dependent on the government. I would love to think that my children would be free of this humiliating yoke.

Posted by David Becker, Mich | Report as abusive

Didn’t Bush propose something like this??

Yeah, and didn’t leftists screech about it back then, too?

Posted by Blacque Jacques Shellacque | Report as abusive

>>> Yes, stocks are risky.

Why does everyone assume that if SS were privatized it would all go to the stock market? Ever heard of bonds? Bond funds? Unit investment trusts? Certificates of Deposit? Gold? REITs?

Posted by John | Report as abusive

@Storyburn
Is it tax or tax rate? It makes a big difference.

Changing the rate from 6.2% to 6.7% is an 8% increase in the tax.

If, on the other hand, changing the rate from 6.2% to 6.321% (a .5% increase in the tax) gets us to the year 2085… well, I’d still rather invest a portion of it, but we could talk.

Your comment inspired me to look up the Social Security tax rates. They’re here: http://www.ssa.gov/OACT/ProgData/taxRate s.html

Fun Facts:
-The Social Security tax rate at the beginning 1937 = 1%
-The Social Security tax rate Decreased one time from 1967 (3.9%) to 1968 (3.8%)

Posted by Jason | Report as abusive

It is true that empire has never been an objective of American foreign policy (although it was on William McKinley’s mind). We need strong defense because OTHER nations have empire (or at least caliphates) on THEIR minds!

Posted by sestamibi | Report as abusive

Just saw an article in a Brit rag about the public sector unions not wanting to ante up and reduce some of their benefits. This will be the U.S. in just a few short years with our new health care and social security. I can see some years from now people saying, if only they would have listened to Bush.

Posted by Jim | Report as abusive

Sestamibi you are right. Leftist think because we go to war we are colonizing that nation and sending American’s there to create an empire. What American wants to go colonize Afghanistan, Iraq? If we wanted to be an empire we’d rule half of Europe today, but we didn’t.

Social programs means paying for the ignorant and lazy who are too stupid to survive (so why let them?). Defense protects my liberties and freedoms. Now would you rather pay for people who are lazy and follow Acorn or pay for some F-16′s to protect your family?

I don’t go to work (though I do through forceful coercion by a corrupt gov’t) to pay for welfare people and illegals.

Posted by Progressivism=Slavery | Report as abusive

What’s totally ignored (probably intentionally) is that Congress was allowed to “borrow” billions from Social Security and never paid any of it back. Social Security funding was JUST FINE until we let Congress get away with that scheme. We, the public, let them do it because it meant our taxes wouldn’t have to be raised to fund past budgets. So we’ve made our own problem and we should be paying higher taxes to correct the problem.

Also: what’s said about giving people the option to shift part of their Social Security fund to private accounts would have meant even greater disaster if we’d done that when G.W. Bush was campaigning to privatized Social Security. Bush’s administration and Bush’s Congress let the financial industry perpetrate massive fraud which led to the economic collapse: which would have decimated “private Social Security” funds along with the rest.

Anyone who’s still wasting their time spouting Conservative Nonsense should realize how stupid they look now that the consequences of their beloved “Laissez Faire” have struck America down. Simple minded politics for simple minded people. If Conservatism was for real: we’d have all our problems solved and there would be no other political philosophies. Try a little independent – clear – thinking.

Posted by 4Truth | Report as abusive

Here’s a question one of the Jims or other Palin voters might care to answer:

Why is it that people who work all their lives paying into pension funds with legitimate expectation of their money still being there when they retire are regarded as lazy commies; while obnoxious robber barons living high on the hog, frittering away other people’s fortunes, reneging on the very spirit of capitalism, plundering workers’ retirement funds etc, seriously expect to be heralded as god’s gift to American business instead of facing firing squads?

I mean, fair’s fair.

Posted by The Bell | Report as abusive

They do not have to kill Social Security. All they have to do is limit it to people who actually paid into it and their spouses. Giving Social Security to people who have never paid into it is what’s causing the problems.

Posted by Kristy Howard-Clark | Report as abusive

U.S. citizens already have PRIVATE pension plans; we can contribute to 401K plans, IRAs, both traditional and Roth. SS is a program of SELF-INSURANCE and is entirely self supporting. Workers and their employers contribute equal amounts each pay period.

Social Security is President Roosevelt’s gift to us in 2010 during this Second Depression (it was not created to help him during the First Depression); it’s to provide SECURITY in our old age that might not be there in our PRIVATE plans should a market downturn occur or should citizens fail to put money aside.

Posted by Marge Walsh | Report as abusive

There is no Social Security Trust Fund. There are no SS reserves to invest. And though it was sold as “your money”, it’s NOT there. Most Americans will necessarily see a negative rate-of-return on a debt-free Social Security. When a worker dies at 35, his spouse and children collect SS benefits that far surpass the funds the employee/employer contributed. This is paid for by the workers who contribute their entire working life, retire, and die in short-order after retirement. It was not designed as a sole-source of retirement income for, say, 30 years of retirement. It was meant as an insurance policy to help the destitute. SSI has become the ONLY retirement plan for so many Americans that this trejectory needs to be arrested.

Posted by Social Security INSURANCE | Report as abusive

Saving Social Security is best done by returning it to its roots

Posted by Social Security INSURANCE | Report as abusive

Let’s give social security to the leaches on wall street. They can leverage it, and hedge it, then stick it in a derivative and presto. We are all retiring in cardboard boxes, and living on cat food.

Posted by George Smietana | Report as abusive

Question for Republican economist Pethokoukis:

Who put us on the road to ruin?

Ans: Reagan, who tripled the national debt, whose tax cuts never paid for themselves as advertised.

Bush I had only 4 years, so the best he could do was increase the national debt by 50%. Bush II, having a full 8 years, doubled it – and this during a time hailed by Conservative economists such as Grover Norquist and Larry Kudlow as a time of unmatched prosperity and “the Goldilocks economy.” During times of prosperity, individuals and countries are supposed to save, to be able to spend more than what comes in during difficult times. But instead, we had an administration that actually believed and stated “deficits don’t matter.” So Republicans believe deficits don’t matter – unless we have a Democratic President, coming into the mess his predecessor left.

The failed Republican policies of the last 30 years, tax cuts for the rich and deregulation, interrupted only by the 8 Clinton years, which left us with a project $2Trillion surplus, have brought to the brink. Bush cut funding to the SEC, sharply reducing the amount of money spent on enforcement, together with Greenspan’s interest rate bubble, took us to brink of Great Depression II. The economy lost 750,000 jobs in January 2009, and the Dow was closing in on its low of 6600 (made within 6 weeks of inauguration). Since then it has risen almost 70%. As Stephen Colbert would say, “the market has spoken” on the effectiveness of Obama’s economic policies.

Just as Republicans still curse FDR (whose FDIC was the only thing standing between us and a run on every bank in the country in the fall of 2008), now they blame Obama for the mess Bush and his two Republican predessors made of the national debt.

Republicans are consistent about one thing only – their hypocrisy.

And these are the people (including Jeopardy champion Pethokukis, a regular guest on the Kudlow Report) we should look to for advice? I used to listen to the Kudlow Report regularly on XM during my long commute in 2007, and I NEVER remember Pethokukis disagreeing with Kudlow about the “goldilocks economy,” just months before the world began to fall apart.

Marge Walsh wrote:

“There is no Social Security Trust Fund. There are no SS reserves to invest. And though it was sold as “your money”, it’s NOT there.”

More Tea Party drivel. It IS there, in the form of Special Treasury Securities, backed by the full faith and credit of the U.S. government. The only thing that makes them “Special” is that they are not traded on exchanges. Moreoever, if nothing is done, when the Trust Fund is exhausted in about 30 years, current Social Security receipts will equal about 76% of projected expenditures. So the worst case of a 24% haircut in SS benefits 30 years from now, while unpleasant, is hardly Armageddon.

Past SS surpluses had to be invested in SOMETHING. What did you expect, they would be placed under the world’s biggest mattress? And what would you suggest as a SAFER investment than U.S. Treasury securities?

Do you believe U.S. Treasury Securities are worthless? If so, better stock up on gold and ammo.

Also: what’s said about giving people the option to shift part of their Social Security fund to private accounts would have meant even greater disaster if we’d done that when G.W. Bush was campaigning to privatized Social Security. Bush’s administration and Bush’s Congress let the financial industry perpetrate massive fraud which led to the economic collapse: which would have decimated “private Social Security” funds along with the rest.

Anyone who’s still wasting their time spouting Conservative Nonsense should realize how stupid they look now that the consequences of their beloved “Laissez Faire” have struck America down. Simple minded politics for simple minded people. If Conservatism was for real: we’d have all our problems solved and there would be no other political philosophies. Try a little independent – clear – thinking.
- Posted by 4Truth ********

I would agree…”4truth” because in this article, you exercised No independent thinking.
First off…to answer your issues raised…..Congress (both repubs and democrats) voted to repeal the glass/steagle act, widely viewed as the reason for this mess and former President Bill Clinton signed the documents to repeal this law.

Former President G.W. Bush’s move to privatize SS would have resulted in moving a portion of retirees monies into Bond funds, and Bond programs, In effect the safest monetary investment you can make with a solid yield over time. This would have also allowed for the ‘transfer of wealth’ in so that when a person dies, they can/and should “will” the remainder of their monies to their family instead of allowing the US govt to keep it.

4truth, you spout a lot of jargon, “bush this and bush that” but you are VERY limited on the actual facts of the matter….but then again, i notice that more and more with liberals.

hey hmimperson, way to add 2+2 and get 7.

why is it…..the liberals refuse the facts?

hmimperson states that republicans are responsible for the massive debt we have now…..yet he makes NO mention of Obama spending more than the last 3 presidents COMBINED in 1 year?
That budget surplus you mention??? That was from a republican congress and a roth ira that had just been activated, increasing one time tax receipts for the govt.
In fact, that 2tril you quote is not even close to accurate. Try Factcheck.org.
And do check your civics books and govt books from high school. the president doesnt set the spending, congress does. the president can only veto spending bills.
but this president has no issue with spending.
if only he would spend it to get us out of the recession we are in, and the democrats share more than half the blame for.
please note…that almost unanimous voting for repeal of glass steagle came from congress and president clinton signed the repeal.
again….liberals should study the facts more, and learn about the issues before spouting off. it just makes them look ignorant.

The undoing of Glass-Steagall itself reads like a giant conspiracy.

http://www.pbs.org/wgbh/pages/frontline/ shows/wallstreet/weill/demise.html

(blunter versions available elsewhere online, e.g. counterpunch.org)

Its repeal sure as hell didn’t happen by accident. And everything since then has been one gigantic hit-and-run pile-up. If Congress hadn’t been so busy minutely surveying Monica Lewinsky’s oral skills, all of Social Security might have been swallowed by Wall dot Street in the late nineties.

Your 401k in the hands of banking NGOs that own both sides of Congress is now worth less per hundred Y2k dollars invested than comparable items at any nearby 99¢ store.

Want the same thing to happen to Social Security? If so, keep on backing the same lame bipartisan TBTF horse thieves, Goldman, Citi et al.

If not, bring back Glass-Steagall and interrogate under oath all those who engineered its (hopefully temporary) demise.

Posted by The Bell | Report as abusive

clinton surplus – thought congress developed the budget in with the President and approved by the senate. So it is the clinton/newt surplus, is it not?

Posted by dwall | Report as abusive

“are asleep? Oh!” fiddle with the fire of the stick in the hands fling, maple carefully approached the night huddled under the full moon mulberries and Los dance.