LazaX

Privatization of Social Security, and why not to do it

I have been following discussions about economics and privatization of Social Security. What might be a streight forward economics, it was a revelation to me that Social Security is no better and no worse economically after being privatized. (In short, Arnold Kling explains that obligations would just shift from future's taxpayers to today's retirees). So the reasons for or against privatization cannot be based on economics.

So here are my reasons why NOT to privatize Social Security:

• Corporite Crime: under privatized system a lot of money WILL be stolen by financial institutions in Enron-like machinations (Citigroup, CFSB, Merrill Lynch, Salomon Smith Barney will not pass up this oportunity). Proponents of privatization say that the stock maket will go up at 7% per year, and that the returns invested in stocks will be higher than Social Security payments. Even though the stock maket can go up at 7% per year, financial institution fees will eat up a significant portion of earnings (if any).

• Inflation: if we are hit by a large inflation or devaluation of the dollar currency, than all the investments would be severely affected. On the other hand, Social Security would be adjusted for the inflation, standard of living, and the ability of the government to pay. In this case, Social Security can be viewed as diversification - do not put all the eggs into the same (stock market) basket.

• Forced Savings: Having in mind tendency of the consumers to charge everything on credit cards and get in debt,
  Arnold Kling sumarizes it better than I could:
  

  
  Also, we have very different propensities to save. Given the huge need for savings, what this could lead to is a world where the savers subsidize the spendthrifts. I don't think it's fair that if I consume temperately and save carefully for future contingencies that I should then be viewed as a "soft target" for soak-the-rich tax policies. I want to force other people to save, so that they do not come whining to me (or to the government) when they don't have money to pay their health bills when they get older.