Tuesday, September 28, 2010

Privatizing Social Security. Borrowing to save

It doesn't really make sense to borrow money from a bank in order to deposit money in a savings account, but this is what Bush's plan for privatizing Social Security would have done.

Glad it's now dead in the water, but other similar ideas are floating about.

Back before the crash of 2008, former President Bush came up with a plan to allow young people to pay slightly lower Social Security taxes in order to divert that money into private savings accounts for supplementing their Social Security when they reach retirement age.

Problem is, with less tax revenue coming in, Social Security would have to borrow money in order to continue paying out the same benefits for older people who are currently retired.

This situation of "borrow to save" would take place during a long period of transition until enough of us, who are currently at, or near, retirement age have died off.

After that, according to the Bush planners, there would be a panacea where private savings could play a larger role in people's retirement again. Kind of like the days before there was Social Security, only this time, it would be kind of a hybrid situation with some Social Security still intact. Bush apologists might call this a more "balanced" approach with private savings and government both playing a role.

Problem is, it's a long transition of robbing Peter to pay Paul until enough of the current generation of older folks dies off.

With smoke and mirrors, it might look like an improvement in America's dismal savings rate, but when money is being borrowed, even if just over a period of 20 years, or so, it cancels out what's being saved.

Increasing America's private savings rate is a good idea, but there are better ways to do this than the "borrow and pretend to save" plan for Social Security.

Why don't people just save more of their own money, aside from Social Security?

Before the crash of 2008, our environment for savings was abysmal. Interest rates from bank savings were (and still are) very low. Who would have wanted to save?

Saving isn't likely in a climate of low interest rates. That's the problem. Maybe interest rates are too low.

How did Americans save back then?

Buying real estate. That was people's "savings." Thus fertile ground for the real estate bubble. People using property as their savings. Low interest rates encourage this. I even remember someone writing a book with the title "Spend Your Way to Wealth."

While I'll admit I haven't read the book, I have heard that one thing it stressed was the wealth-building potential of buying a home. That was, of course before 2008.

Problem with the low interest rate / real estate bubble is the fact that it seemed like buying a home was the only sound investment one could make. No "diversification of portfolio" when everything else is "in the tank," so to speak. With stocks dubious, money in the bank paying practically no interest, starting a business risky; people would say, "lets buy real estate."

The bubble situation also lead to unaffordable housing as prices kept rising. When folks start spending well over 1/3rd of income on rent or mortgage, what's left over for savings?

Now that the bubble has burst, bank savings rates have improved dramatically, but not because interest rates are higher.

Why are savings rates so much better?

It's because people are scared shit less. After the crash of 2008, rainy day funds and things like FDIC look pretty darn good. It's just about protecting the principle now.

To permanently improve savings rates, it looks like we need higher interest rates. Rather than trying a gimmick like privatizing Social Security, higher interest rates could do the trick.

Still, nothing is a panacea, higher interest rates could also threaten to slow the economy. We'd have to learn how to survive and even thrive in a slower economy. We'd have to learn how to distribute the jobs in better ways. Less people unemployed, but also less people working overtime.

A more laid back economy? If one could afford the cost of living, I think most would go for it in a heartbeat.

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