Michael: Why Private Social Security Accounts?For the many of us who were not invited to discuss matters of state with the President on Monday, it is enough to know that you didn’t miss anything new. The President was relentless on the message of privatizing Social Security, pausing only to wax hypocritical about the Schiavo case.
Now, the President had already admitted that the plan to privatize SS does not address the fiscal problems the program could face 13-15 years from now. He has admitted that the likely hasn’t the congressional support needed to pass the reform. And despite GOP polling indicating that people are seeing the issue as more important relative to other subjects than they did 6 months ago, most people still prefer small and incremental changes, not radical solutions such as private accounts... oops, sorry, 'personal' accounts. So why does George keep pushing this dead horse around America like it was a prize stud?
Why does the GOP want the particular reform it calls for, and why now? The first is easy, because we are essentially a one party state at the moment. If they are ever getting away with any major change to Social Security, it has to be now. But why these specific reforms? Many couch the policy in a negative light: destroy the system, cut the safety net, or break the backbone of the New Deal. Some see a positive, if possibly troubling agenda; create an ‘ownership society’, give people more control over their retirements, or even lining the pockets of traders selling the financial instruments of reform. Except for the last, it is really all just so much hot air; and the commissions from the kinds of highly controlled investments aren’t going to be making traders the cheeva like churning a 401(k).
I’ve become convinced that the real reasons are much deeper and address far more basic needs of Bush’s constituency. That’s when I read the work of Michael Hudson of the University of Missouri in this month’s Harpers magazine (not yet online), and it all clicked neatly into place. For years Michael has been writing about the tech bubble and the growing crisis of corporate pensions funds. Michael puts it simply, "it is not the Social Security system that is broke, but today’s stock markets that need an infusion of cash to cope with shrinking earnings."
Hundreds of major corporations have been systematically under-funding their pension plans in order to use that income to report increasing profits in the 1990s to justify share prices. Of course, that just kicked those unfunded liabilities down the road, and the vultures are starting to roost. Now we face a corporate landscape in which major American firms are facing 100s of billions in obligations they can’t met. Firms are bankrupting to escape those obligations, leaving pensioners holding the bag, and leaving the Federal Pension Benefit Guaranty Corporation (PBGC) with losses of 23 billion last year alone. Bailing out the PBGC could cost taxpayers 100 billion, or more, if the trend continues.
The root cause of this malaise is under-funding of pension reserves, and the stockmarket’s relative doldrums. Most of the pension reserves are stock in the sponsoring company or a diverse sampling of the market. What everyone really needs is a rip-roaring good stock market rally (read, BUBBLE. Pension reserves go up, corporation pull their bits out the fire, everyone who’s rich gets richer, and the little people get a taste of the action. Sounds swell. And it has historical precedent; many a good stock speculation bubble had a government behind it trying to dig its way out of public debts. The British government swapping dowdy old treasury bonds for sure bet stocks in the slave trade caused the South Sea Bubble of 1711. By the time the bubble collapsed, the government had paid off the debt and investors were left holding worthless paper. Bush’s plan really is not that much more complex than the South Sea Bubble, convince Americans to trade those stogy old T-Bills for exciting new growth stocks sure to make them wealthy. Once he’s privatized the risks of default, and socialized the large obligations or corporate owners, well everybody’s happy, except perhaps you if you lost everything in the crash of 2020 just before retirement. But, oh well, we’ll have a debtors prison or a good work camp for you, chump.
Well, like all ponzi schemes there is always the last sucker, and retirees stupid enough to rely on Social Security are Bush’s chosen marks. SS will be missing as much as half its revenue at a time of unprecedented demand from retirees. Bush’s plan almost certainly will boost the stock market; how could hundreds of billions in new dollars chasing the same equity fail to do otherwise? But the market will recede again because those investments won’t be used for real production, they will be used to cover the damage of yesterday’s excess and to continue fattening a financial and executive class who have begun to believe they are entitled to outrageous salaries and perks. The market will recede, as markets do, leaving us all poorer and without a viable system to help the elderly live in dignity in this nation.