1. Most of the Social Security funds will be transferred to a few wealthy Americans.
2. The government will take over control of U.S. corporations

But this won’t happen because:

1. The rich aren’t greedy
2. Cato’s aware of the problem

Given that libertarians can’t get rid of even the most obvious waste and pork in the federal budget, why would Cato propose a plan like this?

OMFG!!!

10. Could the government invest the money instead?

On the surface that approach may have some appeal; in reality it is fraught with peril. It could potentially make the federal government the largest shareholder in American corporations, raising the possibility of government control of American business. In addition, there are serious questions about what types of investment the government would make. Political considerations and “social investing” are likely to influence the government’s investment decisions, allowing the government to manipulate economic markets. After all, should the federal government be investing in tobacco companies or companies with holdings overseas?

When Federal Reserve Chairman Alan Greenspan was asked about allowing the government to invest he stated his belief that this “has very far reaching potential dangers for a free American economy and a free American society.”

(http://www.socialsecurity.org/reformandyou/faqs.html#10)

Your response to many of my question, though, is simply that the money won’t be pooled, rather it will be in individual accounts. Perhaps my confusion comes from the Cato Institutes own Social Security reform plan:

Tier II

Workers initially have a choice of three
investment options. As soon as a worker’s con-tributions are reconciled, they are electronical-ly deposited in one of three balanced funds,
each highly diversified and invested in thousands
of securities. The default portfolio, where
one’s money is invested if no choice is made,
has 60 percent stocks and 40 percent bonds.
The two other funds have the same asset classes
but with different weights. For younger
workers one fund with a higher concentration
of stocks is created, and another, more geared
toward less-volatile bonds, is created for those
near retirement. Workers can move their funds
from the default portfolio to either of the other
two options.

This implies to me that there will be three stock picking ‘czars’ selecting which stocks go into the three funds. If true, in a few years, these three czars will be the most powerful people in the financial world. Goldman Sachs, which I believe is the biggest investment bank, is ‘only’ worth about $50 billion. In a fairly short time, these funds will contain trillion of dollars, in the long term tens of trillions of dollars.

Just to put some perspective on these numbers, every home in America, residential real estate, has a total value of around ten trillion dollars. And as I stated above, the value of every American stock worth investing in is around ten, maybe twelve trillion dollars.

And on a cynical note, this whole push for private accounts seems to be setting up a massive transfer of wealth from the bottom 80% of American households incomewise, to the top 20%.

Consider:

1. According to a recent fed study, the wealthiest 1% of American households own half of all common stocks in American corporations, the top 5% own 75% and the top 20% own 96%!

2. The 2003 ‘temporary’(hopefully) tax relief package reduced the capital gains tax rate down to just 15% for the wealthiest American.

So imagine our three stock picking czars on the first day of the new SS plan, armed with, say, $200 billion dollars worth of SS money, ready to secure the ‘average’ American their slice of future riches.

Why would the wealthy sell their stocks? They know next year another $200 billion dollars will be looking to buy stock. And if they wait another year, etc., etc.

It seems to me, the moment this bill passes, the price of shares is going to skyrocket. It’s not like the supply of American companies stable and profitable enough to be safe investments is elastic.

Any stocks sold after the SS bill passes will be sold at a huge markup. And why not? Congress just passed a law that say trillions of dollars in Social Security money will be invested in stocks…

A fair bet would say the wealthiest 20% of Americans stand to make a windfall of about $10 trillion in the coming years…and only pay 15% in taxes on it.

And one final point for tonight, the people who are pushing private accounts paint a rosy picture of stocks rising steadily for the next 40-50 years, making private accounts the obvious way to go to boost SS earnings. Funny thing is though, all the predictions that say SS is in trouble use much more gloomy economic forecasts.

A stock market that rises constantly for 40-50 years at 5-6% annually implies that there truly won’t be a SS crisis.

A puzzler

Hehe, I guess what I was pointing out is that there is a considerable difference between Chile, or even Britain, investing its retirement in the stock market and the US doing so.

Yeah, the difference is our capital markets are even more developed so it should make the process even easier.

My point about Fox is that, like all but one of the original Dow components (GE is the only one still in business), it will likely go under before 2018. Making money in purely US stocks requires many transactions.

That’s healthy. Indexes that we will invest in like the Dow Industrials will turnover. Older companies like Goodyear and Sears will get replaced with companies like Intel and Microsoft to keep the index growing. In Cowboy Capitalism one of the points made was how little turnover there is within the German DAX and how it was a sign of economic stagnation.

I assume only the stocks listed on the Standard & Poors 500 will be eligible. Combined they are worth about 10 trillion dollars.

I’m sure there will be mid-cap and small-cap options as well like the S&P; 400/600 or Russell Indexes.

In a few short years, the combined Social Security private accounts will own enough stock to have a seat on the board of every major US company. With 5% ownership, you have to file with the SEC as a beneficial owner. Who will represent the private funds on these boards?

Assuming the S&P; 500 is fairly valued now,(actually its a little overvalued, returning about 4.5% annually) will the SS private accounts wait to go into the market? Or will they invest in stocks already overvalued?

In 20 years or so, the SS private accounts will own over 50% of the stock in every major US corporation. So now we will have a government agency holding a controling interest in every private company…is this a new form of communism?

You are missing the whole point of private accounts. If the Treasury were to invest the surplus in the companies then yes, we would run into problems of John Snow having to vote the proxies and the U.S. government being a major owner of many corporations. But with private accounts, individuals will be taking ownership stakes and voting the proxies. How do you expect an individual account to own over 5% of a company when people are are only going to be able to put in something like $2,000 a year? In short: no worries, not a new form of communism.

Assuming the SS private accounts are tax free, the dividends corporations pay to these accounts will also escape taxation. These dividends are about $500 Billion a year now, how will the government make up this lost revenue?

Let’s ban 401Ks and IRAs while we are at it then think of all the revenue that the government could generate. But it’s not a zero sum game here. This will spur new investment that the government is not currently collecting on just like the aforementioned IRAs and 401ks.

As I said before, if the government wants to maximize value of the retirement accounts they will have to buy and sell the huge blocks of stocks they hold. Selling a huge block of stock in a company at the wrong time can bankrupt it. Will this become a political issue?

Again the government isn’t buying anything… they are individual accounts.

Much of the business US companies do is for the US government. Will the government be as responsive to picking the right company for a contract(haha) if they know that by, say, NOT giving a contract to Lockheed will cost private account holders Billions of dollars when Lockheeds’ stock plummets on the news? Will the FDA be as ready to keep a new drug off the market, knowing it could tube a large drug company and cost private accounts billions?

Again the government isn’t buying anything… they are individual accounts.

And my last question(I have hundreds on this topic):

Knowing in advance which companies the government is about to buy or sell stock in could make some people extremely rich. How will a government committee ever keep this kind of insider trading out…especially in an environment like Washington?

Again the government isn’t buying anything… they are individual accounts.

Oh…and what about shareholder lawsuits. And suits against companies that harmed people or the environment. Will the government set up a new, indepedent judiciary to avoid the obvious question of conflict of interest when the government is a major shareholder in all major US companies?

Again the government isn’t buying anything… they are individual accounts.

I could go on forever:)

I can’t and am going to bed. Do some more research on the issue yourself as you’re misinformed on a number of specifics.

My point about Fox is that, like all but one of the original Dow components (GE is the only one still in business), it will likely go under before 2018. Making money in purely US stocks requires many transactions.

I assume only the stocks listed on the Standard & Poors 500 will be eligible. Combined they are worth about 10 trillion dollars.

In a few short years, the combined Social Security private accounts will own enough stock to have a seat on the board of every major US company. With 5% ownership, you have to file with the SEC as a beneficial owner. Who will represent the private funds on these boards?

Assuming the S&P; 500 is fairly valued now,(actually its a little overvalued, returning about 4.5% annually) will the SS private accounts wait to go into the market? Or will they invest in stocks already overvalued?

In 20 years or so, the SS private accounts will own over 50% of the stock in every major US corporation. So now we will have a government agency holding a controling interest in every private company…is this a new form of communism?

Assuming the SS private accounts are tax free, the dividends corporations pay to these accounts will also escape taxation. These dividends are about $500 Billion a year now, how will the government make up this lost revenue?

As I said before, if the government wants to maximize value of the retirement accounts they will have to buy and sell the huge blocks of stocks they hold. Selling a huge block of stock in a company at the wrong time can bankrupt it. Will this become a political issue?

Much of the business US companies do is for the US government. Will the government be as responsive to picking the right company for a contract(haha) if they know that by, say, NOT giving a contract to Lockheed will cost private account holders Billions of dollars when Lockheeds’ stock plummets on the news? Will the FDA be as ready to keep a new drug off the market, knowing it could tube a large drug company and cost private accounts billions?

And my last question(I have hundreds on this topic):

Knowing in advance which companies the government is about to buy or sell stock in could make some people extremely rich. How will a government committee ever keep this kind of insider trading out…especially in an environment like Washington?

Oh…and what about shareholder lawsuits. And suits against companies that harmed people or the environment. Will the government set up a new, indepedent judiciary to avoid the obvious question of conflict of interest when the government is a major shareholder in all major US companies?

I could go on forever:)

Paul Krugman commits a cardinal sin of logic regarding Social Security, and repeats it, and repeats it…

That logical sin: looking at an option and condemning it without considering the alternative.

This is now the standard operating procedure of those defenders of the Social Security status quo who denigrate the higher returns that can be expected from real investments in private accounts as being “risky”, “expensive” or whatever. As they do this, they never compare such returns to the expected returns from Social Security as it is, and as they want to keep it. In a moment we’ll see why.

Color me convinced. So long, Will. I’m moving over to Democratic Underground.