Privatizing Social Security, I fear—The Easy Mark is Strong in this One

Privatizing Social security is a terrible idea. It is a deadly idea…

One of the keys to Stupidparty’s electoral survival remains the aging white male demographic. Social Security is working for these guys—even though they are largely oblivious to how this program does so. It is self-financing and works like clockwork. When was the last time you heard about someone getting ripped off or someone walking away with beneficiaries’ retirement funds? It is so solid, it is so beautifully boring, that it only makes the news when some wanker from Stupidparty is trying to undermine the system. Why would anyone do that?

You would think that they would know that touching this live rail of American politics represents something close to political suicide. Now the smarter ones realize that the deft way around this is to grandfather any reforms so that none of their aging voters, their easily manipulated base, would feel threatened. It is not like they think much beyond their own bank accounts. Now, if Social Security was in serious danger of defaulting due to demographic changes (which I doubt is the case), then that scenario would need a correction, possibly reform. There might be other reforms worth thinking about.

But there is one type of reform that is totally unacceptable: privatization. The people suggesting this approach tend to be the candidates who are both the most removed from the real world and the most reliant on the wealthy for their political viability:

Romney in 2007:
“One thing that President Bush proposed, and it’s a good idea, is to take some of that money, [social security fund money] or all of that surplus money and allow people to have a personal account,” Romney said while campaigning for president in 2007. “So they can invest in things that have a higher rate of return than just government debt. They can invest in things like our stock market or the world’s stock market…so that they can get a better return, and maybe that would make up for some of the shortfall. That’s a good idea.” A short while later, the market crashed and retirement accounts were savaged.

Jeb Bush 2015: “My brother tried, got totally wiped out,” Bush said, “Republicans and Democrats wanted nothing to do with it. The next president is going to have to try again.”

Ben Carson: Suggests that Americans who “really don’t need” Social Security should “voluntarily opt-out” of their benefits as a way to save funding.

Ted Cruz: “Now, I also think you’ve got to give George W. Bush some real credit—he showed remarkable courage in the beginning of the second term taking on Social Security reform and personal accounts. It was the right thing to do.”

There are $2.6 trillion dollars in a trust fund (recently increased to $2.8 trillion). Did the taxpayers have to bail out this fund in the aftermath of the financial collapse in 2008/09? No! Can the stupidest Congress in the history of the planet hold the nation up for ransom by refusing to issue social security checks? No! That is why we have the trust fund—to protect us from stupidity, greed and corruption.

So what is the game? Rewind to that $2,600,000,000,000   number and multiply it by, say, 2.5 percent. Now we can see how much money Wall Street is not making on this fund, in fees. $65,000,000,000 a year. In forty years the amount of fees earned by Wall Street would add up to the entire amount of the funds in the trust. How many helicopter accessible yachts are we talking about here? Ah, you say—but Wall Street is better at investing than the man on the street, and certainly better than the government.

Let me explain why that is not the case and why this would be catastrophic for millions of people.

We will start with a bit of introspection. You probably believe that you are quite intelligent. You possibly believe that you are a pretty good investor. But let me ask you some questions, the same questions that I ask of myself: Do you (I) really even understand your (my) telephone bill? We are all up against some pretty crafty actuaries who are trying to milk us. I cannot keep up with it. When you upgrade a smartphone through the AT&T, Verizon (or T-Mobile) monopoly, or the Apple store, how much does it cost you? Well, I must admit that I have figured this one out: it costs pretty much the same as a new iPhone, but AT&T and Verizon do not necessarily tell you that.

However, if you wade through that phone bill, you might well see a charge of $32.50 per month for twenty months—this and the upgrade fee is in excess of what you would have been paying if you kept the old smartphone. So you actually do not even own that new phone for twenty months and, when that has passed, you have paid $650 for it—excluding whatever upgrade fee you were charged.

Now, back to investing. I am wondering if you are like me—that if the market has done badly over the prior month you are not so keen to open your monthly 401(k) or other statement. I believe that we tend to dwell on our successes and bury our misses. But actually all this concern is really quite pointless because study after study shows that specific investing picks are no better than randomly throwing a dart at a dartboard and letting the dart make the pick. This even applies to the super-duper hotshot hedge fund multimillionaire guru your friend knows. Yes, these investment gods might be able to be beat the market by a small margin, but that margin gets eaten up in higher fees that fund that guru’s private jet, weekend beach mansions, and lobbying campaigns that line the pockets of any politician ready to say, “let’s privatize Social Security.”

So now that I’ve told you that even if you are pretty with-it/sophisticated about finance, you are most likely still an average investor, it is time to cut to the chase. The Wharton School of Business has designed a simple financial literacy test. It just asks three questions.

Here are the questions—see if you know the answers.

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? (a) More than $102. (b) Exactly $102. (c) Less than $102.
2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account? (a) More than today. (b) Exactly the same. (c) Less than today.
3. Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock in a mutual fund.

Only 33 percent of Americans over fifty got all three answers correct. Higher-income people did better—thus, we can say that the number of lower-income people who are financially illiterate is significantly in excess of 67 percent. These are the very people who might starve, get sick, and/or die as they are thrown into poverty—but they do not because of Social Security.

Regarding the third question, remember that this study was aimed at elderly people. The consensus is that as you get older one should become more conservative in one’s investing strategy. So getting question three “wrong” is a lot less important for a younger person. Yet the answer remains the same: a single stock investment is far more risky (less safe) than buying stock in a group of companies.

And this is where Jeb!!! and his chums step in, a guy who has only to sneeze in order for some sycophant with a nefarious agenda to happily throw a $1 million dart at him. This is his plan: allow the asset strippers (the very people who actually can perform no better than that dart) to take over and earn a commission on every trade, buying and selling, acting like children given free reign at a candy store. Who’s going to profit from this? Yes, those same people who contributed millions, hundreds of millions, to Jeb!!!’s, (or whoever eventually gets anointed leader of the Stupidparty) campaign coffers—the people he is beholden to. Each candidate will be made an offer that they cannot refuse—for when was the last time a Stupidparty leader acted with intellectual integrity?