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Risky, Risky
This excellent column from Sebastian Mallaby is noteworthy for being by Sebastian Mallaby who's just the sort of centrist dude who normally regards politicians' unwillingness to privatize Social Security as the gravest sin imaginable. The basic point is simple -- the US economic has shifted a lot in recent years toward being riskier. This has brought some benefits -- with risk comes the possibility of reward. But since we're already drifting toward greater riskiness, why add even more riskiness to the retirement system.
Now David Frum in Dead Right makes the argument that the problem with America is that it's not risky enough. This wasn't an economic argument, he just thought it was important for life to be risky in order to strike terror into the hearts of average people and spook them into bourgeois respectability. It was an interesting, if weird, take on the situation, but I don't think it's going to sell at the polls. Meanwhile, the genius of the plan is that rich folks like George W. Bush have an immense capacity to bear risk, so they'll make out like bandits.
December 20, 2004 | Permalink
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"David Frum in Dead Right makes the argument that the problem with America is that it's not risky enough. This wasn't an economic argument, he just thought it was important for life to be risky in order to strike terror into the hearts of average people and spook them into bourgeois respectability."
And of course, that's the right's position on sex-related issues in a nutshell. Are we going to see abstinence-only economics?
Posted by: rea | Dec 20, 2004 1:06:20 PM
I really liked that column, too. Mallaby is underrated IMHO. His book is good, and his column is occasionally very good.
My parents and I had a discussion about this risk thing some time ago, leading me to believe that it's something that would really resonate with people. For instance, every time a new technology comes out they freak. My mom doesn't really know how to use a computer yet; it's just one more thing she has to learn. And now that she has to deal with retirement planning, she just wants someone to tell her what to do or, better yet, take care of it for her. And yet politicians don't seem to address this issue, really. Mallaby has hit on something very important, but it's not clear how to take advatage of it.
Posted by: praktike | Dec 20, 2004 1:27:48 PM
Mallaby: "The fact that freedom triumphed over the totalitarian systems of the 20th century should not be read as proof that people want all freedom, all the time."
To that I would further add that the idea that "privatized SS" = "more freedom" (in some noble, quasi-moral sense as well as in a more practical sense) is nothing but ideology. It's supposed to be better just because it's getting rid of some government management? That needs to be argued, not assumed. And the idea that more choice in how to invest the funds = more freedom has to be weighed against the significant time, effort, and stress of making those investment decisions -- as Mallaby points out.
Posted by: ok | Dec 20, 2004 1:40:43 PM
In his press conference remarks today, Bush directly referred to overhauling social security as a task to convert defined benefit plans into dfined contrituion plans. EXACTLY! That was a gigantic admission for those accounting techies (like me) who know what those are. He is clearly envisoning then, transferring risk to retirees....cutting benefits by causing them to ride and absorb the ebbs and flows of the market, and taking guaranteed payment amounts (i.e. defined benefits) off the government's back. ALSO....even more important, all defined benefit and contribution plans are covered by ERISA, which clearly sets out the safety and grade of investments that retiree/employee monies may be invested in. He slipped, and was almost honest. It also reflects a much greater understanding on his part that we give him credit for. He knows he is screwing seniors.....Why is no one talking about this?
Posted by: Deborah White | Dec 20, 2004 1:43:31 PM
"Bush directly referred to overhauling social security as a task to convert defined benefit plans into dfined contrituion plans."
Can you translate that into English for the rest of us? This sounds interesting.
Posted by: praktike | Dec 20, 2004 1:57:43 PM
defined contribution = 401k plan.
defined benefit = you work X years at Y salary you get function of that as your pension until you die.
Posted by: Atrios | Dec 20, 2004 2:06:40 PM
Um, not that it's reasonable to expect him to have one, and I didn't read the book, but what's Frum's logic for arguing that more risk will frighten people into bourgeois respectability? It seems to me that in a high risk environment, where you can do everything right and still get screwed, it's at least as logical to decide there's no reason to be respectable and every reason to do whatever you can get away with and live like there's no tomorrow because all that's really certain is right now and you've got nothing to lose. And I'd guess most people are at least as likely to choose this response, being more fun and all, than the puritanical respoectability one.
Posted by: veruca | Dec 20, 2004 2:07:18 PM
The life, of course, should be risky only for the workers; the rest of us have our golden parachutes, thank you very much.
Posted by: abb1 | Dec 20, 2004 2:29:13 PM
Its good to remind ourselves at this time of the year of the core Republican philosophy, as represented by Febeneezer Frum. Just in time for Christmas,some good old-fashioned holiday Social Darwinism - reminiscent of Scrooge and Old Man Potter. Lots of risk, and a without-a-net struggle for survival turns the "dicontented rabble" into a "thrifty working class" - fearfully packing all their hard-earned wages away in Potter's bank for the rainiest of rainy days, thus liberating that imprisoned cash from the grubby hands of the masses so it can do some productive work in the capitalist system. And if we make the system really deliciously risky, by junking Social Security altogether, it will even "decrease the surplus population" for us, freezing some more of those lazy old people in their homes, as punishment for not saving enough.
Stone cold hyper-capitalists hate nothing worse than a transfer payment. Social security shifts a certain amount of national income every year from saving wage earners to consuming old people, depriving businesses of cheaper money and capital markets of their fair share of the national loot. All for the sake of those wizened parasites who didn't save enough money, or made unsound financial decisisons by sending too many kids to college or having too many medical problems. Better to move to Social Scroogism: We all battle to keep our heads above water. Some sink; some swim, some float on the bloated carcasses of their drowned neighbors - and capitalists profit as all the thrashing kicks up some fish for them to eat.
Of course there still are some safety nets. If you have a family-owned safety net, strung together from all your dad's high-level connections, you can fuck up over and over and over - and still be President!
Posted by: Dan Kervick | Dec 20, 2004 2:38:35 PM
Here is the single best, clearest explanation of why what is being passed off as SS reform is in fact destruction of the program, from http://moneycentral.msn.com/content/P93629.asp:
"Having said all that, there are lots of people in this country who, for one reason or another, desperately need what Social Security offers. I'm not a big-government fan, but if we as a country would still like to provide that for them, then going down the path of pretending Social Security is an individual retirement account is complete lunacy. As I said before, those folks are probably the exact same ones who will wind up unable to successfully invest their "Social Security IRA." So, let's call a spade a spade. Under the guise of fixing Social Security, this "reform" is just a subterfuge to end the government's liability and let down the people it was supposed to help."
Read the whole thing. It's not complicated.
Posted by: Barbara | Dec 20, 2004 2:40:23 PM
Because in the Good Old Days, when the poor either were taken care of by relatives/their church/lucky charity/Grim Reaper, people were Well Behaved. The children were respectful and behaved their elders, the women obeyed their husbands and the lower classes doffed their hats when the elites came by.
The 'undeserving poor' were generally out of luck, since their families wouldn't take care of them, and they didn't belong to a church. So they either died off, lucked out onto some lucky charity, repented and were reformed by Hard-Nosed Faith-Based charities, or were caught stealing. In which case they provided a few minutes of entertainment and a warning for other evil doers on the gallows.
All in all, the Good Old Days, in stark contrast to our Long Nightmare of Peace and Prosperity which the US enjoyed after WWII, which pretty much destroyed traditional morality.
Posted by: Barry | Dec 20, 2004 2:44:07 PM
praktike...English it is. It's not quite as simple as Atrios stated. I am a longtime CPA...a graduate of pre-scandal Arthur Andersen. Bush has always before simply described this as a way for Americans to gain more control....more ownership...over their FICA funds. He always claimed that no benefits would be cut. What he said today was completely different. It has zero to do with ownership, and everything to do with transferring risk.
The simple definition of a defined benefit plan is that one puts money into an account over time, and a certain payment (benefit) is guaranteed, regardless of market conditions or of administrator and trustee fees. (That benefit is calculated using actuarial assumptions.)That is precisely how social security works today. All risk of fluctuations and fees are assumed by the holder of the funds.
The simple definition of a defined contribution plan is that one puts a defined amount (the FICA payroll tax rate) of money (contributions) into a fund, and God only knows what you'll get back years later. The amount you pay in is subject to reduction by market fluctuations, administrator and trustee fees and whatever else anyone can charge to your account.
The point is, under defined contribution plans, there is NO guaranteed amount that you will receive years later from your forced "investment."
Most large corporations have dropped defined benefit plans because...well, they didn't want out pay out that much to retirees and investors, and have to bear the fees. And defined contribution plans are just easier to administer...no messy assumptions, no actuarial services, and far easier to charge lots of fees.
This is an entirely different program than simply an ownership and control transfer.
Also, in businesses, one's contributions to any plan is voluntary. Under social security, it is mandatory. The lack of ethics in mandating that FICA be withheld from paychecks...and then mandating that such witholdings be put into defined contribution plans and subject to market whims, and bankers' fees....is a new low.
Truly akin to gambling with retirees' FICA funds...and perhaps theft, too. Gamblng and theft with no recourse. And with no apparent ERISA (investment safety) protections that are mandated for ALL defined benefit and contribution plans in the business world.
And I thought Bush couldn't surprise me.
Posted by: Deborah White | Dec 20, 2004 2:46:53 PM
I seem to recall that the sort of rapacious, nineteenth century variety of capitalism led directly to the new deal, and Democratic dominance for a generation.
A dominatrix I knew once told me that most of her clients were Republicans (this was in the bay area too, where one would be hard pressed to have nearly exclusively Republican clients for any service), and that most of the other dominatrixes she knew also had almost exclusively Republican clients.
Perhaps there is a deep strain of massochism to the conservative psyche, which needs to be punished for its sins. Perpahs deep down what they really seek is a series of humiliating defeats at the hands of uber liberals (even gasp woman uber liberals), and a socialist republic. Perhaps deep down they *want* to be punished by the rest of the world for their swaggering, moronic arrogance, and lunatic wars.
Posted by: Snarkasaurus Rex | Dec 20, 2004 2:59:01 PM
A larger point to be made is that the risk averse, whatever their reasons for being so, are great free riders on the risk taking of others. All these lovely drugs that are so great they are presumed by some to be basic human rights only exist because of risk taking.
The greater the extent we subsidize risk aversion by taxing risk taking, the poorer we all become.
Posted by: Jason Ligon | Dec 20, 2004 3:01:30 PM
I have a great idea. You see all those noisy, intrusive Santas out and about this time of year, ringing their idiotic bells and extorting cash from the housed and healthy and turning it over to the homeless and hungry? I say we privatize that whole bloated, broken and inefficient system, and the bloated Santas that staff it.
Let's replace the Salvation Army with the Saving Nation Army. Instead of putting our dollars in Santa's pot, taxes on food and shelter could be invested in interest-bearing accounts, so that we can all individually support our own future homelessness and joblessness. No more noisy bells, no more liberal guilt, no more giving - only saving. And we can clear the streets of those fat commie Santas - wearing red naturally.
Posted by: Dan Kervick | Dec 20, 2004 3:01:57 PM
Thanks, Deborah.
This part is key:
The lack of ethics in mandating that FICA be withheld from paychecks...and then mandating that such witholdings be put into defined contribution plans and subject to market whims, and bankers' fees....is a new low.
When you put it that way, it sure sounds bad.
Posted by: praktike | Dec 20, 2004 3:06:54 PM
All these lovely drugs that are so great they are presumed by some to be basic human rights only exist because of risk taking.
All those lively drugs (vast majority of them anyway) only exist because the taxpayers financed the basic research. And then they gave the results of that research to a bunch of greedy bustards (vast majority of them anyway) who have made millions without any risk whatsoever.
Talk about free-riders.
Posted by: abb1 | Dec 20, 2004 3:06:57 PM
Or, rather, 'bastards'.
Posted by: abb1 | Dec 20, 2004 3:08:33 PM
"Truly akin to gambling with retirees' FICA funds...and perhaps theft, too. Gamblng and theft with no recourse. And with no apparent ERISA (investment safety) protections that are mandated for ALL defined benefit and contribution plans in the business world."
Yikes. Try this in your private defined benefit plan:
1) Maintain the current outflows with current withholdings.
2) Instead of maintaining ERISA mandated minimum funding requirements in a trust, write yourself a bunch of IOUs with a promise to pay the trust fund interest.
3) When filling out your balance sheets for the year, make sure that you call those IOUs 'secure investments' instead of debt.
That is what Social Security is - a completely empty DB plan administered in a manner that would land everyone involved in jail if it were to be attempted in the private sector. I would think that the very first ERISA protection we would be clamoring for is that notion of the account held in trust.
Posted by: Jason Ligon | Dec 20, 2004 3:09:21 PM
abb1:
"...without any risk whatsoever. "
This is a colossally uninformed view. Start asking around with any financial advisor, money manager, or even broker you like where on the risk spectrum biotech and pharma stocks lie.
Posted by: Jason Ligon | Dec 20, 2004 3:19:16 PM
praktike...By federal regulation, a defined contribution plan not following ERISA investment-safety precautions would be illegal and subject to prosecution of the corporation, trustee and plan administrator. It's deemed too risky, and inappropriate use of retirement funds.
Yet, now Bush proposes this for his overhaul of social security. Those were his precise words in today's press conference!
Posted by: Deborah White | Dec 20, 2004 3:19:28 PM
That is what Social Security is - a completely empty DB plan administered in a manner that would land everyone involved in jail if it were to be attempted in the private sector.
Yes, it's EXACTLY like the private sector, except for the fact that it's not at all. You may have noticed that entities in the private sector don't have the ability to levy taxes on the entire wealth of the world's richest nation.
Still, except for the fact that they're completely different situations, they're exactly the same.
Posted by: A Tiny | Dec 20, 2004 3:20:04 PM
abb1:
Not to mention that the tax dollars that funded the basic research still came from risk takers.
Posted by: Jason Ligon | Dec 20, 2004 3:21:21 PM
"praktike...By federal regulation, a defined contribution plan not following ERISA investment-safety precautions would be illegal and subject to prosecution of the corporation, trustee and plan administrator. It's deemed too risky, and inappropriate use of retirement funds."
What are those investment safety precautions, pray tell? Mind you, not 404(c) requirements that are voluntary on the part of plan administrators, but the massively protective investment safety precautions on ERISA. BTW, you know that ERISA applies to DB plans as well, right?
Posted by: Jason Ligon | Dec 20, 2004 3:24:36 PM
Mr Ligon:
"A larger point to be made is that the risk averse, whatever their reasons for being so, are great free riders on the risk taking of others."
How, exactly, does SS as it now exists amount to giving the risk-averse a free ride on the backs of the risk-takers?
"The greater the extent we subsidize risk aversion by taxing risk taking, the poorer we all become."
You don't mean "poorer" in a financial sense here, so in what sense exactly do you mean it?
Thanks for any response.
Posted by: curious | Dec 20, 2004 3:27:01 PM
