Social Security for Dummies
I promise this is the last I'll write about the subject for a while, but it seems there are people out there who still don't understand how this works. For example, let's take a look at this recent post from http://www.freerepublic.com :
This doesn't even take into consideration how the additional money invested in the stock market will encourage economic growth.
That is a major point in the program's favor. One I haven't heard anybody making.
Private accounts will create an enormous pool of new investment capital that should support immense long-term economic growth -- generating even more wealth. And, not coincidentally, even more tax revenue.
Private accounts may well end up eliminating the deficit...
It's in red, because, you know, red states and all.
Anyway, the reason you don't hear anyone make the point is that it's absolutely false. Let's simplify the discussion a little. Let's say that total government spending is $100, and also that the total amount of money available to invest in the stock market is also $100. With me so far?
Ok, so, when we privatize Social Security accounts, we take $10 from the government's income and invest it in the stock market. Now, instead of $100, we have $110 to invest in the market. Stocks boom! Mega-growth! Right?
Not so fast.
Government expenditures haven't changes, so they still need $100 to cover their outlay. They've only got $90 now. Where's that other $10 going to come from? They have to borrow it, which comes out of the investment pool available for stuff like the stock market. Worse, now, instead of simply collecting the tax revenue, they're having to pay interest on that money they borrow.
"Aha!" say the freepers. "Government spending won't stay constant! It'll shrink with the decreasing revenues because, um, it just will!"
Whatever. You see, the problem with this argument isn't that it is not true. If the government spends (that is to say, borrows) less money, there will be more available to invest. The problem is that this has no bearing on the SS discussion. If we were to cut government borrowing right now, without "reforming" SS, it would have exactly the same effect.
In short, thinking that privatizing Social Security would erase the deficit is not just wishful thinking, it shows a fundemental misunderstanding of how the system works. There are reasons to think that privatization could be a good thing, but given the lies and misinformation being used to sell the program, I'm highly, highly skeptical.
This doesn't even take into consideration how the additional money invested in the stock market will encourage economic growth.
That is a major point in the program's favor. One I haven't heard anybody making.
Private accounts will create an enormous pool of new investment capital that should support immense long-term economic growth -- generating even more wealth. And, not coincidentally, even more tax revenue.
Private accounts may well end up eliminating the deficit...
It's in red, because, you know, red states and all.
Anyway, the reason you don't hear anyone make the point is that it's absolutely false. Let's simplify the discussion a little. Let's say that total government spending is $100, and also that the total amount of money available to invest in the stock market is also $100. With me so far?
Ok, so, when we privatize Social Security accounts, we take $10 from the government's income and invest it in the stock market. Now, instead of $100, we have $110 to invest in the market. Stocks boom! Mega-growth! Right?
Not so fast.
Government expenditures haven't changes, so they still need $100 to cover their outlay. They've only got $90 now. Where's that other $10 going to come from? They have to borrow it, which comes out of the investment pool available for stuff like the stock market. Worse, now, instead of simply collecting the tax revenue, they're having to pay interest on that money they borrow.
"Aha!" say the freepers. "Government spending won't stay constant! It'll shrink with the decreasing revenues because, um, it just will!"
Whatever. You see, the problem with this argument isn't that it is not true. If the government spends (that is to say, borrows) less money, there will be more available to invest. The problem is that this has no bearing on the SS discussion. If we were to cut government borrowing right now, without "reforming" SS, it would have exactly the same effect.
In short, thinking that privatizing Social Security would erase the deficit is not just wishful thinking, it shows a fundemental misunderstanding of how the system works. There are reasons to think that privatization could be a good thing, but given the lies and misinformation being used to sell the program, I'm highly, highly skeptical.
posted by No. 6 at 9:01 AM
