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Created: July 29, 2002
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Privatization of Social Security

Teaching Essay Copyright: Jeanne Curran and Susan R. Takata and Individaul Authors, July 2002.
"Fair use" encouraged.

Essay based on The Private Interest, by Paul Krugman. New York Times Opinion Section, Friday, July 26, 2002. At p. A 21. Backup.

Paul Krugman addresses the issue of privatizing the funds associated with social security that finally makes sense to me. I couldn't understand why people thought they would be better off investing their own money than with a government guaranteed safety net for the increasing older population. For me this relates to such memories as the See divorce case (of See's Candies - California divorce case). The husband claimed that he didn't work, so that there was no earned income to be shared with his wife. They had lived wholly on rents from his separate wealth. Imagine that! Having so much money that you need never work!

And then I recall the rest of that case. The wife's lawyer claimed (and, as I recall, proved) that the rents from Mr. See's separate wealth required his full time work at managing the wealth. I seem to recall that Mrs. See won on that issue. But you'll have to look up the case to see. What's important here, and what I retained from the case is that even after you have all that money, it's pretty much a full time job to take care of it and see that it doesn't diminish through poor investments, market changes, etc.

So suddenly having a milliion dollars may not be all it's cracked up to be. It could take a lot of work to maintain that wealth. Now, that's if you just suddenly win the lottery and find yourself with a million dollars, or are lucky enough to have parents rich enough to give you a million dollars. Maybe there are no perfect worlds. If you're not working at earning the money, you're working at keeping it. It seems that Mr. See worked hard at keeping his.

But what if the money came in dribs and drabs as you earned it, bit by bit. If investment management is that time-consuming when you know as much about money as Mr. See must have, and when you have a lot of it to start with, it could be pretty time consuming to keep that bit you've saved out of what you've earned. And you'd have to know a lot about the market and investing.

Well, I'm smart. I could learn. But I already have a profession, important skills, a job I love. And I'd have so little to start with, how would I ride out the market swings? I once knew a rancher who invested in cattle; every penny he had went into feeding and caring for those cattle, which he kept on his own while he worked for a very wealthy cattlemen. When it came time to sell the cattle, the market fell. He couldn't make enough on that group of cattle to pay all his costs. And he couldn't afford to keep feeding the herd and wait to sell them until prices rose. Of course, that's what the wealthy cattlemen, his employers, did.

Investment is about reasonable risk taking for which profits are higher than for traditional savings because such risks provide risk capital for growth. But there is risk. The Florida fund manager who kept buying Enron stock as the company collapsed lost a considerable amount of many people's retirement funds. That's lots more serious than just dropping a small percentage of your wealth at the casino tables. Many people are now concerned they can't retire as planned. And those already retired? Well . . . Retirement funds need to be safe to provide for a time when our needs may exceed our ability to meet them.

Paul Krugman talks about this "safey net for the middle class." We think of safety nets as being for the poor. Welfare. But safety nets are needed throughout the social system. Chrysler depended on a safety net when facing bankruptcy. Many corporations depend on the government to provide safety nets to balance market swings. CEO Kenneth Lay, of Enroe, tried to meet with White House representatives as he came to recognize that bankruptcy might be unavoidable. And Krugman likens the savings of the small investor and his/her pension fund to the middle class safety net.

Given the impoprtance of the safety net, I had had great difficulty understanding why the President was so determined to privatize social security. That is, to give each of us our own pittance, so that we, like he, can manage our own finances. Shades of Mr. See working all day just to keep his nestegg safe! p>Paul Krugman helped me understand that I was right about the expertise needed to invest successfully, and right about the risk that is justifiably a part of investment, and right about my need for a safety net somewhere. He reminded me that when puzzled, I should follow the money.

" Those personal accounts won't be like personal stock portfolios. The Social Security Administration can't and won't become a stockbroker for 130 million clients, most of them with quite small accounts. Instead it's likely that a privatization scheme would require individuals to invest with one of a handful of designated private investment funds.

"That would mean enormous commissions for the managers of those funds. . . . "

Paul Krugman believes that those commissions will go to Mr. Bush's friends.

"Could America's retirement savings really be used to reward the administration's friends? Ask the teachers of Texas. In one of many odd deals during Mr. Bush's time as governor, the Texas teachers' retirement system sold several buildings without open bids, taking a $70 million loss, to a company controlled by Richard Rainwater, a prime mover behind Mr. Bush's rise to wealth."

I don't pretend to make any final conclusions here as to who's right, me or Mr. Bush. But for me, it helps a lot to understand why conservative politicians are pushing so for privatization of social security. There's lots of profit to be had from managing those little bits of private funds collectively, and someone's going to profit off the workers who must find ways to make the funds grow, and/or at least stay safe for future needs. Wasn't it Chairman Greenspan of the Federal Reserve Board who suggested that corporate greed might just do us in?