RE: The Economic Limits of Privatization. Give me a break!

[Javier Jimenez <jimenj@yahoo.com>]

So, what you mean to say is that a system that invests in nothing
will always provide a better return, more security, and freedom than
a system that invests in the one vehicle that makes this country
the economic powerhouse of the world?  Give me a break!

>>>>>>>>>>> Steve Johnson Wrote:
On privatization, my feeling is that those for it haven't 
checked out its limitations, while those who are against it
haven't checked out its benefits.

The privatization issue needs to be analyzed on economic grounds
as well as moral grounds.

A few key statistics.

The average dividend payout by all corporations listed on U.S.
stock exchanges runs roughly 2.5% of GDP, year after year after
year, regardless of what's happening on the stock market.

The total Social Security benefit payment each year now runs about
4.6 percent of GDP.  In 2075, Social Security benefits are 
projected to run about 6.9% of GDP.  

Just put these facts together and think about them a moment.
If Social Security owned 100% of the stock market, the annual
dividend flow would barely be adequate to support half the 
current benefit obligation to retirees and the disabled.

In 2075, a dividend flow of 2.5% of GDP would support little
more than a third of Social Security's expected obligation to
beneficiaries.

If those facts don't convince the advocates of privatization that
complete privatization is economically unfeasible, try these.
The average value of the what is virtually the total stock 
market (New York Stock Exchange, NASDAQ, and the American Stock
Exchange) has been about 65% of GDP from about 1925 to 1995.

The type of Personal REtirement Account system that Cato advocates
would result in PRA's accumulating a pool of capital worth 
anywhere from 120% of GDP to 150% of GDP.  

The type of PRA program that Cato advocates would have to own
virtually 100% of the entire stock market simply to match the
benefit stream provided to retirees by Social Security.  Cato
of course expects retirees to do much better on a privatized
system than they can on Social Security.  So - if Cato's dreams
are to be realized - the size of the capital pool has to be
increased from 130% of GDP to perhaps 200% of GDP. Or 250%.
Which means that PRA's end up owning the entire stock market, 
not just once, but one and a half times, or two times over.

Looked at in cold hard economic terms, the goal of complete 
privatization is quite literally impossible.  From any realistic
perspective, privatization can't possibly hope to replace more
than about a third of the existing Social Security system.

On the other hand, it does make sense to accumulate a good 
savings fund.  Social Security faces quite an awesome gap in 
the future between receipts from payroll taxes (at 12.4% of payroll)
and expenditures on benefits (projected to rise to 19.9% of payroll.)
If Social Security had in hand a very substantial pool of capital,
worth 50% of GDP or 60% of GDP, held either in PRA's, or in 
the Trust Fund, or in both, the earnings from that pool could go
a long way toward making up the gap between the 12.4% that 
will be received and the 19.9% that is supposed to be paid out.

This sounds complicated, right?  But it's the same message as 
the fable of the ant and the grasshopper.  It's smarter to save
than not to save.  A Social SEcurity program that accumulates a
pool of savings about five times larger than the current Trust Fund
(relative to GDP) will be strong enough to handle the nation's 
upcoming explosion in total retirees.  In other words, if we first
heard the fable of the ant and the grasshopper when we were in
kindergarten, we learned everything we really need to know (about
saving Social Security) in kindergarten.