Friday, February 25, 2005

Two Hours Before An Econ Test...

It's amazing the things one thinks up at 5:25 in the morning after having had an erratic sleep schedule at best. In this case, it's something good about Social Security.

In economics, we discuss something called optimal balance. Every individual can choose a certain balance between interest-gathering money (i.e. bank accounts or bonds, arguably stocks) and liquid assets (cash and such). They typically do so based on their own consumption preferences, concern about the future, and the interest rate that's been set. What right-wingers typically ignore about Social Security is a very basic fact about economics (leave it to connies to miss basics).

Investments are inherently risky. When one gives money to a bank, they loan out that money to someone, and if that person defaults on the loan, your share that was loaned out loses out. Further, we run on something called the required reserve ratio system. Banks don't keep every dollar that you put into their coffers. Let's say the Fed sets required reserve to 20% and I deposit 100 bucks into a bank. They have to keep 20 dollars in the bank, but they not only are willing to loan out 80 dollars (which is the real value of my deposit) but 400 dollars. This is because of something called the money multiplier. Now, where did this money come from? People like Murray Rothbard say nowhere: I disagree with caveats. The money multiplier takes into account that the 80 bucks they loan out from me will percolate around and will be spent multiple places AND will likely contribute to valuable future investment. It is true, however, that banks cannot tolerate what's known as a "bank run", since they don't keep around tons of assets.

It is true that stocks do often generate positive returns. Yet in depressions or even recessions or, heck, even in localized industry problems, one can suffer drastically. This is why smart investors almost never invest in only one company. Ever heard the phrase "diversified portfolio?" A smart person wants to be willing to take some calculated risks, sure, but also have some safe money for a rainy day. It's not entirely dumb to keep money hidden under your mattress or in bonds. I think it's a safe rule to say that, the higher the interest rate, the more risky the investment is. That's why the interest rate is there: As an incentive for you to loan your money.

Now, here's the key fact. Social Security becomes a government-assured aspect of this diverse portfolio. Each generation essentially pays for the next, not a massive sum to be sure, but enough that those people hopefully won't starve. What are the positive benefits? The older generation is willing to retire earlier and have more leisure time; the working class in general feels that there is a general safety net, which boosts their power relative to the upper classes; there are investment benefits in terms of quality of life; etc.

Remember that, just as older generations paid for the infrastructure to insure growth to benefit the younger generation, so too does the younger generation make a contribution to the older generation. Even more importantly, one typically pays into the system proportionally to how much money one makes (though the tax is regressive, the payout is progressive).

What seems so onerous about this? It is a societal investment to give everyone a reasonable expectation of safety and security; literally, "social security". Do I oppose perhaps democratizing Social Security more? Not at all, and I think part of doing that would be to charge progressively as well. Do I think Social Security has become a patronage fund? Absolutely. Do I think that the society should be able to change pay-outs, pay-ins, allowable eligibility ages, whatever? Sure. Those things are all fine. And I wouldn't mind an opt-in for Social Security to be used for government-backed bond-like programs (safe investments, rather than potentially disastrous stock market investments). But it's hardly democratic for a small group of Wall Street investment professionals to ram through a bill even Hastert recognizes is practically suicide, using their superior access to candidates and to the media to distort the perception of and reporting of the issues, and thus causing people to invest into the stock market, making their retirement contingent on them fighting against their class interests (higher wages, better pensions and social services, etc.) I think it's a travesty that someone's life is tied to their success on the market. Hell, I think the market is a travesty, but as long as it's around, there should be something to ameliorate its effects.

I must admit that this is a hard question, because I would like more radical democracy even extending to Social Security, but I think that society owes it to those who cannot work or who are retired to keep them afloat, as a repository of wisdom and as a social justice issue. However, I hardly think that serious democracy is threatened by someone not being able to invest the hardly substantial amount of money that comes from one's paycheck towards Social Security.


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