Social Security is the flagship program of FDR's New Deal. Retirees depend on this program to supplement their income, and many depend on it as their sole source of income. Critics attack it as a culprit exacerbating fiscal problems down the road. Such attacks greatly miss the mark.
Social Security operates from a separate pot of money and has no significant bearing on any real or imagined "fiscal crisis." The Congress could readily assure the future of Social Security with relatively minor adjustments, if only it would be willing to do it.
My objective of this piece is not to review the minor adjustments that would assure future viability of Social Security, but to review some points too often neglected in discussion of this program - namely, its substantial contribution to regional and macroeconomic stability.
In short, Social Security should not - repeat, not - be privatized, even in part. Here's why.
If Social Security payments were tied to financial markets, that is, to the health - or lack of it - of the general economy, recessions would be deeper and last longer. Our most economically vulnerable retirees who depend on Social Security would receive reduced payments at a terrible time. And, recovery of the economy from recession would be delayed.
During an economic downturn, consumer demand and spending falls, business investment in capital equipment falls, and unemployment rises resulting in further reduced consumption spending. But Social Security payments remain stable as a source of reliable spending. Economists refer to this as a "built in stabilizer."
This continuous source of spending is not by its self enough to provide the counter cyclical kick to lift the economy out of recession, but it is a source of continued expenditures that keeps a downturn from being deeper than it otherwise would. Reduced Social Security payments and expenditures during recession would be at the absolute worst time for the macro economy.
Let's take a look at regional effects. Across the Great Plains and much of rural America, many small towns are populated largely by retirees who depend mainly, and some exclusively, on Social Security. Steady, dependable Social Security payments are a source of stability that would be lost if payments were tied to unstable, declining financial markets.
What about partial privatization - allowing a portion of Social Security taxes to be put into private financial markets - the perennial hope for higher returns? It's still a bad idea.
Some citizens might beat the market, but others would not. And either way, a portion of Social Security income tied to financial markets and the economy would fall during recession, depriving recipients of funds when most needed.
I have nothing against putting some money in stocks. I do it myself and follow markets and financial stuff religiously. But money in financial markets should be over and above what goes into Social Security. Social Security can be the bedrock of a retirement program, essential to the individual, and an important contributor to macroeconomic stability.
I learned my private economics and acquired my philosophy on saving and investment while growing up on that dairy farm where every dime went back into the business. And I learned my academic economics at University of Wisconsin-Madison and University of California-Berkeley, from professors for whom the Great Depression was the defining economic event in their lives. Social security payments to retirees are a steady, reliable source of income. And it is a steady source of expenditures for the broader macro economy during good times and bad. It needs to remain that way, as a "built in stabilizer."
A steady, reliable source of income is essential for retirement. Those fortunate enough to be working for a government institution or private employer that offers a retirement plan should, without question, take full advantage of that golden opportunity. Those plans, professionally managed, generally offer opportunities to invest in a wide array of stocks and other financial instruments.
My Swiss heritage impels me to advise people to save above and beyond that to the extent possible. To some, this may sound frugal in the extreme. But "Swiss frugality," for which we Schweitzers are often panned, is not about depriving yourself of the fine things in life. It is about not throwing money away on stuff that does nothing to improve quality of life - it's about managing money so you can have the better things in life.
Social Security is the bedrock of a sound retirement program. It's a contributor - not the only one, but an important one - to macroeconomic stability. Beyond that, individuals who are fortunate enough to have one are well advised to participate to the max in their employer-based retirement plan. Beyond that, prudent individuals should make every effort to save and, depending on knowledge and tolerance of risk, put some money into private financial instruments.
Unfettered capitalism is inherently unstable. Markets tend to overshoot. In their attempt to maximize short run profits, large financial institutions run out of control. The Great Depression of the 1930s and the recent Great Recession are grim reminders.
Defenders of unregulated, unfettered markets insist that markets adjust in the long run. The great economist John Maynard Keynes famously reminded us that, "We're all dead in the long run." His point was that it makes no sense to suffer hardship of recession while waiting in vain for markets to - eventually - "self correct," especially when we have the means by which to stabilize the economy and moderate its vicious cycles.
The Social Security program helps moderate the economy. It is a "win-win" situation. It's a win for retirees as a foundation for a sensible retirement program. And it's a win for the broader macro economy for its moderating and stabilizing effect.
Privatizing it would detract from both these objectives. Congress needs to recognize this and make the relatively minor adjustments necessary to assure its long-term viability.
And - keep privatization off the table.
- John Waelti of Monroe can be reached at jjwaelti1@tds.net. His
column appears each Friday in The Monroe Times. He is a retired professor of economics.
Social Security operates from a separate pot of money and has no significant bearing on any real or imagined "fiscal crisis." The Congress could readily assure the future of Social Security with relatively minor adjustments, if only it would be willing to do it.
My objective of this piece is not to review the minor adjustments that would assure future viability of Social Security, but to review some points too often neglected in discussion of this program - namely, its substantial contribution to regional and macroeconomic stability.
In short, Social Security should not - repeat, not - be privatized, even in part. Here's why.
If Social Security payments were tied to financial markets, that is, to the health - or lack of it - of the general economy, recessions would be deeper and last longer. Our most economically vulnerable retirees who depend on Social Security would receive reduced payments at a terrible time. And, recovery of the economy from recession would be delayed.
During an economic downturn, consumer demand and spending falls, business investment in capital equipment falls, and unemployment rises resulting in further reduced consumption spending. But Social Security payments remain stable as a source of reliable spending. Economists refer to this as a "built in stabilizer."
This continuous source of spending is not by its self enough to provide the counter cyclical kick to lift the economy out of recession, but it is a source of continued expenditures that keeps a downturn from being deeper than it otherwise would. Reduced Social Security payments and expenditures during recession would be at the absolute worst time for the macro economy.
Let's take a look at regional effects. Across the Great Plains and much of rural America, many small towns are populated largely by retirees who depend mainly, and some exclusively, on Social Security. Steady, dependable Social Security payments are a source of stability that would be lost if payments were tied to unstable, declining financial markets.
What about partial privatization - allowing a portion of Social Security taxes to be put into private financial markets - the perennial hope for higher returns? It's still a bad idea.
Some citizens might beat the market, but others would not. And either way, a portion of Social Security income tied to financial markets and the economy would fall during recession, depriving recipients of funds when most needed.
I have nothing against putting some money in stocks. I do it myself and follow markets and financial stuff religiously. But money in financial markets should be over and above what goes into Social Security. Social Security can be the bedrock of a retirement program, essential to the individual, and an important contributor to macroeconomic stability.
I learned my private economics and acquired my philosophy on saving and investment while growing up on that dairy farm where every dime went back into the business. And I learned my academic economics at University of Wisconsin-Madison and University of California-Berkeley, from professors for whom the Great Depression was the defining economic event in their lives. Social security payments to retirees are a steady, reliable source of income. And it is a steady source of expenditures for the broader macro economy during good times and bad. It needs to remain that way, as a "built in stabilizer."
A steady, reliable source of income is essential for retirement. Those fortunate enough to be working for a government institution or private employer that offers a retirement plan should, without question, take full advantage of that golden opportunity. Those plans, professionally managed, generally offer opportunities to invest in a wide array of stocks and other financial instruments.
My Swiss heritage impels me to advise people to save above and beyond that to the extent possible. To some, this may sound frugal in the extreme. But "Swiss frugality," for which we Schweitzers are often panned, is not about depriving yourself of the fine things in life. It is about not throwing money away on stuff that does nothing to improve quality of life - it's about managing money so you can have the better things in life.
Social Security is the bedrock of a sound retirement program. It's a contributor - not the only one, but an important one - to macroeconomic stability. Beyond that, individuals who are fortunate enough to have one are well advised to participate to the max in their employer-based retirement plan. Beyond that, prudent individuals should make every effort to save and, depending on knowledge and tolerance of risk, put some money into private financial instruments.
Unfettered capitalism is inherently unstable. Markets tend to overshoot. In their attempt to maximize short run profits, large financial institutions run out of control. The Great Depression of the 1930s and the recent Great Recession are grim reminders.
Defenders of unregulated, unfettered markets insist that markets adjust in the long run. The great economist John Maynard Keynes famously reminded us that, "We're all dead in the long run." His point was that it makes no sense to suffer hardship of recession while waiting in vain for markets to - eventually - "self correct," especially when we have the means by which to stabilize the economy and moderate its vicious cycles.
The Social Security program helps moderate the economy. It is a "win-win" situation. It's a win for retirees as a foundation for a sensible retirement program. And it's a win for the broader macro economy for its moderating and stabilizing effect.
Privatizing it would detract from both these objectives. Congress needs to recognize this and make the relatively minor adjustments necessary to assure its long-term viability.
And - keep privatization off the table.
- John Waelti of Monroe can be reached at jjwaelti1@tds.net. His
column appears each Friday in The Monroe Times. He is a retired professor of economics.
