In a commentary entitled "Bush Offers Social Security Savers a Call Option" in his Bloomberg column, Michael Lewis writes:
The hysterical reactions to President George W. Bush's proposal for private Social Security accounts are a little hard to understand. There's still no plan on the table and it's impossible to know exactly how much financial freedom Bush intends for Americans to enjoy -- how much new risk he plans to introduce into geriatric life.Actually, the reaction is not that hard to understand once you realise that it is not the actual plan itself that people are against but the rationale for needing such a plan: The claims that Social Security is facing an impending crisis, needs a drastic fix and that private investments provide that fix. Many Americans, especially in the Democratic Party, have already rejected these claims, alleging that they are based on erroneous assumptions. Prof Brad DeLong, for example, criticises the proposal to privatise Social Security regularly on his blog.
However, Lewis has good points to make about the consequences of Social Security privatisation.
The first social consequence will be to turn every American worker into a Wall Street customer... As a result of their own investment decisions, some old people will wind up with more to spend, and some with less. Anyone who winds up with more will of course be delighted, but what happens to the people who wind up with less?And he may have a point. As Lewis points out, when things go wrong, Americans tend to sue, not accept responsibility for consequences.
What happens to the aged American on his way to the shuffleboard court who finds that he has, for 40 years, traded in and out of the U.S. stock market at precisely the wrong time, and has squandered a big chunk of his Social Security money?
In theory, he will suffer the consequences of his folly. In theory, he will be forced to sell his Florida condo, store his Viagra, and limp back to work. That's the whole point of the Bush plan: to force Americans to take responsibility for their retirement years. To reduce the average American's dependency on the federal government and increase his stake in the U.S. economy -- and thus, presumably, in capitalism. But in practice, do you believe that will happen?
I don't. Specifically, I don't believe that Americans will ever accept responsibility for their financial decisions.
The real effect of any plan that gives Americans the power to invest in the stock market is to grant Americans a free call option on the stock market. If the market rises, the enriched American retiree will congratulate himself on his own wise decisions. But if the stock market falls, or even if it merely stagnates, he'll do what he has to do to get his money back.Which means that instead of ridding the US government of a liability, Social Security privatisation may potentially be transforming one form of liability into another one that the government is even less financially prepared for.