Privatizing Social Security? No thanks, says Eliot Spitzer

Slate has a good piece today by Eliot Spitzer (yes, that Eliot Spitzer) suggesting that it's now time to kill off the goofy idea of privatizing Social Security. Here's the gist of it:

Since Jan. 1, 2000, the Dow has dropped from 11,497 to 8,000, a drop of more than 30 percent. So what would this have meant to an average recipient of Social Security?

Let's try to quantify this, albeit roughly. Under the current system, a couple earning a household income of $100,000-$150,000 per year would get slightly more than $3,000 every month in Social Security benefits. And their benefits would be inflation-adjusted every year. Suppose the couple were to invest for retirement in the private markets. With an income of that size, the couple would be able to save about $500,000. As Allan Sloan calculated in Fortune, a couple retiring at age 66 at the end of 2007, having accumulated $500,000 in a private savings account, would have been able to purchase an annuity delivering $3,000 per month until the death of the longest living of the two. In other words, that couple would get an annuity worth about the same amount as their Social Security benefits. A couple retiring at the end of 2008, by contrast, would have been able to purchase an annuity delivering only $2,000 per month—a 33 percent loss.

In other words, if Social Security were in private accounts, the payout you'd receive would be more correlated to the timing of your retirement than to anything else. With a privatized system, those retiring in 2007 would have been reasonably pleased—though they still wouldn't have made a windfall compared with normal Social Security benefits—while those retiring now would be devastated, receiving vastly smaller retirement payments.
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Social Security is, as we all know, a Ponzi scheme that would make Bernie Madoff proud. Today's contributions by workers pay for today's payouts to recipients, with some being saved in a trust fund that, given changing demographics, will be exhausted several decades from now. If we were to create private accounts for current contributions, invest those accounts in the market, and thus withhold those dollars from the system for current payouts, the shock to the system would be enormous. Where would the money come from to pay current recipients? We would incur a "transition cost" to privatization, as it is politely called, in the trillions of dollars—money that would have to be borrowed in the market to cover the lost cash flow into the Social Security system.

And that fact makes clear the fallacy of the next argument often proffered by privatization supporters: They claim that the flow of dollars into the private accounts and then into the equity markets will stimulate the economy. The problem is that for every dollar put into the market through a private account, the government would have to borrow a dollar in the market to cover existing payouts. Thus the supposed benefit is entirely eliminated, as the net impact on the capital available for investment is zero.

It's a good article. Looks like Eliot Spitzer's working on his comeback.