Bush's Social Security reform effort was rather puzzling.
My recollection is, he called for SS reform in a string of speeches about 2 years ago, but never put a coherent proposal into an actual bill that could get anywhere in Congress. His message was "Dear Congress: I want reform. You figure out the details." Unfortunately the devil really is in the details with this issue. The Republicans controlling Congress weren't willing to put together an actual bill and bring it to the floor, probably having heard that SS reform is the "Third Rail" of politics.
The Democrats weren't eager to supply the missing leadership, nor could they have in the wake of the 2004 election. The whole thing just fizzled, Bush found out that he had much less "political capital" than he'd thought, and Social Security reform got pushed off the stage by the worsening Iraq situation.
Social Security reform is a fearsomely complicated task. Private accounts are fine for young workers just starting out, but they make the system's funding gap worse by diverting money needed to fund benefits for older workers and current retirees, so you need to cut benefits or raise taxes or increase deficits to close the gap during the transition.
Personally and selfishly, I'd welcome a privatized or partly-privatized social security system. It would send a flood of money and fees to the capital markets, which seems like a Good Thing for someone like me who works in the market. I don't (again, personally and selfishly) much care whether a privatized system results in higher benefits or just higher transaction costs. Actually, higher transaction costs is probably good for my industry.
Some "basics" links in case anyone is interested. There is almost no chance of social security reform for the rest of Bush's presidency, but I hope the issue will come up again in some other Administration.
http://www.aicpa.org/members/socsec.htm
http://money.cnn.com/2004/12/06/retirement/social_security/
Oh, here is something I have wondered about. I think it would be interesting to think about, so I'll mention it.
One of the claimed problems with the current social security system is that it is essentially an unfunded obligation. The $1.7 trillion dollars supposedly in the Social Security Trust Fund are actually simply IOUs of the Federal government, the actual cash having been spent along the way. The great majority of the money needed for future benefits is not even represented by the Trust Fund IOUs, but will simply be funded from taxes along the way.
In contrast, the appeal behind a privatized system is that is would be funded. Your future benefits would be backed up by the money accumulating in your own account today.
Okay, let's see if that would really work. Suppose we fully privatize Social Security. Somehow we get through the transition and 150MM Americans each have private retirement accounts that are invested in the market and will provide for their retirement income. Now what?
First, how much money are we talking about?
The US labor force is appx 150MM people. Suppose a worker on the verge of retirement has $350K in his private retirement account, present value of $20K/yr for 30 yrs at 4%. Suppose the average US worker has 1/2 that amount in his account, averaging out the young and old workers. That's appx $25 trillion dollars in these accounts (in 2006 dollars).
Second, what the heck are all these accounts invested in?
Can't be stocks, not most of it anyway. The entire US stock market has a market capitalization of only $25 trillion roughly. Pouring all the private retirement accounts into US stocks would double the US stock market cap, making stocks grossly overvalued - and grossly overvalued assets have negative returns. Maybe we let these private accounts be invested abroad, but that doesn't help much - the entire global stock market is only about $44 trillion market cap.
So a huge chunk of it has got to be in bonds. The US bond market has a market cap of appx $25 trillion, about $7 trillion is US treasury debt ad the rest is corporate, municipal, mortgage, etc. I'm going to guess the global bond market is $50 trillion - I can find the actual number if it matters.
Alright now, we have the entire country's retirement savings (the Social Security part, anyway), totalling $25 trillion, invested let's say 1/3 in the stock market and 2/3 in the bond market.
Third, how secure is this?
Well, the stock part is vulnerable to bear markets. It can easily go up or down 20% in a year. Worse yet, such an enormous sum of private retirement account invested in stocks could become like the tail wagging the dog. When we get a demographic wave of retirees, their accounts start selling stocks, driving the market down. When a recession sends the market down 20%, 150MM Americans get scared about their retirements and start tightening their belts, causing the economy to slow even further. Sounds like it could be pretty volatile to me.
And the bond part? Bonds are merely IOUs from a government or a corporation. Bond issuers can and do default. The safest bond in the world, a US Treasury bond, is nothing more than an IOU of the US government - in fact, basically the same IOU that the much-maligned Social Security Trust Fund now holds. A $1MM US Treasury bond is risk free because considering the size of the US government and economy, there is no chance of default. But is a $20 trillion US Treasury bond "risk free"? The federal government takes in only about $2 trillion/yr in taxes. Wouldn't you call a borrower with debt 10X his revenue a "high risk"?
Bottom-line, my question is whether the US financial system actually has the ability to accomodate the massive sums of money that would come with a fully privatized social security system. Or would it create a massive and unstable bubble, potentially 10X larger than any previous asset bubble in our history?
Thoughts? What am I missing?
Parting (selfish) thought - if such a bubble were created, I guess I'd be okay with it. I'd make a fortune, convert it to gold, and go live in Switzerland during the ensuing Great Depression II back in the US.