The Journey of a Privatized Social Security Dollar

This is George.



George is in charge of the biggest and most successful retirement insurance program in the world.

This is George's friend Ken. You might remember the company he used to run.



George has a terrific idea for you ...and Ken. Mostly for Ken. Here's what he'd like to do.

First, George will borrow a dollar from Ken. He'll do this by selling US Treasury Securities to Ken. Ken knows this is a pretty good investment, because they're backed by the full faith and credit of the United States, with a low rate of return but with virtually no risk.

(George has been borrowing a lot of dollars on your behalf from Ken lately, but that's another story.)

Next, George takes a dollar from you in Social Security payroll taxes. Right now, when you give that dollar to George, you're paying part of some retiree's monthly Social Security installment, and you expect that somewhere down the line, some other person will help pay yours when you retire. That's the contract that forms the basis of Social Security.

Well, George takes your dollar and gives it to the retiree just like he's always done. However, George says he's got a better idea for the second part of the deal: you know, the one where you get paid back that dollar when you retire.

Here's the deal, says George. (He almost said New Deal.) He's got that dollar that he just borrowed from Ken. He says, instead of giving it to you when you retire, he'll give it to you now, and then let you invest it in the markets. He says that he's sure that by investing it in the markets, you can earn a high rate of return. High enough, he says, that you'll end up with much more money in your retirement than you'd end up with if you just had Social Security.

Well, that sounds pretty good, doesn't it? Who wouldn't want more money when they retire, right? So you say, Sure, George. Sign me up. And you hold out your hand for that dollar.

Oh, no, you don't understand, says George. He didn't say he'd just give you your dollar back. See, what he meant was: He's going to invest this money in the markets for you. And then, when you retire, he'll give you that dollar back, plus whatever you earn on it from investing it in the market.

That's not exactly what George said at first, but what the hell. You're still going to get those great returns from investing in the market, right? So okay, you go along with it.

George takes the dollar he borrowed from Ken, and he puts it into an account with your name on it. Then, he uses that dollar, from that account, to buy a share of stock in Ken's company. Now, your account is just one of many millions of accounts that George controls this way, so when he starts buying stock in Ken's company, he's buying a lot of stock, and the price of the stock starts to rise. Pretty soon, the stock that George bought for you for one dollar is worth two dollars.

Ken has a few shares of his company's stock, too. Ken likes the fact that his stock price is going up, especially since he didn't pay anywhere near what you paid for the stock. But hey, as long as stock prices are rising, who cares? After all, it's worth a lot more than you paid for it, isn't it? So everybody's happy. Pretty soon, the stock that George bought for you for one dollar is worth three dollars.

At this point, George tells you that there's something else about your account you need to know about. Since it's a private account, he's going to charge you a quarter to administer it for you. Well, what the hell? After all, you put a dollar in, and now it's worth three dollars, which is two dollars more than you would have gotten back with old Social Security. So even minus a quarter, you're still way ahead of the game.

A few years later, Ken is found to have committed a few felonies in the conduct of his business.



It seems his company wasn't doing nearly as well as everyone thought it was doing. Ken was lying about the state of his company's finances in order to get people to keep buying his company's stock. That's called securities fraud.

Of course, Ken has known for a long time that the jig was up. (When you have friends like George, you know when the FBI is on its way.) That's why he sold all of his stock, at three dollars per share. Ken made a lot of money. But by the time word of his arrest and his company's collapse reaches you, the selling frenzy has already begun. Ken's company's stock is worth a penny a share.

Remember that dollar? All you have left of it is one cent.

There's nothing I can do about that, says George. Investment carries risk. You read the prospectus before you signed on.

That's right, says his friend Paul. "Part of the genius of capitalism is that people get to make good decisions or bad decisions. And they get to pay the consequences or to enjoy the fruits of their decisions."

Well, says George, now that it's time for you to retire, let's see how you did.

You have one penny in your account.

You owe George a quarter for managing the account. That doesn't depend on how well you did.

Oh, and remember the dollar you started the account with? George borrowed that dollar from Ken, but in thirty years, a 2.5% bond has doubled in value. Remember, George borrowed it in your name.

So now you owe Ken two dollars and George a quarter. Those are tax dollars, by the way, which makes George's IRS, in effect, Ken's collection agency.

You haven't got it? You were counting on that three dollar return? That's too bad, but George will be all too happy to help you out by liquidating your house or anything else you have of value.

Ken needs that money, after all.

See, after bankruptcy reorganization gets that company back on its feet, Ken has some penny stock to buy.