Today was the first day of three days of International Baccalaureate training at Global Jaya. One of the guys who plays futsal on Sundays is a principal at Global Jaya, not to be confused with the principal because the place is huge! It's literally a campus with four or five buildings, tennis courts, and multiple fields! Needless to say, compared with Mentari, which has been forced to build up due to a lack of acreage, Global Jaya is a suburb unto itself. Additionally, I ran into Kevin (futsal buddy) during the morning coffee break and we were able to catch up and chat a but, but unfortunately he thinks he has Dengue Fever. He's going to the doctor tomorrow, so hopefully that yields positive results, but is definitely sobering.
This past week, I viewed an e-mail chain passed between a number of friends regarding privatization of social security and I thought it over for a while, since I had a good amount of time to think on the bus to and from Global Jaya today :). The phrasing alone "privatization of social security" sounds scary. It elicits images of the government abandoning its duty to protect and serve its senior citizens by handing over social security to the highest bidder. Honestly, given the way in which Russia was "privatized," this image has relevance, power, and is a major cause for concern - just ask any Russian who lived through the 90s how privatization "helped" them out. However, this is not what it means to privatize social security. In reality, you would have a better understanding of what has been saved for you because you'd be able to see the total figure in an account rather than rely upon some formula concocted by Congress. Granted, that formula hasn't changed much, but that's the problem. 'Defined-benefit' packages are unsustainable and as the bulk of the baby boomers retire, they will suck up the reserves built up for social security and become a major liability for current tax-payers unless the formula for paying out social security is changed, which would be an actual hit to the security of the elderly in America, thus should be avoided if at all possible.
Furthermore, the psychology of Social Security is twisted. Social Security is the "net" for your retirement that continually pays out, but as my brother likes to say, he's a fan of smokers because they're saving Social Security for him. The reality is, if you die for whatever reasons shortly after you retire, you won't have collected anywhere close to the amount of Social Security that you contributed over time. Some may say this doesn't matter because, well, you're dead, but if you happen to have a family, it might make a great deal of difference. Overall, Social Security simply becomes a nebulous security blanket of payments you can assume to collect in your old age. Furthermore, since this security net exists, it creates disincentive to save enough money on your own. Figuring out how much you need to live on during retirement is extremely complex (ie, will you be maintaining your standard of living, thus need to be accustomed to revenues similar to what you had during your working years, or will you be taking advantage of every senior citizens discount and thus rely on less money, or will you use this time to travel and do things you never had time for during your working years in which case you'll probably need more money) The natural reaction to this matrix of choices is to throw up your hands, say "I don't know," save what you can (as long as it doesn't spoil too much of your fun right now) but know you have some unknown quantity of money (S.S.) to fall back on. Instead, by privatizing Social Security, you are giving the people the knowledge of exactly how much they have in retirement and also makes for an easy forum in which to inform people a loose range of how much money they will need depending on the age in which they plan to retire (taking into account all three scenarios described above).
The main issue arises with how to go about privatization, and thanks to Sweden, we can learn a lot of lessons. First of all, and this isn't limited to Sweden, but is something that must permeate the public sector, and that is to simplify economic public policy issues. By convoluting the language, people are confused and they make the wrong choices. This brings me to my first point, and that is for effective privatization of Social Security, people need a wise 'default' option. This is, in fact, what Sweden did. The default was carefully chosen to have an appropriate asset allocation for long-term growth between equities, bonds, and other financial instruments, however, in the spirit of self-determination, the Swedes wanted their citizens to make their own choice of funds. This brings us to mistake number one. At the out-set, there were 456 different funds for the Swedes to choose to put their retirement savings into. 456. Clearly, this is far too many funds from which to appropriately differentiate anything beyond rates of return (which at that time were wildly in favor of technology stocks, since Sweden privatized around the height of the tech boom and consequently too many citizens invested in tech heavy funds) Lesson 1, limit the number of funds and clearly demonstrate the differences in their asset allocation. Second mistake, the Swedes actively advertised for choosing a fund other than the default and allowed the funds unlimited ability to advertise in favor of their own fund. Consequently, most Swedes abandoned the carefully chosen default fund in favor of whatever was made to sound best to them. Lesson Two, dealing with money is complicated enough for most people and if you've assembled a broad team of experts who have diligently done their best to choose a secure long-term fund, don't advertise against it. Rather, change the branding to say that the default has been chosen carefully by experts in the field, but that you are welcome to change your fund to one of a limited number of clear alternative funds.
By learning from the Swedes, we can help make peoples retirement savings more transparent and potentially more secure than by staying with our current 'defined-benefit' system. The danger of the defined-benefit system is that if we run out of money, we either will be forced to change the formula or make up the difference through increased tax revenues (and we all know how much people love to see their real income decrease...) By transitioning to a 'defined-contribution' system, more specifically, your current contribution to Social Security but set aside solely for you, that money can't be taken away from you by an act of Congress. Yes, it would mean your retirement is subject to market vulnerability, but let's discuss where the market was in 1960: around 600, 1970: around 800, 1980: around 850, 1990: around 2500, 2000: around 10000, and today: around 10000 - after the "Great Recession" nonetheless. But for those of you who don't feel confident in the market, you could choose a different fund than the default, likely one that invested in T-bills, which are safer than Social Security would ever be.
One of the more difficult questions is how to transition the country to a privatized system that doesn't hold the government to any 'defined-benefits,' just continued 'defined-contributions' from your paycheck. This will most likely use up our entire savings of over $1 trillion for Social Security, but in the long-run, that will be a drop in the bucket and well worth the start-up cost.
Last thing, this morning I got a fee waiver from UVA, kind of freaked out and hadn't recovered before meeting up with my ojek driver this morning. I don't think he really understood, I honestly don't think I do yet.