One thing to listen for in tonight's speech and the class five hurricane of spin afterward is for comparisons by Bush and friends between Social Security
privatization private accounts personal accounts and the Thrift Savings Plan (TSP) for federal workers. (The Hill thinks it will come up, too.)
If it works for our federal civilian workforce, wouldn't it work for the rest of us? Here are a few ideas to ponder if they try to use TSP as a model:
- On the plus side, the TSP has very low fees -- eleven cents per $100, by one estimate -- but they are so low that if it were copied for Social Security, Wall Street would be decidedly lukewarm toward the proposal, as the Hill reports. Well, at least Bush would be able to say it's not a windfall for Wall Street, but politically he would lose allies he was counting on to help push privatization.
- That said, how do the fees stay so low? One reason is that management of the fund is handed to a single firm, Barclays. That will, shall we say, annoy other Street firms, who will press to open the program up. But that would result in higher fees, tighter regulation or -- most likely -- both.
- Another reason the fees stay low is that federal agencies -- i.e., the workers' employers -- pick up a substantial portion of the overhead themselves. This investment ranges from record keeping to investment advice. So, do you think your average small business would be willing to do that, not to mention your average regional grocery store chain? Think again. Either the federal government would have to step in (administrative fees through the roof) or this is a heavy burden on businesses. Or just pass it on to the workers themselves and leave them twisting in the wind.
- But it is said that the risk under TSP is very low for federal workers. Yes, because they are given only five investment options. Will the Cato and Club for Growth people still be as enthusiastic for a program which nearly eliminates individual choice? Isn't that part of the point of privatization for them?
- It does not, however, eliminate risk. Government Executive notes the retirees who saw their TSP accounts drop just a few years ago. Of the five, one fund lost money in 2000, 2001 and 2002, while two more that had been created in 2001 didn't turn into the black until 2003. Only two of the five funds saw modest returns during that period. Brad DeLong, though a lukewarm fan of the TSP option, reminds us that even with only five options, there is plenty of room for people to make stupid mistakes. And, during a downturn in the economy, when three of the five funds under TSP lost money, I don't like those odds even for the less stupid investors.
So, be very cautious of claims that TSP automatically translates into reasonable privatization for Social Security. With tens of millions more workers and retirees covered, and with private businesses taking on a much greater administrative load, you can bet next month's Social Security check that it won't be nearly so easy.