11Financial Theory

11Financial Theory - Financial Theory

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Financial Theory: Lecture 11 Transcript October 8, 2009 << back Professor John Geanakoplos: Okay, today we're going to talk a little bit more about Social Security. Social Security, remember, is the biggest program the government runs. Its annual expenditures are slightly bigger than the military expenditures every year, and those two things are way bigger than everything else. It's been the biggest program the government's run since the New Deal, since Franklin Delano Roosevelt put it into effect in the late 1930s, and it seems to be broke. So it lasted for 70 years, and now it seems on the verge of going broke. So what happened and how can we fix it? And as I said, this has been a topic of conversation, presidential conversation, at least since 2000. There were a bunch of commissions before that, looking at the problem, and what I said last time was, the general public and our politicians seem completely confused about what's going on. So we need to figure out, how could it be that the program went broke? Should that have been a surprise, and how can we fix it? And the three standard things everybody says is, President Bush and many people like him saying, "Well, the system's going broke. The rate of return young people like you are going to get is less than 2 percent a year. That's terrible. Any bond, any stock, you can expect a much higher return than that, so the program's just awful. We should stop it or privatize it." I'll explain what privatizing means. In that way, your money, instead of going to old people, will be put in the stock market and you'll get a higher rate of return and you'll do much better. Then a second thing people say is, "Well, the thing lasted all this time. I mean, what's really gone different? What could possibly have caused the change? It must be those dastardly baby boom generation-ers, like me, who are headed towards retirement in another 20 or 30 years, and they're going to bankrupt the system. There are going to be so many of those old geezers hanging around needing to get paid, that young people like you won't be able to carry the burden, and so it's our fault." And then there are the people, the naysayers, Gore chief among them, but many others, Obama now similarly saying, slightly similar things, saying, "Well, privatization doesn't make any sense. It's logically impossible, because if you take the taxes that the young people are paying, and tell them, those Social Security taxes, they can invest in private accounts, the stock market, with their own name on it, then how are we going to give money to the old people now? So you'll just be screwing the old generation." So privatization is impossible. So those are the three most standard things people say. All three of them have some truth to them, but on the whole, they're substantially wrong, completely wrong, and once we clarify what stage the system is in, we'll be able to think about what the right solution is.
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11Financial Theory - Financial Theory

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