As several readers have written in to point out to me, Senator George Allen (R-VA) made some odd comments on Meet The Press yesterday while I was busy trying (successfully!) to stuff a Klippan couch into a Honda Element. Allen says that “in the event that a personal savings account approach is taken” with Social Security, we ought to allow people “to invest in a home in addition to . . . stocks, bonds and other financial instruments.” After that he suggested that old people should finance their retirements by selling their homes because “they don’t want to be cutting grass and trimming hedges, and that is good for the economy as well.”
This suggests some intriguing new spin possibilities. Why do Republicans want to cut Medicare and food stamps? To save poor people from the trouble of going to the grocery store and taking kids to the doctor!
Snark aside, there’s a serious point to be made here. When selling phase-out to policy mandarins, journalists, etc. the administration is always quick to point out that there will be severe restrictions on where people can put their money. Just four or five balanced investment funds, all relatively safe. That’s important, because if people are given free reign to do whatever they want with their nest egg, some people will invest it very poorly or very unluckily. Even if most people do fine, this is a problem, because if any non-trivial number of people see their account tank, there’s going to be irresistable political pressure to bail them out. But once you start bailing a few people out you create a moral hazard and we’ll wind up in a downward spiral of bad investments.
But when selling the plan to the public, the White House is all about choice. Your private accounts will be yours and yours alone! The government has no right to tell you what to do! There are going to be a lot of business lobbies out there working right away to loosen the restrictions on what people can invest in. Real estate interests will push for the Allen plan. Financial services companies will want to let people pick and choose individual stocks — or at least invest in heavily-managed mutual funds that generate more fees. And just as with 401 (k) plans, the coalition of lobbyists and libertarians will succeed. Some folks will think that’s great. I disagree (see moral hazard below). But agree or disagree, everyone should understand that the administration’s promises on this score are not credible. But then again, when are they?
