Tyler Cowen has some interesting thoughts on privatizing Social Security. (I would point out that my own position is more... nuanced... than Tyler says it is. I am attracted by the idea, and see how it could be done in a way that would make the world a better place, but that is overridden by the mendacity, malevolence, incompetence, and simple disconnection from reality of the Bush administration: everything they touch turns to mud--and it is a good bet that they will make as a big a mess of this as they made of the Medicare drug benefit or farm policy or fiscal policy or energy policy.)
Posted by DeLong at October 19, 2004 11:03 AM | TrackBackMarginal Revolution: Should we privatize Social Security?: I agree with most of Brad's analysis (though the equity premium matter is complex and poorly understood), but I am less sanguine about the privatization idea. I wish to privatize many things, but forced savings is not one of them.
[...]
Most of all, I am worried about the fiscal implications of this privatization. Current plans need not, in the long run, cost us any money, as Arnold Kling reminds us. But they do require a big tax increase in the short to medium run. In essence the proposed reforms stop collecting "pay as you go" contributions and move everyone possible toward private accounts. But during the transition an influx of money is still needed to pay off the current elderly, therefore the tax increase. And we are talking trillions here, not just small change.
Of course these taxes must come sooner or later, given that privatization is simply shifting future claimants out of the public sector expenditure nexus. So if we raised taxes today, to finance a transition, and cut them twenty years from now, social security privatization would be revenue-neutral in this regard (of course it could influence revenues along other dimensions).
Now you can see my fear. If we move to privatize social security, I predict that higher taxes today will mean still higher taxes tomorrow, not an eventual tax cut. People would grow to tolerate the higher taxes, and our ever-diligent Congress would find new ways to spend the money (don't trust any promises to the contrary -- remember when they told us that social security numbers would never be used for purposes of personal identification?).
I think of social security as having two parts: a welfare system for old people, plus a regime of forced savings for the young. The Bush plan cuts back on the welfare angle, but also would put the forced savings in the private sector.
If we were starting from scratch, I could imagine that a fully vested system of private accounts could make sense. But given where we are, I would like to see social security evolve into a system of welfare for the elderly, and junk the forced savings aspect. Keep in mind those "private" accounts will be regulated rather than truly private in the libertarian sense. They will channel benefits to government-approved providers, thus leading to bureaucracy, regulation, and costly commissions. And if anyone's account goes bust, do you really think there will be no secondary safety net to bail them out? What if the whole market went bust for about ten years' time?
One of the original virtues of social security was its minimum administrative costs and its relatively "clean" fiscal nature. Let's not lose their properties of the system just to privatize something -- forced savings -- that should be a matter of voluntary choice in the first place.
So let's push for means-tested benefits, and hope that social security slowly but surely shrinks and evolves to a welfare system for the needy elderly. It should not be a stranglehold over every mainstream employment relationship.
It may sound like a strange world where Brad DeLong endorses social security privatization and I oppose it. [Well, not quite--not with this crew...] But given the other views we hold, this is where we each ought to end up.Brad also takes on whether the government could finance the transition to a more private system by borrowing (also read Bruce Webb's comment, number two in the list). After all, government debt would be higher but government long-term implicit obligations are lower. Would this simply be a wash? (Arnold Kling believes "yes"). I am skeptical. When it comes to government, measured nominal flows tend to be sticky. So say our government increases its borrowing today but lowers its SSA obligations for tomorrow. Even if the transaction can balance without a current increase in interest rates, the increased rate of borrowing (or taxation) will tend to stick in the long run. Plus there is a time consistency problem. If the new debt is placed smoothly, government has an incentive, ex post, to accept some new unfunded liabilities for the future. Knowing this in advance, the bond market will be suspicious about the new debt offering.
I must say, this comes as a shock. I figured you would be more on the Bob Rubin side: have private accounts if you want, but don't destroy the guarantee.
So, if I can pick your brains for a second, how would you go about doing it?
Posted by: Brian at October 19, 2004 12:56 PMAnd when their investment accounts go to shit and we had a bunch of destitute seventy-year-olds we can always reinstitute Social Security.
Posted by: LowLife at October 19, 2004 12:57 PMI think it was queen elizabeth the first who instituted "work houses",. where the indigent could get a bed and food. Now that you have abandoned The Magna Carta, are you going to allow the indigent to starve to death?
Posted by: old ari at October 19, 2004 01:20 PMWhat would be the effects of these temporarily higher taxes on things like economic growth? When you are talking about a substantially higher level of taxing for 20 or 30 years, you are talking about a potentially lower consumer spending for decades. This is not just hypothetical, I live in Uruguay, where we have done just that, and the effects are still uncertain.
Posted by: Carlos at October 19, 2004 01:47 PMReinstate the estate tax with an indexed $4 million floor and 80% for over $10 million. Use the additional 30% to pay off SS obligations. Soak the rich. SS future obligations are not unaffordable.
Health care is a problem in the absence of cost containment.
Posted by: bakho at October 19, 2004 02:00 PMBrad DeLong -
There are five reasons to be in favor of Social Security privatization. They are:
1. There are large-scale financial market failures which cause the equity premium to be *way* too high: the stock market does a lousy job at mobilizing society's risk-bearing capacity as applied to investment. Privatizing Social Security and mandating that such accounts be invested in stocks rather than holding the public Social Security Trust Fund in Treasury bonds is a powerful way to try to repair this market failure by boosting demand for equities
2. Too many households are myopic: they do not save enough. Households resist increases in Social Security taxes--they see no link between the taxes and their future benefits. But if Social Security were privatized so that households saw their Social Security contributions as their own, in the future there would be much less objection to upping the contribution rate--and so creating a real and more effective forced saving program to raise the national savings rate.
3. Prefunding Social Security is moral: it is unfair to make tomorrow's young bear the entire burden of financing the retirement of the baby-boom generation. But prefunding requires raising Social Security contributions and building up huge assets in the Social Security Trust Fund--enough assets to give the Managing Trustee of the Trust Fund effective voting control over corporate America. The Managing Trustee is the Secretary of the Treasury. Do we want the Secretary of the Treasury casting the deciding votes in every election for corporate boards of directors? No. Hence privatization is a necessary first step to create the possibility of doing the moral thing--making the boomers build up the assets needed so that they can shoulder a greater share of the burden of financing their own retirement.
4. We need to raise our national savings rate. But if we just raise Social Security taxes, Congress will treat these taxes as general revenue and spend them. Only by funneling Social Security contributions into some vehicle that Congressional representatives cannot interpret as a resource available to fund current spending can we raise the national savings rate. And private accounts are the best vehicle we can find to (a) accumulate contributions without (b) allowing Congressional representatives to seize them as resources available to fund current federal spending.
5. At present, your Social Security benefits are yours only by grace of Congress: Congress could cut them if it wished. But if your privatized Social Security account were *yours*, then it would be yours not by grace of Congress but by right of property: courts would stand ready to defend it against any casual attempt to cut or confiscate it.
Posted by: anne at October 19, 2004 02:02 PMhttp://www.j-bradford-delong.net/movable_type/2004-2_archives/000269.html
Citation on Social Security privatization. Cutting Social Security benefits for the baby boomer retirees, would be a betrayal of trust. I am thoroughly opposed.
Posted by: anne at October 19, 2004 02:05 PMThe whole point of Social Security is to have a government guaranteed benefit that lifts low income people out of poverty and provides a safety net for the middle class. It does that job admirably. Lowering that guarantee to introduce risk undermines the social benefit and provides little or no economic benefit.
Posted by: Hans at October 19, 2004 05:28 PMI have just sent an email on the subject to Jerry Pournelle (his site is at http://www.jerrypournelle.com). I'm pasting its contents in below. Does the Australian precedent look familiar?
The quotation follows:-
You described a slow transition to move from social security to personal
investment. I once wrote an article about this for an Australian
magazine, News Weekly. It's at
http://member.netlink.com.au/~peterl/publicns.html#NWKART4. Your
transition actually gets a few people caught in the works and doesn't
clean up until their demographic has moved off the board a generation
later. That article describes a better approach with an age structured
phasing out, with age related income tax cuts and social security
entitlement, with the cut off ages moving slowly apart until everybody
has switched.
Unfortunately there is a problem with the comparison you made between
the returns on investment and social security. You gave good advice, but
only for individuals for so long as everybody else doesn't try to
invest. If everybody tried it the investment returns would come way
down. It would still be worth it, but only because of the waste of
the transaction costs of "investing" through government and the gain of
genuine new productivity from real private investment.
Of course, you still have to make sure that the government doesn't tax
away the gains and give a free ride to people still doing it the social
security way. Here in Australia the government has a whole load of
hidden taxes on private superannuation, so that it's a really bad deal
for individuals.
In Australia there are moves to push people into private investment,
i.e. from government intervention. That just makes the private channels
wasteful, allowing them to put up their own take - it isn't really
private, but government regulated and enforced investment through
controlled corporate channels that started out as private options.
Also, we here have different demographic problems. Even with greater
returns from investment, they can be swallowed up by the increased real
prices of services the retired need. That's because there is still going
to be a smaller base of working age people providing those services, a
Ponzi scheme effect that is covered at the moment by an expanding
population whether the retired have their own funds or not. So we
still need to look at the demographics.
Of course your advice is still sound, provided you keep it to just a few
people. Then they would get the improvement, but other people would find
they had less than they used to.
Yours sincerely,
P.M.Lawrence.
GST+NPT=JOBS
I.e., a Goods and Services Tax (or almost any other broad based production tax),
with a Negative Payroll Tax, promotes employment.
See http://member.netlink.com.au/~peterl/publicns.html#AFRLET2 and the other
items on that page for some reasons why.
Remember that we can invest part of the SS taxes in markets etc., but do it in a shared fund for all participants instead of as individual accounts. We can, that is, unless those who can't stand the government involved in markets get in the way.
Posted by: Neil' at October 19, 2004 07:40 PMI don't see any connection between the equity premium puzzle and privatisation. In fact, if there is still an equity premium, it is probably there because people do not know how to invest reasonably (buy and hold the market portfollio).
As I have mentioned from time to time, I think you can get any benefits of privatisation, without the costs, if the social security administration buys a fraction (same for all shares) of all shares and then is required by law to vote the shares proportionally to how other shares are voted.
What's the problem ? What advantages does privatisation have except that it forces people to do two things they don't want to do (save and bear risk) instead of just one ?
My plan is socialism but what's the problem ?
Posted by: Robert Waldmann at October 19, 2004 07:53 PMMaxSpeak has a more reality-based view than yours on privatizing social secirity. Aside from the estd. admin. costs (based on Chile and UK) of 10-15% vs .00% at present. Of course Bush wd. be presenting Wall St. w/ a great gift.
Posted by: Dick Fitzgerald at October 19, 2004 09:01 PMHow about:
Limit social security payments to retirees with assets less than $100K. Payments not taken get accrued in personal accounts for the more affluent, which can be later fully withdrawn if their assets drop below the 100K threshold. Accounts earn t-bill rates, balances remaining at death get inherited tax free.
The more affluent lose the temporary use of their benefits but not the security. The social security fund sees increases due to benefits delayed, which allows new workers to privatize.
Yes, no, maybe?
Posted by: Bliss at October 19, 2004 09:13 PMA $100,000 threshold is way too low. Someone just retiring, with a decade or more to live, would be in serious trouble with only $100,000 in assets. In fact, when Pew Hispanic whatchamacallit reported on the divergence in white vs minority household wealth this week, one of the points made was that minority households suffer from inadequate access to financial institutions. Holding less than $100k in assets means things like laddering CDs (thereby raising the average return of risk-free holdings), while holding sufficient cash in a checking account to cover short-term outlays becomes far less doable. Assuming that a new retiree will live more than a decade, the new retiree probably wants a solid stock mutual fund in the mix, too. Magnitudes matter, both in returns to CDs and in fees paid. Think in terms of multiples of $100k.
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