March 05, 2005
National Savings and Social Security
I seem to have confused a dead parrot--which, when you think about it, really is quite an unusual accomplishment.
The Dead Parrot Society: Savings and Social Security: "The 'conservative' position on Social Security and its effect on national savings seems reasonably clear. If the government issues bonds to allow people to buy stocks with Social Security taxes, the private sector will have to buy bonds and sell stocks. In net, these effects likely offset dollar for dollar. This is the position of Barro, Becker, and apparently Mankiw and Swagel who describe private accounts as neither a panacea nor threat.
Overall, conservatives hope that national savings will increase in the long-run, however, because (a) this will encourage everyone to become an investor and (b) this is the first step toward moving from a mostly pay-as-you-go system to a fully funded system.... To the extent that raising payroll taxes would simply lead to increased government spending, this might raise the implicit debt obligations of the future; therefore, putting Social Security surpluses into the market might also lower government spending and future borrowing. These reasons all tend to appeal to conservatives, thus they tend to view private accounts as attractive and the effect on national saving as either zero or positive.
I have never pretended to fully understand the 'liberal' position, and Brad DeLong's post today reinforces my confusion. He takes great exception to the above characterization: 'Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know ...' [T]his... I believe, makes Brad DeLong the first economist to go on record arguing that privatization will actually reduce national saving....
Let's say that private investors today put away $K in their 401K's, all in stocks for simplicity. This amount coupled with their Social Security benefits ($B) will add up to some future wealth value, say $W. You can think of all these amounts as present-values.
Now, let's chop $B down, dollar for dollar and put the money instead into a new private account, $P, so that we now have $B-$P in Social Security wealth. The conservative argument is that people will sell some of their $K worth of stocks, rebalancing their private 401K to contain $P worth of bonds and $K-$P worth of stocks. In net, therefore, we are back where we started: $K of stocks ($K-$P of it in your 401K, $P of it in your private account). You would have $B-$P worth of traditional social security benefits, but you also $P worth of bonds in your 401K, so it all adds up to $W in the end. No direct effect of private accounts on national saving or wealth.
Brad DeLong is essentially arguing that privatization will make you sell even more than $P worth of stocks from your 401K. In such a world, we would have less than $K worth of stocks in total, we'd have $B-$P in Social Security wealth, and $P in bonds. Overall, therefore, we'd have less than $W for tomorrow. This means that privatizing Social Security would actually reduce future consumption below $W....
Let me first take exception to having my position called "liberal." My position on this is the same as Alan Greenspan's, who says:
Alan Greenspan: First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back. If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector'. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.
What Greenspan is saying--what I am saying--is that the Dead Parrot might be right--it might be the case that you wind up with "no direct effect of private accounts on national saving or wealth." But it might not be right. And if it is not right, then, as Greenspan says:
[I]t would be creating more difficulties than I would imagine. So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way.... I do say, as I said previously, that I would be very careful about very large increases in the [government's] debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'
My position is that we really don't know what the impact of having the Treasury sell $4.5 trillion more of government bonds and then having individuals invest that $4.5 trillion in their private Social Security accounts will be. I would bet that there's at least a 50-50 chance that it will be a wash as far as national savings is concerned. I would also bet that there's at least a 20% chance that it will shrink national savings significantly--that people will regard their private accounts as relatively close substitutes for their 401(k)s and other assets, and so reduce the amounts they commit to funding their other retirement savings.
What I object to are assertions that people know that the effect on national saving will be a wash. They don't know this. What I object to are assertions that worriers--like me and Alan Greenspan--should "stop railing about the budget impact [of the Bush Social Security plan]. The... increase in the budget deficit won't place a new burden on future generations." There's reason to hope that this is the case, and I think it is better than a 50-50 bet. But as Uncle Alan said, it's important to go slowly: if it is a big mistake, we need to find that out in time to stop it.
There's nothing "conservative" about plans for large social and economic transformation based not on evidence but on hopes about what is the case. Nothing conservative at all.
Posted by DeLong at March 5, 2005 05:22 PM