03 Sep 2008

Let’s Really Privatize Social Security

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In my previous post, I explained why I never got on board with President Bush’s plan to “privatize” Social Security. Because Bush wasn’t going to raise anyone’s taxes or cut any government spending, any revenues redirected from the SS trust fund into the stock market, would have to be borrowed right back by the government. On net, there would be no increase in saving and investment in the economy, and so it would be impossible for the plan to make workers richer over time, as the plan’s proponents claimed.

If you really want to get complicated about it, you have to deal with risk. The reason the government can borrow from the private sector at, say, 3% and invest in the market at, say, 8%, is that the government can always resort to taxation and/or the printing press to cover its bonds. So from the individual worker’s point of view, any gain in expected returns is counterbalanced by the risk that the government has to increase taxes and/or debase the currency in the future, in order not to default. As I said, the Bush plan offered no net increase in savings and investment, and so there is nothing to fund this alleged increase in workers’ wealth. At best, the plan could have redirected funds from less risky to more risky investments, which would have a higher expected rate of return. Yet this is hardly what the advocates of the Bush plan thought they were proposing. (I.e., my point about total saving and investment being the same is still valid, but the people who say “Higher market returns!!” could still be correct. What happens is that the same level of investment gets redirected into different channels, because of the Bush plan. Expected returns can be higher, but only with an increase in risk.)

Also, Lew Rockwell made a great point in the last year or so on this: If Bush had pushed his plan through, then the “higher stock market returns” would have been disastrous thus far–can you imagine if 1/3 of workers’ Social Security contributions had been pumped into SPDRs since, say, 2006?!

Anyway, notwithstanding all of my criticism of the Bush plan, I should make it clear that I do think Social Security–which is neither social nor secure, discuss–should be truly privatized. As I explain in this article, all of the demographic problems with Social Security are due to its paygo nature; in a genuine pension plan, it doesn’t matter how many young people come after you, because you are living off the wealth you accumulated during your career–you’re not living off of the labor of the younger generation. At first this seems impossible: Aren’t young people ultimately the ones growing food, making clothes, and producing electricity for retirees, no matter the financial system? Yes that’s true, but with genuine savings and investment, those younger workers are equipped with more and better tools because of the old fogeys who came before them (under a private pension system), and so the young people’s labor is augmented. This is simply not true under the Ponzi scheme established by FDR. The money taken out of your paycheck during your working career isn’t contributing to a growing pile of new equipment, to augment young folks’ labor when you retire; no, it’s being consumed as you earn it, by present retirees.

So how do we move away from the present system, and into a truly private one? Well, as my critique of Bush’s plan suggests, there’s no painless way to do it. Once a Ponzi scheme is in motion, someone has to bite the bullet to break free. I think one way to do it would be to allow everybody to opt out, including those who are in their 40s and have already “paid in” a lot. Then implement a means test to give true welfare payments to the elderly, widows, etc. whom the public doesn’t want to leave out in the cold. It’s true, I don’t like this system either, but it seems like the only feasible way to get out of the present arrangement.

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