If you're going to privatise, then why bother having any sort of system at all for people who want to opt out? Why not let people decide for themselves how much to put aside for retirement?
Oh, right, because a lot of them won't. Let's face it, the SS system is an anti-poverty program for seniors. And it will continue to be so, at least until it goes bankrupt. Those who save nothing, either through bad luck or bad judgement, will nevertheless expect the SS system to keep them from privation in their golden years. Given this safety-net view of the SS system, privatisation makes little sense. To the extent that you can afford less of a safety net, cut taxes instead. One way to need less of a safety net would be to actually treat it as a safety net and means-test the benefits.
Hazards I see with privatisation:
- The financial soundness of it is based on the expectation of outsized returns in the stock market, or elsewhere. What if those fail to materialise? Imagine the effect of the 70s bear market, or the current one for that matter, on people retiring right at the same time. Is it really the case that the government will allow large numbers of seniors to starve because "they're just getting what they deserve" for making poor investment choices?
- If people expect that no matter what, the government is going to bail them out in their golden years, what's to stop them from (perhaps literally) going for broke with their investment plans? The theory being, I'm either going to be very wealthy or I'll just be like everyone else. You can't remove the downside of unwise investments and expect good results.
- The scheme could effectively make US government administrators the largest stakeholder in many companies and funds, an alarming prospect to those of us who would like to see the central government wield less power over the economy, not more.
In the final analysis, most of the ideas being floated are bean-counting tricks. Step back a bit and look at the economy from the vantage point of an observer that could only view physical activity, and you realise that ultimately retirees must get whatever livelihood they'll enjoy from the efforts of people still working, the increased productivity of any capital they've managed to build, or from the stored fruits of past labour. This means that pretty much all ideas for solving the problem must either (a) increase the burden on future workers, (b) improve the worker/retiree ratio, or (c) increase current savings/investment.
Shifting money into private accounts won't, by itself, accomplish (c), because it will create huge budget deficits. Proponents of privatisation will doubtless say that other measures should be taken to correct such deficits. Amen to that. But then, such measures could be taken without privatisation, could they not? And, if successful, could have the overall effect of reducing the tax burden. Either way, you accomplish (c) by allowing more money to be channelled into productive investment.
Indeed, the relationship to the budget deficit is often missed out in analyses of the solvency of the SS system, which purport to put the date of insolvency many decades hence. Those projections refer to the point at which the cumulative bean count goes negative, but in fact, since the flow of beans in and out is being used to cover the deficit, a real problem develops as soon as this balance goes negative, a point that will be reached much sooner than technical insolvency. Allowing those under 25 to opt out of the system will hasten the end of the SS pyramid, will it not?
While I think (c) is attractive because it promises a painless solution, I'm not persuaded that government spending can be so easily reigned in. So, I think we need a backup plan, to wit:
- People are living longer now, so some increase in the retirement age is necessary to help rebalance the worker/retiree ratio.
- Means-testing benefits - let's drop the pretense that SS is a retirement savings system. We can't really cut benefits because the payments to those at the bottom provide bare subsistence, but we can at least stop subsidising relatively well-off seniors by taxing struggling workers. We already have de-facto means-testing in the form of income taxes on 1/2 the benefits; we could make 100% of the benefits taxable.
- Fund it from general revenues and eliminate the FICA tax. This is in line with the view that SS is an anti-poverty program. In its effect, this is little different than removing the salary cap on the FICA, but it's a bit fairer in that all forms of income would be taxed, and also people would really see the full effect of the taxes rather than having half of the burden hidden behind the employer's side of the ledger.
Private SS accounts are tantamount to a forced savings plan. The presumption is that people are too stupid to decide for themselves how much to save. If that's true, how can they be trusted to invest wisely? If it's not true, then give us a tax cut instead and let us make our own decisions. |
