the SS fund returns are so paltry, that if it was in the hands of a private fiduciary, he would have been sued for mismanagement
True. And yet, if it were in private hands, say run by a giant insurance company, it would likely have filed for bankruptcy during the recent stock-market collapse. It goes to the heart of the safety-net question. A safety net cannot be allowed to fail, therefore it cannot undertake any risk, therefore it cannot earn the higher rates of return associated with greater risk.
Let me give you an example to illustrate: suppose that we decided to privatise the FDIC, spinning it off as a private insurance pool. Presumably it could earn greater rates of return on the funds it collects from member banks through more aggressive investments, allowing it to either lower costs to those banks, or increasing the benefits (like raising the $100,000 cap). Now, would this change increase or decrease your confidence in the banking system? The FDIC is a safety net; we don't expect it to earn a good rate of return, we expect it to be there for any situation short of the collapse of civilisation.
Why not treat privatised SS funds much like IRAs or 401(k)s and avoid this problem?
Indeed, why not just go all the way and expand the existing IRA/401k idea and forget about private accounts altogether?
There's an essential difference - you're given incentives to save via an IRA or 401k, but you're not forced to do so, whereas the private accounts, like SS itself, would be compulsory.
Why do we need a compulsory system? The answer, ultimately, comes down to this: are we going to allow seniors to live in poverty if, for whatever reason, they haven't saved enough for their own retirements? If the answer to that question is no, then we need the compulsory contribution system.
IMO the compulsory system should be limited to meeting that goal, and any excess returned to taxpayers to do with as they see fit. The compulsory system should provide a fairly low level of benefits - if you want more than that, you'd be well advised to start saving.
The current system of middle-class entitlement goes well beyond the original anti-poverty goal. The goal now is to provide something approaching a middle-class level of benefits, with higher benefit levels going towards those who "contributed" more. In effect, the government is forcing people to save for their own retirements, but, as you've pointed out, providing absurdly low safety-net level returns.
Why is that necessary? It must be because we think the government knows what's good for us better than we do! That could be true, and although I'm suspicious of the idea, I can't prove it's not. Heaven knows we use that sort of reasoning a lot - for example, our laws against controlled substances and gambling, even our freeway speed limits! |
