Arnold Kling

Social Security and the Stock Market

Arnold Kling, Great Questions of Economics
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According to economists Peter A. Diamond and Peter R. Orszag, the President's Commission to Strengthen Social Security came up with ways to weaken Social Security. The Bush proposals call for setting part of individual payroll taxes aside to be used to fund individual retirement accounts that could be invested in the stock market, for example.

by themselves, the individual accounts make Social Security's solvency problems worse both in the short run and over the long run...If all (two-thirds of) eligible workers opted for the accounts, the new revenues required over the next 75 years would amount to between 1.2 and 1.5 (0.8 and 1.1) percent of payroll.

The way I see it, the only way to "privatize" Social Security and keep it from expanding as people live longer is to raise the retirement age and index the retirement age to longevity.

Discussion Question. One can think of the Bush proposals as trying to convert part of Social Security from a defined-benefit plan to a defined-contribution. Why is such a transition problematic?

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