Social Security Arithmetic
By Arnold Kling
If privatization will work, it won’t be necessary. If privatization will be necessary it won’t work. And exactly no one has provided numbers that prove any different.
I may be putting words in Webb’s mouth, but I think that what he is saying is that if productivity growth is high, then privatization will not be necessary, because Social Security will be solvent with a relatively small tax increase. On the other hand, if productivity growth is low, then stock market returns will be low, and in that sense privatization will not work.
I think that there are two scenarios under which Social Security will be insolvent even if productivity growth turns out to be at or slightly above the standard forecasts. Under one scenario, Medicare costs grow as projected, and because Medicare tax rates rise, labor supply declines. Under another scenario, longevity increases faster than the actuaries project. Under either scenario, the ratio of retirees to workers rises too quickly, and Social Security collapses.
However, I would not try to argue with Webb that under my two scenarios privatization solves the problem. On the contrary, I have always disagreed with the hypothesis that shifting more money into stocks is going to bail out Social Security. To me, privatization means making people more responsible for saving for their own retirement, and I think that the most straightforward way to do that is to adjust the retirement age to reflect the longevity increases that have taken place since the 1930’s and then index the retirement age going forward.
Another benefit of privatization, which I thought that Brad DeLong endorsed, is that it might constrain the political tendency to promise a free lunch. His latest post (on which Webb comments) appears to take the opposite position.
in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits. As Dick Schmalensee says, “You have to ask yourself not just, ‘Is this good policy?’ but ‘Will this still be good policy after Congress does its worst to it?'”
I guess I would rather give people their money, let them make mistakes, and take a chance on how Congress decides to deal with those mistakes. If we are lucky, the set of people who makes big mistakes and comes whining to Congress about it will not be large. Instead, to not allow private accounts amounts to pre-emptively giving everyone’s money to Congress, which raises the potential for mischief by at least an order of magnitude.
For Discussion. What myth about Social Security poses the largest barrier to a reasonable discussion of policy?