Kinsley on Social Security
By Arnold Kling
Here is the crux of the issue in Kinsley’s argument:
if [privatization] contemplates reducing Social Security payments proportionally to the reduction in taxes — and counting on people to make up the difference with their new investments — people will be, and will feel, no richer than they were before and there will be no supply-side incentives.
What Kinsley is saying is that people will work as hard and save as much in a formula-based tax-and-subsidy scheme as in a private market. To see the oddity of this presumption, turn it around.
Suppose that today we had a completely private retirement system, with mandatory savings accounts. Then tomorrow, the government announced that it was going to replace the mandatory savings accounts with Social Security, meaning taxes on current workers to pay for current retirees. This would tend to reduce labor supply and saving, because you no longer are accumulating your own savings but instead are making “contributions” into the system.
If a transition from private accounts to Social Security would reduce labor supply and saving, then obviously a transition the other way would tend to increase labor supply and saving. I am not saying that this effect would be so strong as to eliminate the Social Security deficit, but that strikes me as an artificially high bar. Anything that reduces the deficit, even without eliminating it, is a net plus.
UPDATE: see also Reform Club’s Alan Reynolds.
For Discussion. Will privatization’s effect on saving be significant?