Progressive Implications of Social Security Privatization
In this essay, I wonder why the Left and the Right do not reverse their positions on Social Security privatization.
However, there is one important difference between keeping Social Security as it is and switching to privatization. Under the current system, Social Security’s liabilities will continue to be funded by payroll taxes. However, under privatization, the transitional debt would be repaid using — guess what? General revenues! In other words, privatization is a vehicle for changing Social Security’s medium-term funding mechanism from payroll taxes to income taxes. It is exactly what the Left presumably wants, and what the Right presumably opposes.
The Left complains about “diverting” payroll taxes into private accounts. But that means that other taxes, mostly income taxes, would be needed to cover current benefits. From the standpoint of the supporters of progressive taxation, that would seem to be an improvement. I honestly do not believe that either side has really thought this through.
UPDATE: Valued Econlog commenter Jim Glass has his own post on the Social Security Trust Fund. He cites a paper showing that the effect of the trust fund is to increase government’s propensity so spend, and thereby reduce saving.
UPDATE 2: Andrew Samwick says that income taxes do not have to rise to pay for the transition. That is true, as those familiar with the zero-transition-cost argument will understand. But assuming that Congress suffers from cash-flow illusion, they may end up cutting spending or raising taxes in the near term, and then face a lower deficit than they would have otherwise in the long term.
For Discussion. Has there been an analysis undertaken of the distributional effects of a shift toward privatization?