Tuesday, February 08, 2005

A defense of social security privatization that really makes sense

The debate over the privatization of social security, even among economists, seems very political to me. As much as I like to disagree with the Bush administration, I have to say that a plan to privatize social security makes sense. Not the current plan, but some sort of plan.

Paul Kasriel puts it very well:
I strongly am advising my adult children, Marisa and Matt, to urge their congressmen and senators to not only support President Bush’s partial privatization of social security, but to go for the full Monte. Why? First and foremost, there is no way they will receive the benefits “promised” to them under the current system. So, rather than having the federal government dictate what their benefits will be, they will likely be better off investing their own and their employers’ contributions.

But there is another reason why Marisa and Matt should push for total privatization of social security. That reason is to protect them from future presidential administrations like the current one. President Bush’s desire to privatize social security almost could be construed as a plea to stop him from spending my kids’ pensions.(Italics mine)
This seems to me a brilliant reason to support social security privatization.

Kasriel makes another, very important point. It is one about sunk costs. He points out something that almost any economist would find hard to deny:
If there were no social security system in this country and the body politic decided that it wanted one now, it is unlikely the model we currently have would be the one chosen. The current social security model, where each succeeding generation of workers pays the benefits of its predecessors, was adopted during the Great Depression as a welfare program for the aged. During the Great Depression, those senior citizens who were able to work could find little employment. And many of those seniors who had saved for their retirements or had pensions found their nest eggs greatly reduced because of the depressed economy and the stock market crash of 1929. So, a welfare program for the aged, established during the Great Depression, persists today. Talk about the tyranny of the status quo!

If we were starting from scratch today to establish some kind of government-forced retirement saving program, it would undoubtedly be one in which employees and employers would be required to contribute a certain percentage of the employee’s salary into an account “titled” to the employee. The employee would have investment options – index stock funds, index bond funds and a money-market fund. The retirement benefit received by the employee would be the value of the fund at retirement. The employee would not have access to the fund until retirement. In the event the employee died prior to retirement, his or her heirs would receive the accumulated value of the fund. This would be the basic framework of a social security system if one were being created today. It has the elements of President Bush’s partial reform of the current system.


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