Cafe Hayek

Michelle's Plan Goes Prime Time

My former GMU student Michelle Muccio was interviewed yesterday by CBS News's Bob Schieffer on "Washington Unplugged."  The topic?  Michelle's idea of suspending the payroll tax, as an alternative to the Obama scheme, to "stimulate" the economy.

Bob Schieffer's question about the solvency of the Social Security system is a good one.  But if Uncle Sam is going to go another trillion dollars or so into debt (on the pretense of "stimulating" the economy), whether he does so by borrowing this $trillion in order to increase his spending by that amount, or by eliminating roughly a trillion dollars of payroll taxes for a year while keeping his spending unchanged, makes no difference on the solvency front.  Either way, the federal government incurs debt of another $trillion or so.

If ordinary Americans truly are struggling to pinch pennies these days, there should be little worry, even for a Keynesian, that the extra money workers get from a suspension of their payroll taxes won't be spent.  However, if you're a politician, the ways private citizens will spend these monies are not under your control -- a fact that renders the political class terribly allergic to Michelle's plan.

Ponzi Schemes are for Suckers

Bernard Madoff and Ponzi schemes.

Go Bulldog!

The Cato Institute's Dan Mitchell has a nice video analysis of Barack Obama's proposal to raise Americans' Social Security taxes.

On Krugman on Social Security

Paul Krugman thinks that it is plain silly -- or, really and worse, an ideology-induced lie -- to say that Social Security faces a financial crisis.  Here's Krugman writing in today's edition of the New York Times:

Inside the Beltway, doomsaying about Social Security — declaring that the program as we know it can’t survive the onslaught of retiring baby boomers — is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.
. . . .

But the “everyone” who knows that Social Security is doomed doesn’t include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.

As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: “The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, such as the coming retirement of the baby-boom generation, our country’s financial health will in fact be determined primarily by the growth rate of per capita health care costs.”

How has conventional wisdom gotten this so wrong? Well, in large part it’s the result of decades of scare-mongering about Social Security’s future from conservative ideologues, whose ultimate goal is to undermine the program.

The only evidence that Krugman presents to support his case against the proposition that Social Security is headed for insolvency (unless it undergoes big changes) is simply that Medicare and Medicaid are headed for insolvency that's even worse.

So Krugman's case that Social Security presents no real problems to worry about is like, say, a lawyer advising client Jones that the grand-larceny charges against Jones are really nothing to worry about because client Smith is facing the more serious charge of murder.

It's true that the fiscal problems looming for Medicare and Medicaid are worse that those that loom for Social Security.  That this fact is so is admitted by those who believe that Social Security faces real and serious problems.

For example, Texas A&M economist Thomas Saving, an eminent scholar and a Clinton-appointed Public Trustee of the Social Security and Medicare Trust Funds, testified to Congress in March 2005 that Social Security faces big fiscal problems.  Mr. Saving admitted explicitly that the problems confronting Medicare and Medicaid are larger than are the problems confronting Social Security -- but he went on, quite correctly, to highlight the nevertheless large problems with the current Social Security system.  And in an essay that Mr. Saving published a few monts later, in July 2005, he said

The recent annual report issued by the Social Security Board of Trustees demonstrates with undeniable clarity that Social Security faces a looming financial crisis. Worse still, the report shows Social Security's lurch toward insolvency has accelerated.

In just a little more than a decade, Social Security will begin to run a deficit, the study shows. Deficits will continue and amplify every year well beyond the turn of the next century. Despite early protestations from many on Capitol Hill that "there is no crisis," few serious observers of the current state of Social Security hold out hope the system can survive as presently constructed.

Regressives

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I argue that the so-called "Progressives" in modern America are, in fact, anything but.  A better name for them would be "Regressives."

A Dangerous Financial Product

Here's a letter that I sent yesterday in response to an e-mail that I received:

22 June 2007

Ms. Clara Perez
www.democracyjournal.org

Dear Ms. Perez:

Thanks for your e-mail alerting me to Presidential-hopeful John Edwards's proposal to create "a regulatory commission to protect consumers from dangerous financial products."

If such a commission does its job, I suggest that the first dangerous financial product that it attacks be Social Security.  Not only are Social Security's returns lousy; not only are its "customers" never vested their "contributions"; not only does the institution providing it have no sound plan to keep it solvent; not only does this institution intentionally mislead its clients about its insolvency (witness its discussions of the illusory "trust fund") - but its "customers" are forced to buy it. That is a dangerous financial product!

Sincerely,
Donald J. Boudreaux
George Mason University

An Argument For Social Security?

Today on Marketplace Morning Report, Jim Carrier (a free-lance writer) argued that Uncle Sam should increase the amounts taken from Americans' paychecks for Social Security.

I disagree with much of what Mr. Carrier says.  But what struck me most forcibly -- actually, what caused me to wonder if he wasn't commenting with his tongue drilled deeply into his cheek -- was this line:

But my total social security tax for four decades was only $63,000. I didn't even miss it. And in 16 of those years my income hit the government ceiling. I wish they'd taken more. But what if Social Security hadn't existed? Would I have set aside hundreds of thousands to provide for myself? 

Not likely. I proved that 10 years ago when I cashed an annuity and bought a sailboat. I sailed to Spain and had lots of fun. But as an investment it was worse than Enron.

So this idea of privatizing, of letting me own my retirement, would have been another Katrina.

Now I have no wish to prevent the Mr. Carriers of the world from spending their money as they see fit.  Who am I to say that a private sailing expedition to Spain wasn't just the thing that Mr. Carrier needed ten years ago?  But on what basis does Mr. Carrier rest his presumption that most Americans are as irresponsible as he is with his savings?  Indeed, can Mr. Carrier even be sure that he himself would have been so irresponsible if Uncle Sam not been at the ready to pick the pockets of others and to transfer part of this booty to Mr. Carrier in his golden years?

Mr. Carrier's tongue, I believe, was not in his cheek.  He's serious.

But why should the rest of us take advice about public policy from someone who is so personally irresponsible?

Social Security as Realpolitik

At least the Boston Globe -- in this warning against serious reform of Social Security -- is (unintentionally?) honest about why it fears reform.  The Globe likes Social Security pretty much just the way it is precisely because the middle-class currently have a huge stake in it.  The Globe fears that if the middle-class stake in Social Security is taken away, the middle-class will find it easier to oppose government welfare for the truly needy.

Here's a letter that I sent to the Globe in response.

Editor, The Boston Globe

To the Editor:

You note that the middle-class supports Social Security because of the perceived personal benefits they get from it ("An Insecure System," April 30). Thus, you oppose reform that reduces the middle-class stake in Social Security because you fear that such reform will make it too easy for Americans to stop helping the truly needy. In short, you endorse a massive middle-class entitlement program as a bribe to quiet the bulk of Americans who might otherwise resist being taxed to pay for a safety net for the poor.

Whatever are Social Security’s merits or faults, let’s hear no more about it being a product of a nobler time when Americans, inspired by enlightened statesmen, were persuaded to rise above their narrow self-interests for the benefit of the less fortunate.

Sincerely,

Donald J. Boudreaux

....

Relatedly, see also this excellent op-ed on Social Security by the New York Times' John Tierney.

Are We Really Too Stupid to Care for Ourselves?

The take-away lesson of this report in yesterday’s New York Times is supposed to be that too many Americans are too ignorant of the principles of personal finance to be given greater personal responsibility for their own retirements.

These clips from the report give a good sense of its thrust and message:

With Washington considering whether to strengthen Social Security by giving Americans more responsibility for their own retirements, a survey released yesterday suggested that the typical American does not know enough about economics to prosper in such a system.

The survey, conducted by Harris Interactive, found, for example, that about half of American adults did not know that if they kept their money at home, in cash, they were at greater risk of losing ground to inflation than if they invested it elsewhere.

"Given recent signs that inflation might be increasing, this is quite a frightening finding," said Alan B. Krueger, an economics professor at Princeton University who served as chief economist for the National Council on Economic Education, a business group that commissioned the survey…..

Mr. Krueger, who contributes a column for the business section of The New York Times, said these findings were disturbing, given the big increase in the number of households that hold stocks and mutual funds.

"Many Americans are potentially open to scams because they don't understand the purpose of the financial markets," he said yesterday.

Other analysts said they thought that the findings added to a growing body of evidence that the typical American is poorly equipped to take advantage of what proponents call the ownership society: a future in which individuals are free to invest their own retirement money, rather than having to accept the returns offered by the Social Security program or a group retirement program at work, like a pension plan.

Let’s not question the finding that many Americans today lack the knowledge to invest wisely for their retirements.  Indeed, let’s agree with Alan Krueger that Americans’ ignorance of basic finance and economics make them “potentially open to scams.”

Do these findings – does Americans’ shocking ignorance of finance and economics – really weaken the case for turning over to each of us more responsibility for our retirements?  I don’t think so.

First, the fact that Uncle Sam has for so long assumed primary responsibility for providing for Americans' retirement goes a long way toward explaining much of Americans' ignorance about investing for retirement.  Americans simply have less incentive to learn about such matters than we would have if each of us were responsible for our retirement.

A person kept from ever swimming in the deepest part of the pool ought not be judged to be an inherently poor swimmer because he cannot today do more than dog paddle in shallow water.

More importantly, the alternative to greater personal responsibility is government control – that is, strangers on the Potomac making and enforcing rules for 300 million people, each with unique histories, needs, circumstances, and hopes – not to mention risk-tolerances.  How do we know that these strangers in Washington are sufficiently competent to formulate and enforce sound rules for taxing funds from each American and then ‘investing’ these sums in ways that prove wise?

The presumed answer is that ours’ is a democracy.  The wisdom of The People ensures that our government is responsive to our needs – that it generally does what’s right and wise – that it looks after us and protects us.

Pardon the predictable question, but if Americans generally are so utterly uninformed about basic principles of personal finance and economics – if we’re such an ignorant lot – how can we be trusted to elect wise leaders?  What reason is there to trust that the outcomes of elections and the policies chosen on Capitol Hill are appropriate and wise? If we’re such easy marks for scam artists, isn’t much of what government does likely to be a scam?

The ostensible lesson of this NYT report, then, is that in our individual, private capacities we are benighted and irresponsible fools but that as voters and political actors we’re informed and wise enough to choose good leaders and to monitor them so that they regulate us in ways that promote our well-being.

This is backward.

When someone is given responsibility for his own well-being, he is more likely to take the initiative to promote his well-being – for if he doesn’t, he suffers the consequences (and, of course, if he does, he reaps the rewards).  But if responsibility for my well-being is shared among hundreds of millions of voters – and then further delegated to hundreds of politicians and bureaucrats who do not know me – what reason have I to trust that these strangers will use my resources in ways that are better than I would use these resources?

Waxing and Waning

The Washington Post reports today that there is growing skepticism about Bush's social security plan.  In yesterday's web edition of the Post, the support was waning.  Either way, it looks like bad news for privatization.  Only 35% of poll respondents approve of how Bush is handling social security.  But look at these numbers from the detailed report on the poll numbers:

9. I'm going to mention changes some leaders have proposed for Social Security. Please tell me if you support or oppose each one.

 

                                                Support     Oppose     No opin. 
a. Increasing the Social Security tax rate       32          64          4

b. Collecting Social Security taxes on all the
   money a worker earns, rather than taxing only 
   up to the first $90,000 of annual income      56          40          4

c. Raising the retirement age to receive full 
   Social Security benefits to 68, instead of 
   the current 67                                33          66          2

d. Further reducing the benefits paid to people 
   who retire early. For instance, people who 
   retire at age 62 would get 63% of their full 
   benefits, rather than the current 70%         36          62          2

e. (HALF SAMPLE) Changing the way Social Security 
   benefits are calculated so that benefits increase 
   at a slower rate than they would under the 
   current formula                               37          57          6

f. (HALF SAMPLE) Reducing guaranteed benefits for 
   future retirees                               20          75          5

So respondents don't approve of Bush's handling of the issue, but other than raising taxes on people who earn more than $90,000 a year, virtually every other solution to social security's problems are as unpopular as what Bush has offered.  But here's the real eye-opening result:

9g. Would you support or oppose a plan in which people who chose to could invest some of their Social Security contributions in the stock market?

                Support     Oppose     No opin.   
3/13/05           56          41          3
12/19/04          53          44          3
7/15/02           52          45          3
4/22/01           53          46          2
3/25/01           52          45          3
10/30/00 LV       58          35          8        
9/6/00   RV       59          37          4        
5/10/00           64          31          5 

Way down in the article, maybe a quarter of a way from the end, the story eventually mentions that some respondents do support private accounts but doesn't report the overall level of support.  Instead, there's an analysis of the differences in support by age:

In this month's poll, 68 percent of adults 18 to 29 years old said they support investing some Social Security contributions in the stock market. That support falls with the respondents' age, to 60 percent among those 40 to 49, 53 percent among those 50 to 64, and 37 percent among those 65 and older.

So among people 50 and younger, 60% or more support private accounts.  The only people who oppose private accounts are the elderly.  That would have made an interesting headline:

Bush Does Poor Job Marketing Private Accounts

Whether it's marketing or reporting, or the plan is too complicated or phased in too slowly, the numbers suggest that there may be hope for private plans, despite the Post's pessimism.

Waning Support for Bush Proposal

Bush's social security proposal is in trouble.  According to a story in the Washington Post:

Support for Bush on Social Security Wanes

Barely One-Third of Americans Approve of President's Plan, Poll Finds

The Post promises more detail from the poll after 5 p.m. I'd like to see what question was asked to generate the headline.  I'll bet they didn't ask this question:

"President Bush has proposed allowing workers to devote part of their payroll tax to fund private retirement accounts.  Would you prefer this plan or one that reduces social security benefits by 22%?"

I suspect that would have boosted the numbers supporting the Bush plan a bit.  It's easy to dislike the Bush plan in the abstract.  But reality isn't optional.  We are either going to have to raise tax rates, lower benefits or fiddle with the other rules of the system.  That 22% number is from the latest CBO study.

I like the word "wanes" in the headline.  It makes it sound like the whole idea of private accounts is just about done.  An alternative would have been "Twilight of an Idea: Bush Plan Headed for Dustbin."

When the dust clears, it will be fun to look back on the media coverage.  My favorite was the New York Times article ($ required) that looked at the world before social security as if Bush were planning to eliminate it.  The headline:

Life Before Social Security; 'A Great Calamity Has Come Upon Us'

If you didn't know better, the media coverage would lead you to think that private investing was against the law in the United States.  It's so risky after all and requires so much time and knowledge.  Somehow, over half of us manage to invest and still sleep somewhat peacefully at night.

Becker on Social Security

In today’s Wall Street Journal (paid subscription required), Gary Becker says that the case for privatizing Social Security is more political than it is economic.

I don’t separate these concepts as much as Becker does – if markets are desirable, they are desirable only because they best their alternatives (especially state intervention); if state intervention is desirable, ditto.

Still, his points are exceptionally sound. They are nicely summarized in his opening paragraph.

Republicans and Democrats are arguing passionately about the future of Social Security, and the argument, at its core, is about privatization. It is true, as some critics observe, that there is no magical gain in privatizing Social Security, since all systems have to provide incomes for retired persons. By that token, however, there's no gain in privatizing a government steel plant either, since steel still has to be produced, too. Yet there are very good reasons -- with roots in political economy -- to privatize steel. And as with steel (and the like), there are excellent reasons for a privatized individual-account Social Security system.

A Handout by Any Other Name....

Several years ago, Bruce Ackerman and Anne Alstott proposed that government

give every young American adult a stake of $80,000 as a birthright of citizenship. The stake should be financed by an annual wealth tax, equal to 2 percent of every individual's wealth in excess of $180,000.

The idea is to give every young American – especially those born to poorer families – a stake in America, seed-corn for their start in life.  Those Americans who benefit sufficiently from this $80,000 will repay it to the government when they die, out of their estates.  Similar (although not identical) proposals are endorsed in today’s New York Times (by columnist David Brooks) and in today’s Washington Post (by the New America Foundation’s Ray Boshara).  As Boshara explains,

Congress should establish a privately owned "KIDS Account" at birth for each of the 4 million children born in this country every year and fund those accounts progressively -- thus creating a lifetime platform for saving, asset accumulation, retirement security and wealth that can be bequeathed.

Awful idea.  Here are just some reasons why.

- Giving people other people’s money is less likely to instill in the beneficiaries a sense of achievement, self-respect, and responsibility than it is a sense of entitlement.

- Such a government program further erodes family responsibilities; no longer is it mom’s and dad’s responsibility to help Johnny and Suzy pay for college or come up with down-payment on their first houses – it’s the responsibility of distant, faceless taxpayers.

- Reflecting on both points above, ask which of the following two arrangements is best for the young person: First, mom and dad tell 12-year-old Johnny “Son, don’t worry.  When you’re 21 we’ll give you $100,000.  In the meantime, don’t bother us; we’re busy.”  Second, mom and dad tell Johnny “Son, we’ll not give you any money later on – we won’t even help you pay for college – but we’ll love you, do our best to teach you right from wrong, make sure you graduate from high school, coach your little-league baseball team, and take you to DisneyWorld and to New England to see the Fall leaves and on other family vacations.  We’ll eat dinner together every night as a family.  And we’ll love you no matter what – even when you gripe about doing your chores – and we’ll be genuinely and deeply proud of all of your honest achievements.”

Surely the second scenario is better for Johnny than the first.  I realize that scenario number one is stark.  I realize that a family can be emotionally supportive and nurturing as well as be financially supportive.  I realize that support on both fronts is better than support on only one. My point is that what matters most, at the margin that most young Americans find themselves on, is not money – it’s that mix of effort and concern that good parents expend to raise their children well – to teach children responsibility, patience, politeness, regard for others, the importance of hard work, of learning, of honesty, and of simple decency.  Anyone brought up in today’s America in such a way has human capital of very high value – worth far more to that person’s life prospects than any middle-class sum of $$$.

In short, such a program rather crassly elevates $$$ to outlandish importance.  It celebrates, venerates, obsesses on $$$ to an unhealthy degree.  But $$$$ is not all that matters; actually, it matters surprisingly little.  What matters much more is the set of institutions – social and personal – that make its lawful acquisition possible.

- Another very different problem with such a program is that it will likely further intensify hostility toward immigrants.  If American taxpayers are committed to giving to each child born in America a substantial sum of $$$ as a ‘birthright,’ be assured that political pressures to keep foreigners out of the U.S. will grow.  (In the extreme, decisions to have children will come to be seen as decisions that properly can be regulated by government, in the same way that people now say “Oh, the government must require motorcyclists to wear helmets because taxpayers pick up such a large part of each person’s medical expenses.  The motorcyclist who doesn’t wear a helmet risks not only his own well-being, but the financial well-being of millions of his fellow citizens.”)

I see other problems, too, but I’ll end here – for now.

Preserving Social Security

Q.  What do you call someone who wants to preserve Social Security?

A.  A conservative.

con·ser·va·tive    P   Pronunciation Key  (kn-s�rv-tv)
adj.

1. Favoring traditional views and values; tending to oppose change.

() I don't think social security is unfixable.  But why would you want to save it just for the sake of saving it?  Why would you want to preserve a program that is 70 years old that was put in place in the middle of the worst economic crisis in American history at a time when our standard of living was a fraction, maybe a tenth (!) of what it is now.  Isn't it possible that it's time for a different way to handle the risks of retirement?

The vehemence against the Bush plan fascinates me.  I'm not in love with it.  I don't think the government should mandate savings.  But given the reaction of the chattering classes so far (and the best—or worst—is yet to come), you'd think he'd proposed mandatory child sacrices to Mayan gods.  My favorite so far was the New York Times article of a couple Sundays ago with the headline: Life Before Social Security: 'A Great Calamity Has Come Upon Us.' 

Old Reliable

Newsflash: Paul Krugman thinks George Bush is a liar.  In today's New York Times, in a column called "Little Black Lies," Krugman accuses Bush of both deceit and playing the race card.  Evidently, Bush suggested earlier this week that African-Americans get a bad deal from social security because they don't live as long as whites.  Krugman calls this a lie, arguing:

First, Mr. Bush's remarks on African-Americans perpetuate a crude misunderstanding about what life expectancy means. It's true that the current life expectancy for black males at birth is only 68.8 years - but that doesn't mean that a black man who has worked all his life can expect to die after collecting only a few years' worth of Social Security benefits. Blacks' low life expectancy is largely due to high death rates in childhood and young adulthood. African-American men who make it to age 65 can expect to live, and collect benefits, for an additional 14.6 years - not that far short of the 16.6-year figure for white men.

Second, the formula determining Social Security benefits is progressive: it provides more benefits, as a percentage of earnings, to low-income workers than to high-income workers. Since African-Americans are paid much less, on average, than whites, this works to their advantage.

Finally, Social Security isn't just a retirement program; it's also a disability insurance program. And blacks are much more likely than whites to receive disability benefits.

Put it all together, and the deal African-Americans get from Social Security turns out, according to various calculations, to be either about the same as that for whites or somewhat better.

(I love that last sentence.   According to various calculations.  But he only gets so many words, so let's give him the benefit of the doubt.)

Now I don't really think it's all that important whether social security is a good deal for African-Americans or any other arbitrary subset of the population.  Or whether African-Americans get a better or worse deal than whites.  In fact, one of the drawbacks of publicly funded retirement is just this kind of ugly argument—who's profiting at whose expense?  And social security is not a racist program—it does treat race neutrally. 

But social security does hurt the poor when they're young.  It forces the poor to contribute to a program they will only benefit from if they live long enough to enjoy the benefits.  And it benefits the elderly poor if they survive to receive benefits because the benefit formula pays lower wage workers more per dollar earned than higher wage workers.

Any differential impact of social security on African-Americans is due to factors that are merely correlated with being African-American—earnings patterns, marital status, life expectancy and so on.

Having said all that, is Krugman right?  Is Bush wrong?  Krugman is probably roughly right that African-Americans do fare about the same as whites.  Here's a Rand study that concludes:

As expected from unequal mortality rates, whites fare better than blacks across the board.  On a per-capita basis, blacks transfer between $2,000 and $21,000 to whites, depending on earning levels and marital status.

But that study didn't include the effects of disability, so if that were included, it probably would be close to a wash.  Then again, Bush isn't planning on changing the disability component.

Fries with Fries

When Jay Leno was just a stand-up comic, I remember a routine of his where he walks up to the counter at McDonald's and orders fries.  The server mindlessly responds, "Would you like fries with that?"  "Hmm," Leno wonders.  "Fries with fries.  What an interesting concept."

We have now reached the fries with fries concept with social security.  Senator Dianne Feinstein is now in favor of private accounts as long as they're added to social security.  The San Francisco Chronicle reports:

California Sen. Dianne Feinstein said Monday she would consider adding private investment accounts on top of the current Social Security system  --  a position that is rapidly emerging as a potential Democratic alternative to President Bush's controversial plan to change the giant retirement program.

So what does that mean exactly?  The status quo?  Possibly.  As far as I know, workers even today are actually allowed to invest their own funds on top of whatever they expect from social security.

"I don't see a private plan that doesn't have real drawbacks," Feinstein said Monday, speaking to California reporters. The senator cited reports that show of the 4 million Californians who now receive Social Security, about one- fifth have no other source of income and about half would be in poverty without Social Security.

"The only thing I would consider  --  and it needs to be thought out  --  is private accounts in addition to Social Security," Feinstein said. "Because Social Security was never meant to be a full pension. It was meant to help.    And I think anything government can do to encourage prudent investment by individuals, say within an indexed, limited fund of companies, maybe with some tax offsets to be able to do it, as an addition to Social Security, would be a good thing."

Feinstein's idea points to a middle ground between Bush's plan and leaving the system as it stands now  --  so-called add-on accounts, where workers would contribute money for their own accounts in addition to their payroll taxes, rather than using part of their payroll taxes.

Isn't this what most of us call "investing?"

Senator Feinstein does mention the government "encouraging" these accounts with tax policy.  That's a good idea.  Somehow I doubt she's in favor of cutting capital gains taxes.  So we have a mystery.  What exactly are these "add-on accounts?"  An increase in government mandated saving?  A government-monitored private investment vehicle?  There is a reference in the article to a plan of President Clinton's where the government would match investments of low and middle income workers.  Some variation on that plan may end up being the political compromise that allows Bush to get something close to what he wants.

Krugman on Social Security

Paul Krugman has written an essay for the Economist's Voice attacking privatization of social security as an overhyped solution to a problem that doesn't exist.

He argues that the worries about the coming death of the Social Security trust fund are greatly exaggerated.  He argues that the virtues of privatization are oversold because stock market returns down the road are unlikely to stay at 7% in real terms.  Finally, he argues that the system is not really in crisis.  There's no reason to privatize.

I think he's maybe 2/3 right.  The troubles with the trust fund are essentially mythic and the current pay-as-you-go structure of the system (which he likens in a bizarre analogy to the highway tax) can surely be sustained if the body politic so desires.

I also think he's right about the overhyped virtues of privatization though I think he's only half-right.  It's not just that stocks may be headed for lower rates of return in the future.  The real exaggeration of the privatizers is that the current system has a sizeable redistributional component that reduces the implicit return under the current system for citizens with above-average earnings histories.  My suspicion is that any successful privatization plan will have to retain this component in some form.  One way is to have the government match private contributions for the lowest-income individuals.

But my biggest disagreement is Krugman's elevation of the status-quo into something virtuous.  His last section is called "Privatization is a solution in search of a problem."  He's right that we can save social security down the road by devoting an increasing share of the budget toward it.  Sure, it's fixable.  But why would we want to fix it?

Just because social security can be made solvent or the government can keep some version of this so-called social contract between the generations, why we would want to do that?  Imagine starting from scratch and creating a mammoth program with a hidden distributional element that's so complex that no one can know what it will be worth in the future other than relying on a meaningless annual letter from the government that purports to tell you what you'd get from the system if you retired today? 

And while Krugman is right that some critics of the system say misleading things about the trust fund, the proponents of the system have been saying misleading things about the trust fund since about 1934.  Until recently, most Americans actually thought that their payroll taxes went into "their" account or something like it or at least into the pockets of the elderly.  It's only recently that some folks have caught onto the fact that much of it goes to fund general government expenses.

If the current system is such a good deal, why isn't it voluntary?  When I propose that solution to defenders of the status quo, they always smile and say, oh that wouldn't work.  And why not?  Because, they explain patiently, people would opt out—what makes the system work is that we're all in it together.  I await a better answer.   I don't think there is one.

Finally, it must be said that all of the privatization plans on the table aren't really about privatization.  They're about mandatory savings along with allowing the coerced savers to invest in private sector assets.  I suspect that's a step in the right direction, but my preference would be for the government to get out of the retirement business and let us as responsible and compassionate adults take care of ourselves and those who are too poor to save much for their old age.  End it, don't mend it.

The right reason to favor some flavor of privatization has nothing to do with trust funds and nothing to do with rates of return.  It has to do with treating citizens as adults, responsible for ourselves (and others if we choose) rather than the current system which treats us as children.

Too Many Choices

EDITED: December 22

In the Washington Post, Sebastian Mallaby, who writes beautifully on trade, writes about the morality of Social Security and the trouble with having too many choices under a private retirement system.  He begins:

The economics of Social Security privatization get plenty of attention: how to think about transition costs, the effect on national savings, the risk of equity investment. But the political philosophy of privatization is often taken for granted: It's just assumed that, if the economics were neutral, people would be happier with private accounts than with a public program. Do we really know this to be true? Is an "ownership society" preferable to a "big government" one?

People want control over their lives; they value their freedom. But the first reason to wonder whether "ownership" is always good is that it can be stressful. It may be true, as promoters of ownership like to say, that nobody ever washed a rented car; but renters are very happy not to have to get the hose out. If it's up to you to choose how to invest your pension account, agonizing over health stocks vs. Asian bonds may not be such a privilege.

I doubt that what will pass for privatization that comes out of the big sausage factory on the hill will allow us to take a chance on Asian bonds.  But never mind.  He has a good point.  Ownership is stressful.  So is deciding where to go to college.  So is figuring out who to marry.  So is being an adult.  Do we really want government to act in loco parentis for us?

But Mallaby argues that being free to choose may not be the deal some of us might think it is:

It's not just that financial planning is a dry topic to most folks. It's that modern life is overloaded with choices. In "The Paradox of Choice," the Swarthmore College psychologist Barry Schwartz shows how a certain measure of choice can be liberating but how too much is a treadmill -- sometimes even triggering depression. Freedom and choice are wonderful things that allow us to realize our human potential. But there's a limit to how many choices each of us has time to make, and most people in the rich world are pretty much maxed out already.

You see this truth in the behavior of the affluent, who actually pay to avoid choices. They hire home decorators so they don't have to stare glassily at 200 kinds of curtain rail. They hire marriage planners so they don't have to fret about cream napkins vs. white ones. There are said to be 10,000 wedding consultants practicing in the United States. If the rich are deliberately avoiding choice, why are we so sure that the majority want more of it?

Yes, there are times when all of us have trouble making decision.  And yes, there are times when all of us ask for help, either from experts or friends to help narrow our choices.  But what are the policy implications of this anxiety?  Boy, there sure are a lot of news sites on the web.  I can narrow them down by bookmarking the ones I like.  I can narrow them down by using Google news.  Is there anyone out there who wants the government to pick my bookmarks?  Or limit my access to all those web sites?  There are a lot of stocks out there and right now, I actually invest in some of them.  I use something called mutual funds to simplify the range of choices and reduce my risk.  It's not perfect.  There's risk.  I might be in the wrong funds.  But would I want there to be fewer choices so I woudn't have to worry as much?
 
Mallaby is worried about the risk issue:    

Ownership does not merely involve choice; it involves risk also. A certain measure of risk is fine; indeed, if you want a dynamic society it's positively essential. But just as the modern economy threatens Americans with choice overload, so it also piles more risk on the shoulders of the average citizens. The risk of not being able to afford health care has risen, albeit because health care has more to offer than it used to. Fewer people have risk-free "defined benefit" pension plans that guarantee a fixed proportion of salary upon retirement. An index devised by Yale's Jacob Hacker shows that income volatility has increased sharply since the 1970s. Given that risk is already on the rise, perhaps public policy should avoid adding to it?

Maybe because they want some insulation from the uncertainty of the market, people sometimes prefer government solutions to private ones, even if they are no more efficient. In Britain, a study led by Michelle S. Mahoney of the University of Exeter found that people were satisfied with the privatized water distribution system but still thought it ought to be run by the government. In Michigan, Lyke Thompson of Wayne State University surveyed attitudes to 14 different services; a majority of respondents favored government provision of 10 of them. Jonathan Baron, a University of Pennsylvania psychologist, has surveyed attitudes on government provision, private provision and various intermediate subsidy options. He finds that people tend to want government to do the things it's doing now. They don't favor more big government, but they don't favor less of it either. They are against privatizing Social Security.

I wonder who "they" are.  I wonder how the question was asked.  It's a piece of cake for a decent survey designer to get any answer you want on privatizing.  The real issue isn't the stress of choosing, it's the stress of seeing your benefits under a private system be greater or smaller than under the current system.  If you think you're going to get more money, then most people I suspect, are for it.  If you think you're going to get less, you're against it.  I doubt most people are afraid of the opportunity in and of itself.

And if you're worried about all that stress, there is a very easy policy solution to let those worriers sleep easy.  Make social security voluntary.  You don't like making your own choices.  Let the government handle it.  How many people would choose this voluntary option?  Would you be comforted and stress-free knowing that the government is going to take those voluntary contributions and give them to today's retirees, knowing that when you get older, the government will tax your children and the children of strangers to finance your uncertain benefits? 

Opponents of privatization usually take the idea of voluntary social security as a mere rhetorical thrust.  It wouldn't work, say the skeptics.  The reason it wouldn't work is that nobody would sign up for it.  Or not enough.  And then you wouldn't be able to do the redistributive stuff that is the real raison d'etre of the current system.

Mallaby closes:

What to conclude from this discussion? The fact that freedom triumphed over the totalitarian systems of the 20th century should not be read as proof that people want all freedom, all the time. The East Europeans who overthrew communism were escaping from an anti-choice extreme. But the American system, which features more risk and inequality than any other advanced society, is over at the opposite end of the spectrum. It shouldn't be assumed that Americans want to embrace individualistic risk more than they do already.

It follows that pro-market, government-cutting schemes cannot be justified by a presumed moral superiority. When it comes to their retirement, most Americans probably want a mix of a government safety net and the opportunity to accumulate their own savings. The current system, featuring a government program that guarantees a pension equal to about a third of the average worker's salary, plus a variety of tax-favored opportunities to save individually, may already be quite close to most citizens' sense of the right balance.

In the absence of the moral-superiority claim, a reform that adds to the stresses of the modern world must hold out the compensating hope of more prosperity. There's no case for Social Security privatization unless it brings a serious economic payoff.

So if government doesn't take care of a piece of my retirement, I'm going to be a nervous wreck.  The argument ignores the private mechanisms that will evolve to deal with the stress, such that it is, of investing: mutual funds, advisors, annuities, fixed-income options and so on.  And I think Mallaby's last sentence has it exactly backwards.  The economic payoff from privatization will be small.  The real payoff is moral—the opportunity to live as an adult, making choices and coping with the consequences, good and bad. 

Ironically, what George Bush calls privatization will not be real privatization.  What is called privatization is simply a mandatory government savings program where the vehicles for that saving will be highly limited to reduce that risk and stress that Mallaby and others are worried about.