Saturday, April 23, 2005

Damn libertarians

I really am beginning to think that convincing libertarians about the merits of privatizing Social Security is actually more difficult than convincing liberals. I sent a blogger from PrincetonLibertarian (and occasional CCL blogger) an email about how he should start a Students for Saving Social Security chapter at Princeton. He responded in a well articulated no thanks. However, I have to disagree with a few points he makes.

1. New avenues for corruption. Getting on the government approved list ofinvestment vehicles (be they funds, stocks, bonds, loans, etc) would be an enormous source of capital. Every fund manager, every CEO would fall over themselves to get access to the list. The approval list would become just another way for politicians to pick winners and losers and another need for the private sector to lobby for special treatment from the federal government. I do not think corruption would be probable, I think that the financial rewards of having access to these funds would be so huge that it would NECESSITATE corruption.'
I completely agree that granting government more power breeds more corruption. However, I think you mischaracterize how exactly a system of private accounts would work. As I understand it, the government would mandate certain percentages of stocks and bonds as well as a certain amount of diversification; other than that, the individual would be free to choose where to invest his money. I agree if the government were to only let people invest in government approved funds that would be scary; luckily, that seems not to be the case.
3. Distortive impact on markets. One thing government can not do, is leave any program alone. Every representative, every Senator, every think tank, every lobbyist group would have their own pet plan to improve the myriad regulations that would govern personal accounts. Every time one of these honorable public servants succeeded in getting their regulation promulgated, it would send shock waves through the markets. The values of financial assets could skyrocket or plummet overnight on even the most innocuous sounding changes.
I agree that a system of accounts would necessarily affect the market sector, but I ask you, isn't social security as it stands now even worse. Two researchers for the Social Security Administration, Dean Leimer and David Richardson, have found that a dollar of expected future Social Security wealth substitutes for about three-fifths of a dollar of personal savings. Harvard's Martin Feldstein puts it as high as one to one. The annual loss of real income that this incurs (the difference between market returns and SS returns: 6.7%) is about 700 billion or 6.3 percent of total GDP. I happen to think that this is a much graver market distortion.

4. More bureaucracy. Its pure delusion to think that personal accounts would not be accompanied by their own federal Czar of Investment Safety and Security. This Czar would be the point man for encouraging the private market to suckle on the federal teat. He would be an unelected official with enormous power and he would be the focus of points 1, 2, and 3.
As it stands now, a system of private accounts would need less federal workers than the current Social Security administration. But again, this is a valid concern.
5. Expanding Nannyism. It would not be long before the federal government, having got the taste for micromanaging investment choices, would expand somehow into our other accounts. I don’t know how it would happen, but somehow, after “giving” us these personal accounts, government officials would start looking into how they could better manage IRA’s, 401k’s, and regular investment accounts.
The only thing that the government would be managing would be the stock/bond percentages in your account. I suppose that at some level this is managing, but it could be a lot worse, like taking your money outright and giving it to current retirees.
I don’t want to “strengthen” or “save” social security. I want it to die. And I want it to die in a way that leaves no doubt as to the cause. I’m afraid that if the personal accounts are added, as soon as things start going bad, the markets will be the scape goat and fuzzy-minds will wax nostalgic about the good old days when government was the great warm-hearted provider.

Despite the fact that I think that this is clearly politically unfeasible, there is something more problematic as well. If you were to get rid of SS while keeping the rest of government the same, you would be creating a huge moral hazard for people not to save and just take from other welfare programs for the elderly poor, like Medicare. And getting rid of the welfare state entirely is not going to happen.

I think this blogger's points are all reasonable, but I think that you have to compare a system of private accounts to the alternative and not the ideal. Appealing to the ideal is important to figure out in which direction policy proposals should head, but it is almost always impossible to implement ideal principles in policy given that we have strayed so far from it already. At least in a system of private accounts you have property rights over your money, you can invest in private markets where you can enjoy the benefits of higher returns, and if you die before you reach 65 you can actually still pass the money on to your children. Does a system of private accounts have problems, sure, but it is still an enormous step in the right direction.


Allen said...

It might be more difficult to convince them of privatizing social security, but be happy that they (hopefully along with you) see the ideal situation as abolishing the whole system.

The more I think about privatizing Social Security, the more I find myself AGAINST the idea. I am always, by my very nature, skeptical of any idea the government comes up with or any idea the government comes up with to fix a previous idea. Inevitably, the so-called "fixes" never turn out to be anything of the sort. In fact the thought of government now being somewhat involved in the finance industry with privatized accounts, scares me A LOT. If it won't happen right away, it will happen soon enough, trust me. I would go further and say that this is precisely the goal: sell social security to the populace on the merits of free-markets, then slowly regulate the finance industry as "privatization" occurs.

In addition, I have given thought to the often-mentioned idea of comparing ideas relative to others. With respect to government, this is practically impossible as well as pointless. Government is not in the business of shrinking in size; that simply is not its nature. For that reason, the only policy I would ever agree to on the part of government would be a one-liner going something like this: We are going to abolish the ******** law/regulation/system. One must always realize, at least in my view, that when government makes it seem as though it is fixing a problem, when it is itself the problem, then there is something we as citizens are missing. In the case of social security, I believe the long-run goal of the privatization plan is to get government more involved in the finance industry.

And thus, I would rather leave social security alone, and celebrate the exact minute of its collapse.

Jeff said...

I think the most important thing to remember is what opportunities we have in reality. Yeah, an end to Social Security would be ideal. But there is absolutely no way that we could even come close to getting that passed.

The CATO system, however, would get passed. The only reason Democrats are against it is misinformation. Groups like the AARP are putting out these commercials and articles of these poor people who don't know about the stock market and lose all of their money - despite the fact that no one will be allowed to invest in the stock market under the CATO plan... I explained the plan to my cousin, who is a hardcore Leftwing, Womens-Studies Major, who worked on Obama's campaign and now works for Blagojevich, and she actually seemed to agree with a lot of it.

This is without a doubt a better system than than the one that we have going. I don't want to root for Social Security to self destruct because I don't want all of these poor old people retiring without any money to live on. The CATO plan would actually allow some people to rely to Social Security for retirement, which would be way better than the current plan.

marco said...

I have a serious problem with just letting SS die out. I know that those of us here will probably have no problem putting money into stocks and bonds after we pay our payroll tax. This, however, is not true for a lot of people, obviously especially so for the poor. SS is giving people 1.5 percent returns on the only money the have for their retirement, money that could be earning 7 percent. I believe that ss is keeping a lot of poor people poor by standing in the way of genuine wealth accumulation. I know some may enjoy how ironic it is that governmental programs actually hurt the poor the most, but it should also be a driving force to change. There are lots of reasons to support a system of private accounts, none, however, more salient than the fact that you would finally let people from all walks of life enjoy the benefits of compound interests and accumulate real wealth that they can pass on to their children.