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
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.