On the Privatization of Social Security

It's funny how things come in threes. There was an interesting post a week ago at Washington Monthly that got me thinking (again) about social security: "The Illusory Trust Fund". Then, on Monday night, I had a long telephone discussion with one of my sons on the same issue. Then, that same night, I read the following comment TGM posted on an earlier thread here:

"I don't see the dismantling of New Deal programs, such as the privatization of Social Security, as a good thing. The safety nets for the average citizen are being undermined, IMO, by this new brand of "Borrow and Spend" GOPers. I fear the least capable economically will pay a high price. The Ownership Society may be a small but wealthy club of Owners."

Someone up there obviously wants me to write about Social Security! (LMAO).

I was all set to do so. In fact, I had it all written. Then, I read the following additional comment from TGM, posted this morning:

On Social Security, Mr. Drum has an interesting Smoke & Mirrors post describing what he calls free lunch proposals:A free lunch proposal is one that - when carefully examined - essentially proposes that we can fix Social Security without any tax increases or benefit cuts. All of these proposals rely on at least one heroic assumption, and in the case of privatization the assumption is that the average return on private accounts will be about 7% per year. Is this reasonable? Over at MaxSpeak, Dean Baker is properly skeptical.A second post entitled, Smoke & Mirrors, Part 2, goes more deeply into future projections.

Feeling duty bound to follow the links provided by my only regular reader, I did so. You should too; especially "Part 2".

The argument in favor of privatization rests on two key premises: first, that social security, as presently structured, will go "bankrupt" by 2040 or so, and second, that private accounts will provide a greater level of benefits than social security for the same dollar contribution. The second of these premises has been widely debated, but, to my considerable surprise, the "Smoke and Mirrors, Part 2" article directly challenges the first premise. That was the one point in this whole debate on which I had assumed there was universal agreement. Silly me. I should have known there would not be universal agreement on anything related to social security. Obviously, I need to do some more reading about the first premise for privatization.

Uncertainty over the bankruptcy premise does not by itself drive a stake in the heart of privatization, of course. But, what it does do is put enormous pressure on the second premise: that private accounts will provide a greater level of benefits than social security for the same dollar contribution. If social security won't go bankrupt and will provide "returns" to retirees comparable to private accounts, what is left of the case for privatization? There are my dearly beloved libertarian arguments: that people, not government, should own their own money; that social security is patronizing and gives the government too much control over our lives; etc., etc. But, it does not seem, even to me, that those sorts of normative arguments are sufficient, by themselves, to justify the wrenching political and fiscal struggle that would be required to completely overhaul social security. I wish we had done social security differently from the outset. But, since we didn't, there has to be a better reason than political theory to change it.

I am inclined to believe that private accounts will provide better benefits per dollar invested than social security even if investment risk is minimized. In part, this is based on confidence in the ability of the American economy to continue to grow through continued better-than-expected growth in productivity. For example, I do not think we have even scratched the surface of what digital technology can do in this regard. Also, though, I believe that future returns on money "invested" in social security are likely to fall, perhaps significantly, from current levels as the government trims benefits through increases in the retirement age, increased taxation of benefits, lower cost of living increases and, ultimately "means-testing."

But, I am less confident about all of this than I was last night, so maybe I'll go do a little research before I make a complete idiot of myself.

TGM: Thanks for the tip.