Social Insecurity

When the popular debate over Social Security privatization is studied, many years from now, it will read as a work of fiction.

Full disclosure at the outset: My own view is that it is very doubtful privatization would "fix" Social Security. I also doubt it would be disastrous. Proponents claim individuals will save more and that this will cause the economy to grow faster. As I see it, there's no clear evidence that this will happen. The path to efficiency gains and faster economic growth is not well understood. My assessment is that the best way to contend with the looming Social Security problem involves indexing or means testing benefits. This is just basic fiscal responsibility. The problem with the stories the proponents tell us is that there are no sacrifices. We receive more, we pay the same or less. Everybody wins. This is just too easy.

That being said, I've found the pundits' analysis of the privatization proposals to be as colorful and imaginative as a comic book and half as accurate.

Story lines from the left depict destitute old people living on the streets and eating from dumpsters because they have gambled away their Social Security on risky investments. This is wrong on so many levels, it almost not worth discussing. But let's pick one level, just for fun. Social Security, as it stands, is not an investment. It is a transfer from the young to the old (or most of it is). To this extent, a privatization program that specified the most conservative investments imaginable would still yield a higher return than what the individual presently receives on payments into Social Security. A privatization program that restricted the allowed investment in any sensible way defeats this argument completely. At best, the argument says we should implement privatization in a correct and careful manner. Why is the objection never framed this way? Because accuracy is not the objective.

The story lines from the right are not only that so-called privatization will fix everything, but that the current privatization proposals are really privatization, that they represent a significant step toward some kind of libertarian ideal. Privatization is a misleading term. It suggests that individuals will be choosing freely. But a program of forced savings is hardly privatization. Individuals will not be allowed to choose what to do with their resources. Government will force them, often against their revealed preference, to save. Evidence suggests individuals have difficulty planning over long horizons and insuring themselves against living too long (indeed, there's no reason to believe this capacity should be hardwired into us). A strong commitment mechanism provided by government appears to help. That's fine by me, but let's not call it privatization. Current proposals involve the replacement of one large government program with another large government program.

The privatization myths have variations. Michael Kinsley's fugue on the theme from the left, posted on Andrew Sullivan's blog, goes like this: Ordinary folks are so dumb they won't invest their money as well as "professionals," and thus privatization will not create higher economic growth. Professionals? Experts? The rational markets hypothesis states, in essence, that a drunken monkey throwing its feces at the stock pages picks winners as well as the smartest expert. The Kinsley notion--that there are "experts" out there, that there are brilliant investors who know how to pick the right stocks so that capital allocation will be optimized for the entire country--is a complete myth. Investing in equities is not quantum physics. Just pick a broad-based index fund and relax. If you're very risk averse, weight your portfolio toward the safest thing around. As long as government is in the business of telling us we have to save, it can also limit our choices on how to save. There is nothing complicated about this. Moreover, if you take Kinsley's argument and his condescension toward ordinary individuals seriously, it suggests we shouldn't even give ordinary folks their own paychecks. Government experts should invest for them and give them some predetermined allowance to spend on consumption goods. This would create higher economic growth because the "experts" would invest far more wisely, capital would be allocated far more efficiently, and the economy would grow much faster. If you buy Kinsley's argument, you almost have believe that a centrally planned economy is the way to go. I'll issue an understatement here: Most economists don't believe that a board of experts allocates resources more efficiently than markets of private individuals do.

Paul Krugman--never one to allow an ounce or two of intellectual fairness to dilute the political venom in his columns--contributes to the epic myth. He creates a bogey man in the privatization debate: Investment fees. But of course, the bogeyman only exists if you design the program unwisely. Krugman himself writes: 

It's true that costs will be low if investments are restricted to low-overhead index funds - that is, if government officials, not individuals, make the investment decisions. But if that's how the system works, the suggestions that workers will have control over their own money - two years ago, Cato renamed its Project on Social Security Privatization by replacing "privatization" with "choice" - are false advertising.

This is a classic straw man. Of course, the Cato rhetoric is false advertising (it's the myth from the libertarian right, described above). That means Krugman's original argument falls apart entirely. It's a splendidly imaginative tactic of Krugman, though: Use a false argument--and one that you don't believe at all--to refute valid objections to your own argument. So the point stands: Privatization will not lead to high investment expenses if it is designed well. Krugman then offers lame arguments for why the program won't end up being designed well. (Lobbyists will hijack it, he says. But this is an argument against virtually every government intervention in the private sector, and Krugman favors many of these).

In any event, ideologues of all stripes seem more concerned with feeding sugar-coated orthodoxies to their ravenous fan bases than to the exchange of ideas and the search for policies that might actually work.

That, rather than any set of budget projections, may be the most compelling reason to feel insecure about the future of Social Security.

-P.S.Babcock

Comments

[Giles]

I think you overlook the framing component of the debate; privatisation is no pancea but it does draw peoples attention to the fact that social security is an indivdual responibility not a right. And once people realise that it is a responsibility they can start to rationally address the problems it creates - whether collectively - i.e. through a social contract - or indivdually through some sort of libertarian ideal.

[doug]

interesting blog. well written articles. however, I'll have to take issue with your "damn both houses" take on social security. I see you wrote this awhile ago, which means that less of the details of the president's proposal (which still hasn't really been released, only floated) were out, and the latest forecast moving SS's bankrupt date was pushed even further back in to the future (for at least the 7th or 8th straight year).
First point: you say, "Story lines from the left depict destitute old people living on the streets and eating from dumpsters because they have gambled away their Social Security on risky investments. This is wrong on so many levels, it almost not worth discussing."
In the current plan, people who are disabled are still entitled to benefits. In the president's plan, they would really be eating out of dumpsters, b/c they won't be covered.
That would only be a small oversight, but what about people who retire during a bear market? They'd most likely not be doing nearly as well as people on the current system. As you know, many old people live solely on their social security checks. A sizeable decrease in payments really would push a fair number of elderly toward or below the poverty line.
Yet, the 800-pound gorilla you didn't tackle was how to pay for privatization. If you cut off a third of social securities revenues while paying the same benefits, the whole system will go deeply into the red pretty fast. This is what Republicans want, and even the president has said he'd like to move completely from a guaranteed benefit plan to a guaranteed contribution plan. Of course, no Republican wants to commit political suicide by cutting benefits that are now guaranteed, so what will happen is that they'll add a few more trillion to the national debt. Once Social Security is deeply in the red, it will become politically feasible to cut benefits, which is the real goal.

Also, one could defend Krugman in a variety of ways from your charge that he's hypocrital b/c he usually backs government intervention but not now b/c lobbyists will hijack it. First, this isn't Krugmans only reason for opposition (since you've posted he's done a series on privatization). Secondly, this administration has a proven track record of bowing to lobbyists and corporations, and they haven't proven to be very adept at carrying out the details of their own policies (see iraq). I'd trust Al Gore much more to write a Social Security privatization scheme, but then the details would look very different. One can't equate this administration's competence with the competence of government's everywhere.