Les Jones

Social Security > Social Security Reform Debate

Informative debate on Social Security reform between James Glassman and Tyler Cowen. Both agree that Social Security should be indexed to prices rather than wages, and that indexing to wages is one of the causes of the current predicament. Cowen raises my main concern with privatization:

Whether we like it or not, government would come to be seen as offering an implicit guarantee for these accounts. If the stock market were to stay low for 10 or 15 years, retirees would demand that government supplement their returns. Government would feel pressure to cough up additional revenue exactly when the budget would be in the tightest squeeze. The result would be higher taxes in times of recession, exactly the opposite of what is appropriate. (It is true that government does not end up guaranteeing current IRAs, but that is only because we already have Social Security as a backstop.)

Glassman, in his counter-counterpoint, acknowledges this problem when he addresses plans that would completely dismantle Social Security (after paying back all contributors):

The second problem is that in the United States we don't let people starve. Some people simply will not save for their own retirement--especially after 70 years of relying on the government. Even Hayek agreed that some form of forced savings is necessary to keep taxpayers from having ultimately to foot the bill for those who don't provide for their own future.

Glassman isn't in favor of let-it-all-hang-out market optimism, and proposes some limitations on the kinds of investments people would be restricted to in order to limit volatility. Cowen worries about the politicization of those government-mandated options, and I don't blame him.

Glassman notes what I think is one of the great unsung benefits of privatization. Namely, that private accounts can transform lives and families by making people active participants in their financial futures, and making the private accounts transferrable to their beneficiaries.

Finally, the establishment of private retirement accounts--even with restrictions--will be a blessing for tens of millions of low-and middle-income Americans who have little or no savings. As we've seen in Chile, when people are introduced to investing in stocks and bonds, they like the experience and want more. The problem today is that payroll taxes are so high that young people especially don't have the cash to save and invest. Reforming Social Security would change that.