Tuesday, November 23, 2004

Social Security and "Forced Savings"

There's a lot of smart folks on the net. Some even smarter than me (although, admittedly VERY few). Take Tyler Cowen, over at marginalrevolution.com. He explains inevitable problems with social security privatization that I really hadn't considered:

First, how much can our government force people to save in the first place? You can make them lock up funds in an account, but they can respond by borrowing more on their credit cards, taking out a bigger mortgage, and in general investing less in their future. The net increase in savings will be much less than the mandated increase. And this will make it much harder to avoid the welfare aspect of social security.
When do the savers receive true property rights over the funds? Surely not at 65. They could then spend it all and apply for the dole. We are back to letting people starve or constructing a secondary safety net; the latter is almost certain to happen, although that was precisely what the forced saving scheme was trying to avoid. Alternatively, the government could regulate how much a person can spend from the lockbox each year (must it limit your borrowing too?). Imagine being on the verge of death and petitioning the government to spend down your account to meet your medical bills or make a large donation. The complications are not encouraging.
Let's put aside the parallels with IRAs and the like. Those plans work as they do because we already have a safety net in place for the elderly. And note that Chile (and many other countries), which has "privatized" its social security plan, maintains a secondary safety net as well.
Private accounts meet further problems if people live for a long time. What about the woman who survives to 105? It is impractical to force everyone to save enough to last until that age. So either the 105 year olds starve or we are back to the secondary safety net. Perhaps you are a libertarian who thinks none of these people will starve; still I predict that the political pressures for public assistance will be overwhelming. We will end up with both forced savings and a welfare system.

There's more here, but that's the meat of it. Social Security privatization is a proposal I have been gung ho in support of - and I think I still am - but this is a compelling argument to think twice before diving in head first.

(But, really, I just hate it when people are smarter than me.)


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