There is an interesting exchange on social security privatization occurring across some fairly well-known weblogs. It starts with a post by Brad Delong, who argues in part that there are excess returns on equities, people save too little anyway, and privatization would be a good scheme for forcing people to save, thus addressing private individuals' myopia while correcting a market failure.
Marginal Revolution's Tyler Cowen responded, suggesting that privatization would look great if we were starting from scratch, but the devel is in the transitional details.
Most of all, I am worried about the fiscal implications of this privatization. Current plans ... require a big tax increase in the short to medium run. In essence the proposed reforms stop collecting "pay as you go" contributions and move everyone possible toward private accounts. But during the transition an influx of money is still needed to pay off the current elderly, therefore the tax increase. And we are talking trillions here, not just small change...
So let's push for means-tested benefits, and hope that social security slowly but surely shrinks and evolves to a welfare system for the needy elderly. It should not be a stranglehold over every mainstream employment relationship.
DeLong weighed in again a few days ago. with another argument for opposing privatization.
There is a bigger, unmentioned reason to be against private accounts. Ten years down the road or so, there will be pressure on Congress to allow people to borrow against their private accounts, or to withdraw them to buy a house, or to use them to meet unexpected medical expenses. Congress will bow to that pressure--it's their money, after all. And in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits.
But, in a post I referred to earlier, Arnold Kling at EconLog, takes a relatively sanguine position on the transition issue.
We could incur the "transition cost" without privatizing Social Security. It is simply a matter of being honest in our accounting. Let us suppose that when I pay $5000 in Social Security taxes that in return the government owes me, in present value terms, $5000 in retirement benefits. As the government spends that money, it could issue debt of $5000 to cover my future benefits. If it were to do so, then its balance sheet would reflect its future obligations. This would be a "transition" to transparent accounting, rather than the Ponzi methodology employed today. As it stands now, the government is incurring future obligations without putting them on the balance sheet.
Cowen responds with a reference to the latest Nobel idea:
Even if the transaction can balance without a current increase in interest rates, the increased rate of borrowing (or taxation) will tend to stick in the long run. Plus there is a time consistency problem. If the new debt is placed smoothly, government has an incentive, ex post, to accept some new unfunded liabilities for the future.
Yesterday at EconLog, Kling posted the latest chapter in the string.
A Word of Warning: DeLong's posts indulge his unfortunate propensity to impune the integrity of those with whom he disagrees -- being in, or a supporter of, the Bush administration is a sufficient condition -- but if you focus on the economics and ignore the snarky non sequiters, his opinions can be worth reading.