Joe Economist
Council Member
The Social Security debate contains a lot of noise, where people argue in great earnest with the worst of cliches. Arguments are repeated over and over until people accept them out of volume rather than reason.
The idea to privatize Social Security deserves more consideration than it gets from either side. Opponents - with a straight face - will warn you about the risk of the stock market, when the money today sits in a system that is insolvent by any measure of the insurance industry. Proponents - with equal ardor - will promise you that a privatized Social Security system would create a pool of capital on which the economy will grow as though Social Security would be a magical money tree.
Lost in the cliche is whether privatizing Social Security is sound public policy. The question is whether it is better for society to prepare for retirement with insurance or savings or a combination of both. Insurance and savings are not the same thing. Both provide money for retirement, but they do it in different ways. Insurance manages risk where as savings accumulates wealth.
In terms of society, a mix is more efficient. With pure insurance, society only has to allocate sufficient resources to provide for only those living to retirement. With savings, society has to allocate sufficient resources for the entire population. The mix of both allows insurance to manage the risk of old-age, and personal savings to manage the risk of the failure of the insurance company.
It is possible to look at this question as we do auto-insurance. People are legally required to get insurance for every car that they own. For that car, it is possible that we could self-insure and have a personal savings account for auto-wrecks. The fact is that we don't. We use a mix of insurance and deductibles, and hope that we don't have a wreck. It is cheaper. Insurance is an expense not an investment.
This is what we have today - in theory. Social Security provides old-age insurance that augments personal savings. Privatization would rewrite Social Security on new terms with a new goal. Privatization would shift the intent of the system from insuring old-age to building savings. In terms of retirement, these insurance and savings are complements not substitutes. They work together like bacon and eggs. Replacing the current Social Security with a personal savings account is like replacing the eggs with sausage.
Before we replace, the eggs with sausage, someone should ask why is it that a new Social Security will perform the job of accumulating wealth better than the savings programs that we already have, and already subsidized. Virtually every American has access to personal savings accounts. They may be 401Ks, IRAs, brokerage accounts. If savings accounts with tax incentives are not getting the job done, how is throwing more money at them going to work any better?
Any publicly mandated retirement planning will affect private savings. Social Security, and all insurance, will lower private savings because as people spend money to buy insurance, they have less money left over to save. Unlike insurance, a privatized Social Security would displace the need for private savings on a dollar for dollar basis because there is no difference between the two. Privatization creates nothing but noise.
In terms of public policy, insurance is a valuable component of retirement planning. Whether it is Social Security or a private market offering, people should at least have the option to buy old-age insurance. Employers should be given incentives to encourage employees to buy private insurance. Given the state of Social Security and the fact that insurance manages risk, it should be a growing part of everyone's retirement plan.
Here is the real problem with privatization: most Americans do not have access to old-age insurance in the private markets. So privatization would change what we can't get elsewhere into something that we already have and already doesn't work.
The idea to privatize Social Security deserves more consideration than it gets from either side. Opponents - with a straight face - will warn you about the risk of the stock market, when the money today sits in a system that is insolvent by any measure of the insurance industry. Proponents - with equal ardor - will promise you that a privatized Social Security system would create a pool of capital on which the economy will grow as though Social Security would be a magical money tree.
Lost in the cliche is whether privatizing Social Security is sound public policy. The question is whether it is better for society to prepare for retirement with insurance or savings or a combination of both. Insurance and savings are not the same thing. Both provide money for retirement, but they do it in different ways. Insurance manages risk where as savings accumulates wealth.
In terms of society, a mix is more efficient. With pure insurance, society only has to allocate sufficient resources to provide for only those living to retirement. With savings, society has to allocate sufficient resources for the entire population. The mix of both allows insurance to manage the risk of old-age, and personal savings to manage the risk of the failure of the insurance company.
It is possible to look at this question as we do auto-insurance. People are legally required to get insurance for every car that they own. For that car, it is possible that we could self-insure and have a personal savings account for auto-wrecks. The fact is that we don't. We use a mix of insurance and deductibles, and hope that we don't have a wreck. It is cheaper. Insurance is an expense not an investment.
This is what we have today - in theory. Social Security provides old-age insurance that augments personal savings. Privatization would rewrite Social Security on new terms with a new goal. Privatization would shift the intent of the system from insuring old-age to building savings. In terms of retirement, these insurance and savings are complements not substitutes. They work together like bacon and eggs. Replacing the current Social Security with a personal savings account is like replacing the eggs with sausage.
Before we replace, the eggs with sausage, someone should ask why is it that a new Social Security will perform the job of accumulating wealth better than the savings programs that we already have, and already subsidized. Virtually every American has access to personal savings accounts. They may be 401Ks, IRAs, brokerage accounts. If savings accounts with tax incentives are not getting the job done, how is throwing more money at them going to work any better?
Any publicly mandated retirement planning will affect private savings. Social Security, and all insurance, will lower private savings because as people spend money to buy insurance, they have less money left over to save. Unlike insurance, a privatized Social Security would displace the need for private savings on a dollar for dollar basis because there is no difference between the two. Privatization creates nothing but noise.
In terms of public policy, insurance is a valuable component of retirement planning. Whether it is Social Security or a private market offering, people should at least have the option to buy old-age insurance. Employers should be given incentives to encourage employees to buy private insurance. Given the state of Social Security and the fact that insurance manages risk, it should be a growing part of everyone's retirement plan.
Here is the real problem with privatization: most Americans do not have access to old-age insurance in the private markets. So privatization would change what we can't get elsewhere into something that we already have and already doesn't work.
