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Notes -
What would privatizing Social Security look like?
”No one’s gonna take away your grandma’s pension.” - José Piñera, Minister of Labor and Social Security in Chile, right before he took away your grandma’s pension.
Privatizing Social Security has been a conservative pet issue for as long as I can remember, despite being politically unlikely and unpopular. Even Paul Ryan, who paid for his college tuition with SS survivor funds, still reminisced on halcyon days of planning with his Delta Tau Delta bros to privatize SS at keg parties. If it were possible, what would it even look like?
The Background
Social Security is a defined benefit, "pay-as you-go-system," funded by the $1 trillion Old-Age and Survivors Insurance and $142 billion Disability Insurance trust funds, paid via payroll taxes, plus a $63.78 billion Supplemental Security Income from the General fund.
Before FDR passed SS, senior citizens were the poorest demographic in America. Nowadays it’s one of the most popular programs and everyone wants to preserve it in some way.
Problem is, we’re going broke.
What if Ayn Rand was Acting Commissioner of the Social Security Administration?
It should be said that the freest of free market solutions here still imagines coercion of mandatory contributions. Still, the position advocates switching to a privately managed, defined-contribution system, which would get a higher returns by investing in the private market instead of government securities.
Because these are personal accounts, hopefully you fix the problem where an increasingly smaller working population pays for swelling retirees. In reality, those old obligations don't disapear:
Given that this transition would be pretty expensive and the main benefit is getting to invest in the private market, the counter is: why not just let the government invest in the private market? Such a case is made here.
More Consumer Choice?
A privatized system should give individuals more control over their investment decisions. It’s hard to weigh that benefit against the risk of dumb people ending up with less retirement savings than they get under the current system.
Would Management Costs be Lower?
Surprisingly hard to figure out! SS obviously has no marketing costs and boasts astoundingly low administrative costs of >1%. However, some admin work is outsourced, ie employers and the IRS collect the funding.
But hey, the government’s gonna keep doing all that stuff anyway; a privatized system would just have to duplicate them elsewhere, plus means testing, plus marketing costs.
Costs in proposed plans vary a lot:
But forget all these technical hypotheticals. The question we’re all wondering is,
what does this look like in practicewhat would a South American military dictatorship do?El Ladrillo
The largest scale example of a country privatizing its retirement system is under the Pinochet dictatorship in Chile. Initially their rollout was a big success with high returns. However, even Niall Ferguson, a prominent advocate for their system, notes many of the downsides I wondered about above:
That public pension was in fact created by a socialist government specifically to make up for extremely low coverage under the neoliberal system. I find it pretty damning that the most extreme example of a privatized retirement system ran into all the problems its critics said it would, and handled it in the same way every public system does - through backup government funding. If we’re going to end up doing a mixed market system anyway, it might behoove us to keep our publicly managed system but give them leeway to invest privately, rather than pay a ton to transition to a privatized system then pay more later to fix the holes that left:
A broader review of the other countries that followed suit seems similarly disapointing:
Less Radical Funding Solutions
Raise Payroll Taxes - “even a modest change, such as a gradual increase of 0.3 percentage points each for employees and employers (or less than $3 per week for an average earner), could close about one-fifth of the gap.”
Raise the payroll cap - The payroll tax is actually regressive, exempting incomes over $160,200. “The Congressional Budget Office estimates that subjecting earnings above $250,000 to the payroll tax in addition to those below the current taxable maximum would raise more than $1 trillion in revenues over a 10-year period”.
Widen the tax base - “In 1982, 90 percent of earnings were subject to the Social Security tax, but by 2017 the share had decreased to 84 percent.” “Including employer-sponsored health insurance premiums could close over one-third of Social Security’s solvency gap; including other fringe benefits could close one-tenth.”
All in all, I view social security as unfixable. Giving a large percentage of people a check every month turns those people into single-issue voters whenever their check is threatened.
The original sin of Social Security was treating it as something you earned, and not as welfare for old people. People paid in. Now they want their money back, $30 trillion debt be damned. This line of reasoning isn't entirely bullshit. After all, people who paid in more do get more later which is why this "tax" is regressive. It's not really supposed to be a tax. It's supposed to be insurance.
To me, the biggest takeaway is that Universal Basic Income is a bad idea and should be avoided at all costs. Once it starts, it would be impossible to kill even if it fails at all its goals. And of course it will never be enough. The check-getting group will always vote to get larger checks and the expense of everything else.
I think going back to it being insurance rather than a welfare check is probably the only way to really permanently fix it. The problem is that the system was built on the notion that the retired people would be too old and sick to productively work and too poor to live. When retirement started in the thirties, you retired pretty much at the median life expectancy and might live a couple of years before you died and thus the payouts never really got too burdensome. Fast forward 40 years and people retire at 65 and live to 80 or so and you’ve got a problem. And this isn’t even counting the demographics problems presented by having the largest cohort in the USA be retirees and near retirees with fewer and fewer workers holding up the system.
If you go to an insurance scheme, it would probably work fine. You’d have to have a documented reason why you couldn’t work, or have to be within 5-10 years of median life expectancy. No more 20-25 year second childhood boating and traveling and so on while suckling the government tit. Now if you can afford to retire, fine. But I think the idea that workers should give up large swathes of their income and the government should be trillions in debt to finance people living at leisure seems a bit crass, especially since that cohort also are far more likely to own assets and have investments and so on.
Boomers are the richest cohort in America even before social security. Millennials and Zoomers are not only unable to get assets, most are paying off decades of student loans and renting. They can’t afford kids, even with roommates. Most are struggling financially. Investment in making life better for the cohort paying for things might create the opportunity for that cohort to build more small businesses, or buy houses, or afford children. They could spend that money on consumer goods that they need as they buy houses, raise kids, build businesses, and so on.
I wish. But the whole concept of insurance has been undermined already. Look at health insurance. Ever since insurance companies were prohibited from turning people away with preexisting conditions, it was no longer insurance. It became a healthcare system that guaranteed access, and "insurance" was the entrance fee.
I understand insurance is extra fucky in that it's tied to your employer a great deal in the US, and losing your job then forces you into the situation where you may be shopping around for insurance with a condition that is preexisting to your new insurer. I just wish that had been fixed instead of dispatching with the entire concept of "insurance".
I think we may not mean the same thing here. What I mean by insurance is that it only pays out for people with a demonstrable need, rather than being a defined benefit that you get at a given age regardless of any need. You can be perfectly able-bodied to the point of being able to hike twenty miles and climb mountains— if you’ve reached retirement age, under the current system, you get SS. Likewise, you can be filthy rich have millions in assets— if you’re at the right age, you get the same check as everyone else. My ideal system is based on turning people away who don’t need it either because they can still work or because they have enough money to not need money to retire. I’ve little objection to paying for people who literally can’t work for various reasons but are too poor to afford to stop working. Fair enough. But we’re showering money on able bodied people who can provide for themselves which doesn’t make sense.
That's not "insurance", that's "welfare".
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I'm with @WhiningCoil. I agree with what you're getting at, but I think it's a tough sell because people literally don't understand what "insurance" means, in part due to how severely the concept has been undermined in health markets, where we have effectively banned actuarial tables as well as requiring people be insured for things they have effectively zero risk for or need of. I absolutely promise that I don't need PrEP to be covered by my insurance, nor do I need weight loss drugs, but I actually could use significantly more coverage for sports injuries than the median person. Can't do it, all bundled, because telling homosexuals or fat people that they're higher risk and have to pay more would be discrimination.
Why wouldn't this pan out the same in social security? Someone is going to get their ox gored if it isn't just everyone gets it after whatever age.
As Scott once said, dealing with the biology side of things is relatively easy; changing human behavior is what we don't have a solution for.
Besides, pharmaceutical costs aren't really high because other people's problems are uniquely expensive, they're high because we pay for patents - about 75% of pharma costs are from on-patent drugs. From my table napkin math Truvada was about $2 billion a year when on-patent, which is about 0.34% of pharaceutical spending, or not enough to notice any difference in your premiums if you opted out.
Prep, Ozempic, and other such stuff were never even costly in the first place because lifestyle-choice preventative medicine is more expensive than any other kind of medicine; on-patent drug prices can just be raised as high as the market can bear. Truvada fell over 20x in price after generics were released and will now be a fraction of a fraction of a percent and save us significantly more in down-the-road hospital costs. Ozempic will plummet in price soon as well because Medicare has made it target #1 for the next round of price setting.
But even if you it opt them and all the other "lifestyle" stuff out of the bundle now it would still all be a drop in bucket. Make it illegal for companies to even produce that stuff and they'll just invest in different drugs you don't need and raise the prices just as high.
Well, through those patents we’re actually paying for the drugs to be developed in the first place. The reason those drugs exist despite the huge costs of development is that the patent lasts long enough and Medicare doesn’t bargain down the costs of the drugs. Yes the cost falls after generics come out, but without the patent and guaranteed profit, no one would spend billions of dollars and ten years developing the drug in the first place.
I agree 100% - that's part of why I'm against some theoretical unbundled system.
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These were two examples of things I don't want and would never need, not a full cataloguing of things that I have zero interest in insuring myself for. I am very confident that if my insurance options were similarly varied to what I can select for other situations that I would have substantially lower premiums than current pricing.
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