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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.”
I'm not sure any solution can be evaluated outside of what has caused the problem. Probably chief among them, an aging population. Even if it's aging slower than other first world nations "thanks" to immigration, it's still aging. So the ratio of young people supporting old people on social security keeps skewing worse and worse.
The other reason, which may be less supported, is Federal Reserve policy. When the whole system is funded with T-Bills, every time inflation spikes or rates get slashed, social security takes it dry. Even in good times, the same "use it or lose it" dilemma the Fed forces consumers into to keep our consumer economy consuming along with their 2% inflation target is punishing social security. Both by increasing the rate at which it needs to make it's inflation adjusted payouts, and for the last 15 years of low rate environment destroying it's interest payments because inflation supposedly wasn't high enough.
Raise the payroll cap, raise the payroll taxes, widen the tax base, privatize the system, none of it will matter. You need to goose the fertility rate, and not play silly games with immigration to fake the numbers. And you need sound money. Everything else is a bandaid doomed to fail.
What makes you say that? The numbers I looked at suggest those tax changes would go a very far way towards addressing funding shortfalls. Raising birthrates would be ideal but if we could do that on command, we definitely already would. Most likely we'll have a combination of raising taxes, cutting benefits, and raising the retirement age - all stuff nobody likes, unfortunately.
Do those numbers take into account continued declines in fertility? Do they take into account Fed policy decisions in line with the last 20 years of Fed policy decisions? What assumptions did they make about T-Bill returns or inflation?
I just can't be brought to trust the numbers anymore. Estimates in advocacy for policy changes always make optimistic assumptions to make the numbers work. Although perhaps I did come on too strong saying "none of it will matter". It might buy us a few more years, and I'm sure some politicians will pat themselves on the back for yet another non-solution.
Social Security makes projections 75 years into the future and does take declining fertility into account:
Re:
The return on investment in the trust funds has been consistently about 10% total and 6% for OASI. Social Security payouts have a COLA increase based on inflation each year, and can sometimes adjust upward month to month based on the CPI. This is all factored into their budget & projections.
I mean it may be imperfect but raising taxes is more of a solution than hoping we have more kids.
They're somewhat in opposition, insofar as raising taxes in the ways you suggest would transfer resources from the fertile population to the infertile population. Imagine raising social security contributions, but transferring the extra income to people under the retirement age who are medically certified as infertile. Of course, it's hard to say how much of an effect such transfers would have on the birth rate, but presumably they would be negative.
Fair counterpoint. OTOH, raising retirement ages probably also has some effect on the job market & wages as well, in terms of decreasing potential promotion opportunities. No idea how large that would be either and I assume in reality we'll do a mix of everything, maybe raise taxes slightly plus raise retirement ages and reduce benefits.
Yes. My preference in such cases is usually for reducing benefits (either in each case or through means-testing) but I appreciate that it's not usually a sufficient solution.
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