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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 an economist, but doesn't this just amount to increasing the money supply in a way that makes the government responsible for more direct investment decisions? The government (and Federal Reserve) already control the size of the money supply, what makes it better than increasing investment some other way like lowering interest rates or qualitative easing? The linked article talks about higher returns, but money doesn't create wealth, investment of actual resources creates wealth and money decides where those resources go. Right now the money is forcibly invested in government treasuries, which seems identical to the money ceasing to exist for a period of some decades. Since the money is simultaneously collected and paid out, and the amount paid is currently larger, this represents money creation, as well as obviously trasfer to the elderly. If in between it was also invested, this would constitute a lot more money creation, which in general can be done in other ways and right now does not seem like what the economy needs. I guess the main other thing it would do is change the ratio of investment and consumer spending, is that currently desirable in the U.S.? The linked article doesn't say, instead it talks about monetary "returns" to the entity that already prints the money.
I think this is the right concern but, just intuitively, isn't it less distortionary to do what a rational individual who wanted to save money for decades would do, invest it in stocks, rather than disappear the money for a few decades and then reappear it? Other policies might need to be adjusted in response of course.
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They're actually paid out of reserves that we had built up in prior decades right now, we're just running out of those reserves.
The "reserves" are treasury bills. The money that was collected was spent immediately.
I can't tell whether you're making a pedantic point about the payroll tax money is invested or are arguing against us having financial reserves to tap. In 1983 we reached a similar place where the trust funds were facing (much more) imminent deficits. Congress worked together and responded by both cutting benefits and raising contributions; in the years that followed we fixed the shortfall and built up accumulated surpluses (page 36) from all the boomers in the workforce. We've been currently spending down those surpluses for SS payouts but we aren't printing money or borrowing from elsewhere in the general fund (except for the marginal SSI fund).
Hey, we fixed it once, no reason we can't do it again.
A treasury is a reserve to entities other than the government, but it's not to the government itself. Another government's debt would be a reserve.
Everyone including the SSA themself refers to the trust fund's accumulated surpluses as reserves.
I can cut the tusk off a narwhal and call it a unicorn horn but that doesn't actually make it a unicorn horn.
If Apple Computer buys a US government bond or a Germand Bund it will receive money at some point in the future without any further action from itself. This is an actual reserve.
If Apple Computer issues a bond to Beats Audio (a company Apple Computer wholly owns), Beats will receive cash from Apple (conditional on the creditworthiness of the parent). So, when we consolidate these, they net to nothing. Apple owes just as much as Beats will recieve. From an outside perspective they fully cancel each other out and can be ignored. Apple will need to get the money elsewhere that pays Beats.
When the US government issues a bond to Social Security Administration. The US government owes just as much as Social Security will receive. So, when we consolidate these, they net to nothing. The US owes just as much as Social Security will recieve. From an outside perspective they fully cancel each other out and can be ignored. The US doesn't get to claim that it has a reserve via SSA. The US will still need to borrow (or tax) the money needed by Social Seurity in order to repay their debt.
If Social Security owned bonds issued by a non-US Government entity, those would be real reserves, since they should be able to expect the third party to give them money without any required action from another US government entity.
Everyone understands this, they're clearly talking about earmarked tax payments plus interest exceeding defined tax outlays. If you want to be precise and call it accumulated payroll tax receipts plus 6% of money the US government will pay on treasuries, you can, but who cares? This is a semantic argument that doesn't have implications for the fiscal operations of the trust funds.
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