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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 will strongly oppose any increase/stealth increase (raising the payroll cap/widening the tax base) in taxes. Raising the payroll cap is just kicking the can down the road as the CBO mentions:
But it looks great in their 10-year horizon becuase most of the people earning it are well beyond 10 years from retirement.
Bush's partial, optional privatization proposal was probably as close as it will ever get. After the sound rejection that got, I am looking forward to the plan failing. There's no political path to fix it.
My likely XIRR on contributions and statutory benefits under is already a nominal 2.77%. I'd be in favor of privatization whose only option was taking any part of even future social security contributions and sticking them in a treasury direct account, anything beats 2.7%. What a gigantic waste of almost a million USD.
I'm referencing the second of the two options they describe:
Which is taking my 2.7% return and likely driving to near zero or even negative because now I'm paying taxes on more income but only getting a benefit based on a fraction of my contributions. I'd much prefer ending universal social security and setting up a much smaller means tested welfare program for seniors.
Yes wealthy people would be paying a larger share under this sytem and the benefits would be distributed downwards, like most other taxes.
Someone making $160k/yr in NYC or SF, while very fortunate, is likely quite far from being wealthy. The New Yorker would need a roomate to afford median rent, and neither can afford the median home.
This proposal doesn't hit people making over $160k, it hits people making over $250k, about 100 stacks more and solidly in the top 5% of the nation. I empathize with their higher cost of living, but if we have a funding shortfall, who other than the most well off should we be raising taxes on first?
Its always best to tax people who can't avoid the tax. Which means things like VATs, Payroll taxes, and sales taxes. All the most efficient taxes are flat or regressive. Taxing the rich is a waste of time and resources with little actual benefit to the treasury.
Yes, this is a tax on payroll.
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