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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 probably should make an effort post about (not so) useful fictions, but in the meantime you get this: "Retirement" without a greater support structure has two critical components: 1. Provide for your own parents once they can't anymore 2. Have kids that can then provide for you once you can't anymore.
Pensions are a useful fiction that, similar to money, fulfill the same function while reducing friction and risks. But unlike money, which has a single requirement to be useful - other people taking money in exchange for goods & services - and a single result - YOU being willing to take money in exchange for goods & services - which incidentally are perfectly aligned by incentives, pensions actually still have both requirements - people still need to now provide for the current pensioners, and someone still needs to have kids so that someone is around to provide for us - while only having one result - people providing for the current pensioners through the pension system. The second requirement is just left hanging, at best handled with a blasé "well we can't force people to have kids" or at worst with a stonewalling reality denial "but I paid into the pension so I deserve to get my care!".
The incentives are totally fucked up; I've recently talked with a friend about it who isn't sure whether he wants kids, and one of the main counterarguments for him was (retirement) money. If he has no kids, he can work more, save up more, and also has to spend less, so he will have waaay more money than in the alternative reality with kids, where he has to work less and also has to spend more. So the incentives are aligned so that the people are outright punished for actually fulfilling the second basic requirement for retirement to work at all. In fact you get double punished; I still also get punished for other people not having kids, since my pension later on will be worth much less since we lack the manpower to provide it to the degree we'd like. Useful fictions aren't magic, the things that need to be done still need to be done, it's only about setting up the incentives right as well as reducing friction and risks. Letting the market handle it may clear up some inefficiencies but doesn't really change the fundamental issue, while increasing taxes one way or another may fix issues now but doesn't unfuck the incentives.
Immigration can stuff some holes, but ultimately you're just putting it off on other countries and the realities of immigration in most western countries is a thoroughly mixed bag.
Why does no one mention the unthinkable? I.e - No government funded pension at all?
I know, I know, straight up impossible. Free money is just too strong of a drug, and once you've had it, nothing short of rebuilding civilization from scratch can make a people get used to the idea of not having it.
But as a dreamer, I am left wondering that a lot of our economic and social worries wouldn't exist in the absence of giving people free money.
People would actually have to plan for a retirement, They would have to have kids such that the kids can look after them. The kids won't move too far away from their parents (reducing social atomization), Those two things in and of themselves are a massive restructuring of incentives, with so many knockon effects.
Because free money creates extremely strong voting blocs. This is a general problem with democracy, at least democracy with short-sighted voters by and large.
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