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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.”
Do we want a larger share of power and capital in the hands of dumb people?
Similarly, the "funding solutions" you consider all involve taxing labour more, in order to make it easier to have extended idleness for increasing proportions of people's lives. You don't have to be a fanatical Lafferian supply-sider to see this as part of a general slide of the US economy into stagnation and gerontocracy. As Western Europe has already experienced, social democracy via tax-and-spend plus regulation ends up in a trap of stagnation that is politically hard to escape:
https://danieljmitchell.wordpress.com/2022/02/05/comparing-economic-growth-united-states-vs-europe/
(Note that much of EU growth is catch-up growth in the especially backward Eastern European economies like Poland, the Czech Republic, Romania, Bulgaria, and the Baltics. Western European growth is slower.)
I'd like for them to be provided for in retirement! Certainly better than them being up-in-arms against their poverty, even if it's self inflicted. The problem is much larger than a cohort of dumb people at the bottom of the population as well, insofar as you trust self-reported surveys, various studies are always showing that even surprisingly numbers of well-off people report living paycheck-to-paycheck (25% of people making over $200k, 30% of people making over $250k). If these were middle income folks I would happily accept the counter that raising their payroll taxes would make this worse, but if even the Americans with the most disposable income don't save any of it, it's hard to imagine this would be better in a less-guaranteed retirement system.
These just aren't very high taxes on labor. 0.3% isn't going to bring us to anywhere near Europe. I'll note that even if we were, the Scandanavian countries are the pretty central example of high taxes on labor/consumption, low taxes on capital, and have done some of the best in terms of keeping pace with the US.
But we could even skip that and go with option 2 and only tax the top 5% of laborers. If you'd rather fund it by taxing capital I'm fine with that too. But even the conservative Tax Foundation agrees payroll taxes are more efficient than taxes on capital:
We've also been pretty committed to keeping entitlements funded via payroll tax partially because it's the least unpopular tax, since people see it more as an investment.
Yes, because social insurance has been sold as if it's an insurance programme.
So your principle is that, if someone threatens you after they suffer the consequences of bad decisions, then you'll give them what they want?
This falls foul of the Lucas Critique: you're inferring saving behaviour under Policy Regime A from behaviour under Policy Regime B, when a switch from B to A would change the incentives for saving behaviour. Insofar as people have guaranteed consumption in retirement, it makes sense for them to save less now.
Not in itself, but my point was it's another step in that direction. And such steps can be aggravating: by reducing take-home pay of workers, you decrease their incomes relative to their expectations; maybe they respond by demanding more generous tax credits; perhaps these are funded by an increase in taxes on capital; perhaps these deadweight losses lead to slower growth, which requires higher payroll taxes to keep Social Security going...
Social democracy in Europe evolved by a series of steps, most of them seemingly modest in themselves, but ending in stagnation that is extremely difficult to escape, because escape requires pissing off huge numbers of people. The dogmatic and often boneheaded American prejudice against taxation, while often leading to decisions that seem stupid in context, has been tremendously successful in the long-run. This is an example of time-inconsistency: doing the optimising thing at each stage in a process can lead to suboptimal long-run outcomes, whereas precommittment (or equivalently, an irrational dogmatism) to a dogmatic rule can lead to better outcomes. So, even if a 0.3% rise in payroll taxes seems rational now, it weakens the US's culture that has avoided a slide into the relative stagnation of European social democracy.
(Of course, someone might argue that European social democracy is preferable even given this relative stagnation, but that's a different argument. My thesis is only that funding Social Security via increased taxation is one more step in that direction, and that that direction is not without costs.)
My principle is that if you can 100% count on people to mess up, prudence suggests preparing in advance. To not do so is poor governance.
Well, that was why I tried to look into real world examples of what the system looked like in practice. Per the quote in the Brookings Report: “the system [in Chile, Mexico, Peru, El Salvador, Colombia, Argentina, and Bolivia] has done little to stimulate voluntary savings; few workers have channeled additional resources to their accounts.”
I would be one of those people in favor for social democracy, partially because I’m pretty unconvinced taxation is really the root of their slower growth. Europe has had consistently high taxes than America for a long time but the divergence is only in the last 20 years, if anything a period marked more in Europe by slightly falling taxes. But as you say, that’s another argument.
Sure, no disagreement there, my position is just that cutting SS by almost a quarter also has costs, and they seem larger to me than a small tax raise.
Granted, but your previous argument was not "preparing for people to mess up" but that one should cater to irresponsible people, if they will be "up in arms" about having outcomes that disatisfy them.
My point is that "living from paycheck-to-paycheck" doesn't mean that these people won't save more for their retirement under a different system. Whether they save enough depends on how smart and self-disciplined they are.
Additionally, the evidence cited in the quote doesn't do much to support the quote's conclusion: you'd need to look at the overall savings rate (ceteris paribus) to make such a causal inference, not just one category of savings (the retirement accounts).
The divergence in growth rates is recent. The divergence in levels is much older for most Western European economies:
https://fred.stlouisfed.org/graph/?g=19QJO
Note how Germany actually caught up with the US by 1975, but then fell behind again. Also, events in social science are rarely monocausal, so it's not so much "Western European taxation causes slower growth than the US" but "Western European taxation and regulation are part of a set of factors that tend to leave them indefinitely stuck behind the US." Of course, there are exceptions like Norway, but planning on the basis of a massive natural resource boon isn't a development policy; it's closer to a prayer to God.
It's doesn't have to be either/or. An equal increase in the solvency of the system through tax rises and spending cuts (later payment age, slower uprating with inflation etc.) could be a reasonable compromise.
It feels like a distinction without a difference to me tbh, it's just a different way of wording the same policy need that we'll always have to deal with.
Them living paycheck to paycheck is less a particular reflection on SS and more on their spending habits with the money they do have control over; this seems like as good a starting place to make assumptions about how smart and disciplined the best of us are going to be with more cash in hand.
But really, this is part of why I wrote this post in the first place. We don't know fully what people will do under an alternative system, so it makes sense to look at examples of how that system looks in practice. If we note their savings accounts are worse, that certainly shouldn't upgrade our priors to thinking private retirement accounts will help us either.
For the purpose of this discussion it seems most relevant to me whether or not they made use of the retirement savings, but fair enough. The best I can find for personal savings rates is for Latin America overall:
Here's a little closer to the present and after all of these countries went through their SS reforms that seems to say the same thing about overall national savings (which correlates with private savings):
Note that you can look at the specific countries that reformed their SS (Chile, Colombia, Bolivia, Mexico, Peru, El Salvador, Argentina) on pages 12-15, though unfortunately they're not modeled on a chart for easy comparisons with other countries.
Sure, in the inverse, the multifactoral nature of growth is what makes me so suspicious of the original claim that we should be confident European higher government size is the main, or even primary factor here. I don't often see much attempt to isolate those affects, or to account for the fact that many of the countries that have maintained the highest tax levels, like the Scandanavians, have also maintained the highest growth rates (the graph I linked above was supposed to include all of the OECD growth rates, not just Sweden's - sorry about that). Heck, America's own government as a percent of gdp has been moving steadily up forever and we seem to have mostly just gotten richer.
Everywhere faltered around the mid 70s, but when we talk about Germany catching up to America before then it's worth noting this was under a period of famously active state intervention, tight regulations, high union participation, and an expanding welfare state - this is true not just of the Miracle on the Rhine, but of Les Trente Glorieuses, and the Belgium, Italian, Greek economic miracles, etc.
I am no particular advocate for dirigisme (and indeed many of these countries also had pro market reforms that I think contributed to growth as well) but I do need more of an argument for Europe's mild-by-historical standards government size is definitely responsible for its (relative) stagnation now, but its tightly regulated, highly interventionist and welfare expansionist state in the mid twentieth century definitely isn't responsible for its success then.
Agreed! A fair middle ground position.
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You know the parable of the grasshopper and the ant, right? What's the point of being an ant if the ants are going to do all their work AND work to support the grasshoppers too?
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