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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.”
The most regressive aspect of social security is simply that poor people die younger than rich people.
https://crsreports.congress.gov/product/pdf/R/R44846 (pdf warning)
There is about a 10 year gap in life expectancy between the richest and poorest. Which overwhelms nearly any difference in generosity between payouts and the taxes collected.
In general I think social security is a horribly designed system for multiple reasons:
Even if it is a horrible system. I don't think we are getting rid of it. I'm guessing the US government will continue to take the easy way out. They will inflate their way out of the obligations, and slowly scale back how much they pay. Anyone in my generation (30's) would be an idiot for making any retirement plans based on social security payments.
The whole thing should probably be replaced with a disability insurance system.
As you become disabled from doing certain types of work you can receive payments to supplement your income back up to where it would have been. With benefits maxing out at some minimum standard of living. If you were once a construction worker at $20 an hour, but you hurt your back and can now only be a walmart greeter at $10 an hour, then the disability payments make up for that lost $10 in wages. If you instead learn how to program and start making $50 an hour you get no payments.
Possible adjustments to the system if you want to be a nanny state:
Is this not true of any store of value system? Ultimately the question of caring for the old is a question of how the resources of those that are young enough to work will be redistributed to those who are too old to work and what precisely counts as too old to work. If we allowed old people to save thing X in their productive years, protect thing X from being taken with force by those who are young enough and strong enough to do so, and thing X is then used a store of value to pay those who are young and strong for food, services, etc. then we are essentially back in the same place.
This isn't to argue for or against social security, but simply to point out that any system to care for the elderly is going to do so by using some element of coercive redistribution on the young because the scarce element is their productivity.
Seems like a bit of topsy turvy logic to call "not allowing young people to steal" the same as "coercive redistribution". Most people would consider is "coercive redistribution" if you did allow young people to just steal whatever resources they wanted just because they are young and strong.
Old people aren't the only ones who like to save resources, I'm young, I still like to save up and occasionally splurge on larger purchases. A system of saving benefits everyone. Even if I knew for a fact that retirement was unavailable to me I'd still often save money. I wouldn't be saving as much maybe, but still saving.
Saving valuable assets is really just a continuation of owning that thing in the first place. If you want to think of ownership as coercive, then sure go ahead. I wouldn't want to live in a world without ownership. There probably isn't enough common ground for us to have an economic discussion if you believe ownership is coercive.
The idea of stealing and the system that disallows it are just social technologies and systems that are agreed upon prior. "Don't steal and that's the law" isn't different in principle from "young people have to support old people and that's the law." In fact, both are pretty straightforwardly Biblical.
Ownership relies on violence which means it's not coercive only by some means of special pleading, which you make pretty explicit by hinting that it's not coercive because you prefer to live in a world that includes it. That's fine for what it's worth, but recognize it more forthrightly. It is coercive, just a type that you specifically prefer.
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Good point, thanks for the link.
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