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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.”
Politically impossible solutions are economically inevitable. The US population pyramid is doing fairly well by first-world standards but it's still getting older and older. The US is also addicted to spending, racking up enormous debt. COVID is over. The US isn't even in a recession, officially. And yet debt keeps on going up at global pandemic rates.
https://tradingeconomics.com/united-states/government-debt
There's a $2 Trillion deficit planned for this year. Again, the US economy is officially doing well. What does the US economy doing badly look like?
Unless there are radical changes, eventually the US economy is going to collapse under the weight of this enormous and growing debt, now at 120% of GDP. Yes, Japan is over 200% debt to GDP but their interest rates are kept extremely low to keep this manageable, plus they have large current account surpluses to prop it all up. The Japanese economy is not an example to emulate. The US doesn't have the luxury of very low interest rates or current account surpluses, only a diminishing position as reserve currency. People aren't going to trade real goods and services for bits of paper forever, no matter how classy and prestigious those bits of paper might be. High debt, high inflation and high interest rates spells out economic Armageddon, it will make stagflation look like a joke. Imagine the Greek financial crisis but if there's no EU or IMF bailout coming.
Also, isn't a very high proportion of Japanese debt domestic? Domestic debt still causes problems, through deadweight losses, but from a national perspective, it doesn't mean buying things today at the cost of selling your grandchildren's labour to foreigners.
It does mean redistributing wealth from younger to older generations, though.
True, but those older generations then die, and pass on that wealth to the next generation. The big problem is that generations are not people, so you end up with deadweight losses. For example, the younger person who inherits the national debt might be quite different from the person who would have had more wealth as a result of earning more in their working lives. As people's outcomes in life become more the product of what their parents did, this reduces their own incentives to work hard and smart in order to succeed.
I saw this recently in China, where "Lying Flat" culture (do the bare minimum to avoid getting fired from a job that provides you with an ok lifestyle) is becoming more common. From what people told me and from what I've read, it's because success is increasingly a product of whether your parents are well-connected in/with the Communist Party, rather than whether you are hard-working or innovative. So, after a period where upward mobility encourage a Herculean work culture in China, the younger generations are increasingly reverting to the work ethic of their peasant ancestors: do as little as you can while staying out of trouble, because no matter how hard you work, you will never become an aristocrat. Ironically, "Socialism with Chinese Characteristics" is becoming "Capitalism with Feudalist Characteristics."
Similarly, the decline in aristocratic privilege and the necessity of inheritance for wealth were driving forces behind the Industrial Revolution and the Great Enrichment. Unlike almost all of human history, people could rise to wealth and prestige through enterprise, saving, and hard-work, whereas the traditional routes had been (a) being good at splitting open people's heads in battle, (b) marrying up, or (c) being born into wealth.
National debt and intergenerational inequality encourage the same social sickness, by making people's inheritance of wealth more important relative to their own efforts.
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