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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.”
Yes, this is extremely important. Whenever people discuss Social Security they often act like the funding shortfall some irresolvable apocalyptic problem when really a moderate increase in rates can close the gap. From the latest trustees report;
Considering the possibility you mention of raise the cap, the actual tax increase needed without touching benefits would be decidedly moderate. And the above figure is all the way to the end of the century!
That is a huge tax increase though. For a median household that is an additional $2565 which is more than my rent and we are not even close to a median household. You are talking about a tax increase equivalent to 5+ car payments, 2x rent payments, etc.
Where did you get that number from? In 2017 the average person paid about $3,045 in SS tax. Even if you multiplied that by two for a household, a 3.44% increase in the tax wouldn't come close to $2565.
Remember that even though workers really shoulder the full burden of the tax, half of it comes from your employer's account so that's not literally a 3.44% increase on whatever your takehome salary was before.
I took median household income and multiplied.
Your mistake is not doubling your 3045 number.
$2565 is the median household income multiplied by 0.0344. Unless you are increasing the 6.2 (x2) % SS tax by merely 3.44% which would take the total tax rate to 12.8% instead of 12.4% (while I thought you were increasing it from 12.4 to 15.88%) my math works out perfectly.
But that makes it worse, not better. If you have an ostensible 100k salary, your take home after SS payroll taxes (ignoring everything else for now) is 93.8k. But you aren't actually a 100k salary employee. Your post-payroll cost to your employer is 106.2k. So you are actually a 106.2k employee. That is, the take home pay of an employee "worth" $100k to an employer is significantly less than 93.8k it is actually around 88k. Because your adjusted base pay ends up coming down to around $94k, and then you lopp 6.2% off that ("the employee part of SS" and you are down to 88. All of the 3.44% is eventually born by employees. It doesn't "come from the employers account" it comes from you having a reduced wage. That some people are not informed enough to realize this, and as a result we get slightly less rioting from the working class, doesn't make it not true.
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