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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 would like to tie social security to an official retirement age.
Once you hit the retirement age you are expected to retire from any publicly held office. No elected officials older than that age.
This would tie in with the other solution that is my favorite: just raising the age of retirement to save money.
As a young person I have little to no expectation of receiving social security money.
Yeah, this is the most brutal part. Seeing such a huge chunk of every paycheck taken, knowing that you'll never see a cent of it again even though the justification is that you're 'saving for your own retirement.' What a huge disaster, sigh.
Should just be labelled "Boomer bribe" on my taxes. That is the oldest generation that is cogent enough to still defend it, and why it is untouchable as an issue in elections.
If historians were competent they'd label this FDR's greatest blunder. He established a generational pyramid scheme, and instead gets seen as some great savior. This has been a ticking time bomb since day one.
I think that FDR's only real blunder was not realizing how quickly the average life expectancy of a 21-year-old American would rise. The first monthly payment of Social Security was issued in 1940 to a 65-year-old. Of all the men who were born in 1875 and made it to 21-years-old (thus eliminating the infant mortality effect on life expectancy statistics), about 54% made it to 65 and collected social security. Those were the numbers FDR was working with. A little over half of people, dragged up by women's longer life spans (60% of their cohort made it from 21 to 65), would live to actually collect social security.
By 1960 this number was 60% of men, 70% of women. In 1990 the men who turned 65 that year and got their social security checks represented 72% of their age cohort who made it to 21, along with 83% of women.
Similarly, those men that turned 65 in 1940 were expected to live another 13 years, and collect benefits for all 13. The women, 15 years. In 1990, the men were expected to live 15 years, the women 20. This is all from the Social Security Administration's own website. I'm sure that if you found the actuarial tables on the cohorts turning 65 in 2000, 2010, and 2020, you'd see this number just keep going up.
That's why its going broke. It was designed for a certain amount of people to live, and gosh darn it people just kept on living more.
That was predictable. Life expectancy had been going up at the time.
There were other predictable problems:
It's actually mandated by the program that they do. It purchases treasuries. What would you have them do with it?
Anything other than US treasuries. The whole point of the trust fund should be not to require government action to repay.
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