Response to Comments on Social Security Privatization-Becker
Plenty of comments and some quite good. Too many to answer in detail, so I pick out a few highlights.
I made political aspects of government behavior with regard to pay-as-you-go social security the cornerstone of my argument for privatization. I emphasized the substantial lowering of retirement ages in the U.S. and elsewhere-this is a fact not disputed by anyone who has studied the experiences of Europe, and North and South America-- the political determination of benefits that has little to do with a sensible welfare program for the elderly, and not the least, that governments tend to spend the “surplus” on social security accounts (and other tax revenues) rather than saving them for future generations.
Some comments suggest it would be easier to keep the present system and just get rid of these political defects. If only that were possible, governments could operate most industries very well! But I argued these “merely” political defects are intrinsic to a government operated social security system since they occur in pretty much every single pay-as-you-go system, including the European and South American ones.
The case for privatization of different industries throughout the world has always ultimately rested on similar “political” defects in government-run enterprises. As an example of government behavior, publicly owned banks in China continue to make capital available to government enterprises, even though these enterprises for the most part have no chance of ever repaying these “loans”.
Some government involvement in a private system is necessary, especially if, as in my system, there is a guarantee to all retirees of a minimum standard of living. I suggested the use of index funds for private retirement social security accounts as a way to keep government involvement in the new system to a minimum.
The index fund industry is easy to enter, and so is very competitive. Since it involves minimal buying and selling of stocks and bonds, and no research on picking “winners”, this industry has very low administrative charges. So private accounts under this system would most definitely not have high administrative management costs. Moreover, these funds still provide individuals with choice since they can and do vary the fraction of their assets allocated to bonds vs stocks. Those savers who are very risk averse could choose funds with high bond-stock ratios.
Moreover, one should not oversell the low cost of the present social security system. The government managed social security system until recently gave individuals little choice and information about their accounts, and still gives little updating of payments and expected benefits. The cost of promoting and selling cars would be greatly reduced too if they were all produced by the government and were all the same kind. That was the Soviet method, not one to be envied. Private funds would be more costly to operate, but they would give more choice and information as they compete for customers. Index funds, in particular, would still have very low administrative expenses, as exemplified by Vanguard.
It is inconsistent to complain about the low savings in U.S. and object to a system that is likely to increase savings, much of which would be invested in equities. Higher savings would reduce dependence on foreign investments in the country, and would make more domestic capital available to be invested. Is that bad?
Withdrawals upon retirement or reaching a fixed age would be either in a lump sum, or spread out on an actuarially-determined basis. Individuals who are “worried” (not a bad worry!) about living longer than average could save part of their withdrawals. To be sure, some persons might underestimate the amounts needed because they live longer than average, and some of them would fall below the minimum income guaranteed level. If that is considered a problem, the actuarial calculations could err on the conservative side.
Some of you were dubious about my argument that governments tend to spend any surplus. But that is not theory alone, it is also fact, as shown in a Journal of Law and Economics Article of October 2003 by my colleague Casey Mulligan and myself. We look at several types of evidence from different countries, and from US history. Not included in our discussion, but valuable additional evidence comes from the 1990’s. Federal spending was first kept down by deficits, but then both Federal and state government spending grew rapidly with the sharp increase in tax revenues during the boom years at the end of the century. This pattern indicates that the large current federal deficits will force a slowdown of government spending growth during the next several years. Privatization would significantly increase the pressure on spending by removing some personal retirement savings from government revenues.
I do believe that one of the most important obligations of a decent government is to provide a safety net for individuals and families who, for one reason or other, are in bad economic circumstances. My proposal does take care of the elderly who fall into this category since I support a minimum income floor for all retirees. Contrary to comments that complain my proposal would not have a “progressive” structure, this floor does give the payout system a sizeable progressive element.
I conclude by emphasizing that privatizing any government activity, including social security programs as well as many others, does presume some confidence in the ability of the great majority of individuals and families to look out for their own interests, however they define them, in a market-oriented competitive environment. To be sure, people make mistakes, but the crucial issue is whether they can usually promote their own interests better than government officials and bureaucrats can do it for them. I have great confidence in the ability of even the poor and less educated to generally look out for themselves, however limited are the opportunities available to them. Judging from some but far from all the comments, many of you do not have that confidence in people.