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02/06/2005

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Becker of the Becker-Posner blog takes an vastly different angle at supporting Privatized Retirement Accounts. [Read More]

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Gary Becker is all for it: Today both Republicans and Democrats are passionately arguing about the future of social security. Although there is merit in each sides argument, neither side is portraying the situation accurately. In my view, movement tow... [Read More]

» Bulldozing Us from Centerfield
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» "Why I Support a Privatized Individual Account Social Security System" from Coro Blog
From The Becker-Posner Blog, which is typically formatted as an online conversation between the two University of Chicago professors. Gary Becker won the Nobel Prize in Economics in 1992 . [Read More]

» Becker and Posner Respond to Comments on Their Ideas on Social Security from The National Political Observer
On February 12, 2005, University of Chicago Nobel Prize winning economist Gary Becker and Seventh Circuit Court of Appeals Judge Richard Posner posted responses to their arguments on Social Security. On February 6, 2005, Mr. Becker posted a column at... [Read More]

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monkyboy

Americans save at a rate far below Europeans and Asians. Once they see an account with their name on it, they'll be asking to withdraw the funds long before they retire to cover such expenese as medical, college for the kids, home purchases, etc. The larger these private accounts grow, the louder the calls will be to open them up.

Another problem is who will exercise the voting rights on the trillions of dollars worth of stock held by private accounts? Surely, we aren't going to ask all citizens to vote on thousands of corporate issues every year. Concentrating that much control of US companies in the hands of a few government agents would lead to something less than capitalism...

I question whether therre will be enough solid investments to channel all this money into. The S&P 500 is worth only about $10 trillion right now. A few years of SS monies invested in them will purchase a contolling interest in them all. What then, will we take our SS money and invest it in foreign companies?

As an idea, private accounts may be a good thing, but looking at the details reveals many huge problems, any of which could end capitalism as we know it. Is it really worth the risk?

Jay Stirrat

Take my case:
I am 62 and started receiving SS. My wife and I total contribution to SS is $89,080. The company had to pay an equal amount for a total of $178,160. If I had invested this money at the risk free 10 Year Treasury Note. We would have $ 591,547 today. Our life expectancy is age 85 and 88. If we keep this money invested in the long bond at 5.75% and live until 85 and 88; we would receive an average of $40,300 per year (2005 dollars).

Social Security will pay me $16,500/yr (adjusted for inflation) and my wife $7,512/year starting in 2008. So $24,000/yr in 2005 dollars.

If invested in stocks and bonds at a 60/40% allocation I would get $63,000 for the rest of our lives (2005 dollars).

So $63,000 vs. $24,000. Which would the voters choose if given the choice.

Jay S.

Nick

I've always been under the impression that things like Roth IRAs were what one used if they wished to use their retirement money in the stock market. Regardless of the debate, one thing's for sure: The hedge fund managers are going to make a lot of money in the next few years.

monkyboy

I agree Nick. And considering the Fed says that 96% of shares held in this country are held by the wealthiest 20% of Americans...the rich are going to get a lot richer too.

Thank god Bush lowered the capital gains tax to 15% for the rich last year so they won't have to lose too much when their shares skyrocket in value when this scam is passed.

JoeBlow

"Thank god Bush lowered the capital gains tax to 15% for the rich last year so they won't have to lose too much when their shares skyrocket in value when this scam is passed."

As you probably know, high capital gains tax reduces capital investment. Capital investment is why most people actually have jobs. Class envy can be tough to overcome sometimes, but sometimes you just have to swallow your hatred and support having the wealthy invest in your company so that you'll have a job. This doesn't even take into account the fact that millions of middle class investors ALSO benefit from low capital gains tax.


"I've always been under the impression that things like Roth IRAs were what one used if they wished to use their retirement money in the stock market."

ROTHS are funded with post-tax disposable income. Social Security is funded with an onerous payroll tax. In other words, only the well-off can have ROTHs, the rest of us must accept the deal offered by Social Security. I'm suprised more progressives aren't in favor of privatization considering this.

jb

Rob

But doesn't the whole privatized Social Security system begin with an assumption that people will know how to invest wisely? If I am wrong, then whoops, but if I am right, then wouldn't the government itself be obligated to prevent us from potentially losing our savings in the market?

I am just still confused about Social Security in general.

Crazy Monk

It is interesting how you in the end justify the implementation of Bush' plan based on a few select political reasons (though they are good ones). You admit yourself that the economic justifications aren't powerful enough to carry your argument. But don't you see that there is a lot of *risk* in Bush's plan? E.g., perhaps the transition costs will be enough to put us in another economic crisis within the next decade. What if regulation of the accounts (which you mention is *necessary*) goes too far, or even worse, not far enough? And what if, through some unpredictable market mishap, the government ends up having to top off the minimum payout on more accounts than they orginally planned for? Hey, that could lead to higher taxes or an increase in retirement age! (After all, we would still have to have a retirement age with the minimum payout condition.)

My point is, while I see some merit in personal accounts and in reducing government payouts to those who are not in need, I also see Bush's plan as unneccessarily risky and in fact possessing similar financial weaknesses as the current plan. We *know* the potential problems with the current state of Social Security and I bet the reforms implemented over the next 20 years if it is kept would be superior to the consequences of re-doing the whole system a la Bush. I could see myself endorsing a personal account approach to 'social' security if designed and implemented properly, but so far the Bush plan smacks of balls-out financial amateurism in the face of clear benefits to Wall Street.

As an aside, we all know that very few things in government are black and white -- i.e., it can be difficult to predict the pros and cons of one decision over another in our complex and unpredictable world. But notice that almost every policy that Bush supports is a *clear-cut* advantage to the rich and corporate side of society, while the alleged benefits to the poor are often grayer and more theoretical. Example: tax relief to the rich gives immediate relief to the rich, and theoretical relief to the poor. Example: privatized accounts gives an immediate boost to financial industry and theoretical benefits to the elderly poor. Why is that the public is so willing to give the government the benefit of the doubt only when the poor are at risk?

monkyboy

jb, as someone whose income puts him pleasantly in the upper tax brackets, I can say they my opposition to the latest Republican scam to funnel trillions of Social Secuirty tax dollars through their pals on Wall Street on the way to purchasing assets currently held by the wealthy is anything but class envy.

Rather, my opposition comes from a desire not to have to live behind 20 foot walls patrolled by security 24/7 and run the risk of having my children mailed to me piece by piece by blackmailers, as is the current lifestyle of wealthy people in any country where the gap between rich and poor gets too large.

Yes, wisely invested capital can create jobs, but it doesn't seem to be the case in the US these days. A lot of 'capital' seems to be going to mediocre CEOs who dream up ill-advised mergers and lay off American workers.

Sadly, the days of Adam Smith are long gone.

Tom

The details are so skimpy on this it is hard to judge. My worry is that the current system is progressive, tranferrring some of the benefit to low income tax payers. There is also an insurance aspect. For those who use private accounts, are they exempt from the progressive and insurance aspects? I think they are. And what happens when someone dies,do the unused benefits accrue to the system or to the estate. I think to the estate. If I am right on this, it is a way for upper income wage earners to opt out of the system. For example, say I inherit $12,000,000 so I have retirement taken care of. Then I can opt out of the progressive aspects.
I think if we do this the whole idea should be generalized. Let me direct 20% of my income taxes to an expenditure of my chose that give me a high rate of social return. For example from defense to medicaid.

murky

We trust the government with our nuclear warheads and I think we ought to be able to do the same with respecting and accounting for SS revenues and savings. You're proposing privatization as a work-around for what is in effect a form of political corruption. That approach offends me in principle. I know nothing of the weak link between personal investment and personal return beyond what you've told me, but I don't see how that's intrinsic to a public insurance system or why we shouldn't regard it as a remediable structural or management issue. Already as you say wealthy people can invest as riskily as they like with what's left over after the government deducts for social security. If you think the government puts too much of people's savings into low-risk low-return investments, then ask the government to buy into an index fund with some percentage of the contents of the lockbox. I find it very hard to believe that the government, by investing everybody's deductions at a single ratio of Treasuries to index funds, say, would be constraining anybody to an overall investment strategy with a significantly different theoretical return rate than they could obtain were they unconstrained and everybody was able to invest the theoretical optimum portfolio distribution for their savings size. A sensible Social Security program, it seems to me, creates a minimum nucleus of investment in retirement, which is designed for the hypothetical person who finds themselves at retirement age destitute otherwise (because they chose risky investments, for example). As far as being free to choose your retirement age, I don't see why a public social insurance program can't offer that flexibility as well.

GMB

Wouldn't we be better off using this opportunity to uncouple the system from payroll tax? Deep six the payroll tax for quits. The supposed link between that tax and what you later take out is mostly smoke and mirrors isn't it? surely there are less bad taxes.

Tino

"But as birth rates fell drastically, and the life expectancy at age 60 expanded enormously, fewer workers are now being forced to support more and more retirees."

Isn't the real problem here rising life expectancy and decreasing birth rates? In that case, why shouldn't government promote childbearing and risky/life-threatening behavior?

Corey

There IS an obvious gain to privatization here if you are a CEO or wealthy shareholder... trillions of dollars go into the stock market, stock prices go up, the rich get richer.

Moving trillions from the public trust into corporate markets should cause riots, but you are all going to swallow it, because you believe in the myth of the triumph of liberalism and supply side econ.

This plan amounts to a regressive payroll tax which is then converted DIRECTLY to corporate welfare, provided it is an established/indexed corporation, because well, we all know that Exxon is just so technologically innovative and every dime Haliburton makes will come back into the public trust in the form of well paying jobs wiping the oil off of half-dead shorebirds.

Perhaps next time they mail out those Social Sequrity account statements, they can include instructions about the most orderly way to beg for bread outside the gates of the mansions of the rich.

Joe Blow

Monkeyboy: "Rather, my opposition comes from a desire not to have to live behind 20 foot walls patrolled by security 24/7 and run the risk of having my children mailed to me piece by piece by blackmailers, as is the current lifestyle of wealthy people in any country where the gap between rich and poor gets too large."

You lambasted the cut in capital gains tax. Low capital gains tax is good for all investors. It's good for the rich obvioulsy, and it's good for the middle class too. And it's especially good for people like you who are worried about the huddled masses taking over since it creates more jobs for everyone.

Just because something is good for upper incomes doesn't mean it is therefore bad for everyone else. It's not a zero sum game. Low capital gains tax is a good thing, even though we must all accept the fact that some billionaires will get richer.

jb

Will Franklin

Great blog!

For me, there does not need to be a crisis, or even an impending one, to desire reform of Social Security. The system can be better, and it can be fairer.

The most important reason to reform it, and reform it now, is global competition. In a world where workers from Texas compete with India and China, not just Indiana and Connecticut, personal retirement accounts and increased rates of savings are imperative. Prosperity will flow where the free market is the best. America needs to be that place.

monkyboy

JB, correct me if I'm wrong, but isn't a capital gains tax reduction an incentive to take money OUT of capital investments?

The current record setting defecits our government is running is a direct result of the huge tax cuts passed in 2003. The cost of these cuts dwarf any shortfalls in Social Security, Medicare, etc. Now we see with today's budget from Bush he intends to slash programs aimed at helping the poor and needy in our country to help make up for his huge giveaways to the rich.

If you want to increase jobs in this country, offer a large tax cut to those companies that add Americans workers to their payrolls at decent salaries and tax heavily those companies that lay off Americans...

Corey

"Low capital gains tax is a good thing, even though we must all accept the fact that some billionaires will get richer."

I refuse to accept that there should even BE billionaires in the first place. That level of wealth accumulation CANNOT be justified under any form of meritocracy because there is simply not that much variation in human capabilities.

Do you think Warren Buffet is 10,000 times smarter or wiser than you? No?

Several Billionaires, Buffet and Soros among them, were actually against the Bush tax cuts if I remember correctly.

I am middle class, and I did NOT benefit from the Bush tax cut. Prices and costs of "social" benefits went up far more than I saved in taxes. Then I got laid off, but Bush created a new part-time job for me so I guess I should have thanked him for my 85% pay cut. I chose to go to law school instead.

TheJew

Becker plan for privatization:

1: Borrow benefits for retirees and current payees older than, say, 55 from source X.

2: Attach contributions from current payees younger then 55 to each such payees individual future benefits.

3: Allow each individual to choose how much they will diversify away from T-bills into equity assets.

Why not just borrow from source X and have some bureaucrat (as opposed to individuals) choose the aggregate amount of diversification? This eliminates all sorts of administration and transaction costs. After all, some government bureaucrat is either implicitly or explicitly charged with regulating these equities funds (if Uncle Sam says to only invest in S&P 500 index funds, this implicitly makes S&P employees government bureaucrats), and that is much more open to political corruption then simply the level of diversification. (As an aside, you could just make a law saying that the GAO cannot report the Social Security system as part of the general budget.)

But then again, all that would be happening in that case is the government would be issuing additional debt to invest in equities. According to Becker this is beneficial because:

Both theory and evidence indicates that a good fraction of the additional revenue would indeed be spent. Putting aside assets for the future is very difficult for all governments, subject as they are to immense demands for spending now from various interest groups. Well, the answer seems clear now. Clearly, the implication is that we must borrow huge sums of money to increase the apparent size of the deficit, investing these sums in equities whose value will be kept off the books (Ill let the accountants and lawyers worry about how). The then apparent explosion of deficits will force spending restraint in our politicians. Its so perfect only a Nobel laureate could have come up with it!

In all seriousness, I fail to see how a sudden increase in taxes would be significantly more disruptive then borrowing from source X the massive amount that would be required to finance current retirees benefits.

Jaffer Qamar

There are two key notions behind Becker's support for privatization of SS: 1) to solve the fiscal problem (i.e., make the system solvent) presumably because the rate of return (ROR) on equities exceeds the ROR on TBonds and 2) decouple the "social" aspect of SS (i.e., let each individual fend for himself).

Most people correctly understand that money saved in personal accounts would grow faster if it's invested in well-diversified equity funds rather than in government bonds. (By well-diversified I mean 2000-3000 randomly selected stocks, which could be rotated every 3 years). If that's so, shouldn't President Bush persuade Congress to permit (perhaps require) the Social Security Trustees to invest the current accumulated surplus, and future surpluses, into the equity funds (the same ones that the government would approve for us to invest in) instead of investing in low-interest Treasury bonds, which it has been doing all along? This way the Trust Fund would probably become solvent and the benefits would not have to be reduced, nor would the payroll taxes have to be increased, nor would the government have to borrow, in the future, to meet its obligations.

Since the government has an infinite time horizon it can ride out the ups and downs in equity markets.

The debate about making Social Security has focused on fiscal aspects (to make the program solvent) but has ignored the micro aspects namely, the programs built-in insurance schemes and the transactions costs of the privatized system relative to the costs of administering the public program.

What is worrisome about privatizing Social Security is that many social benefits delivered by the public program, at very little cost, would all be lost. Of course, most of the same benefits could be purchased in private markets, too, by each individual, but securing them would incur transaction and learning costs, which would add up to be significant, rendering the private system inefficient relative to the public program. Specifically, the cross subsidy from the high income workers to the low income workers could not be generated in the private markets.

Firstly, the private system cannot propose a prescription for how much money (or fraction of funds in the private account) an individual would be allowed to withdraw each year from his account, after retiring. One would think it would have to depend on how long he expects to live. If he lives longer than expected, he will have used all the funds in his account too quickly. How would he then finance the latter years of his life? Thus, its evident he must convert the funds in his account into an annuity, as soon as he retires. Such a transaction is complex and costly to arrange in the private market. Moreover, would the annuity paid to him each year sustain him? For millions of people it would not, even if they are willing to surrender the accumulated savings, upon death, to the annuity provider. Thus, if we privatize social security, individuals would have to be required to purchase an insurance policy, in case they live longer than expected, else they would become a burden on the government when they run out of funds in their private account.

Secondly, the private system would not cover or be able to support individuals who become disabled before retirement. Therefore, the government would have to require individuals to purchase the disability insurance, too.

Thirdly, the current system supports widows and children of the deceased. In the private system, if a worker dies prematurely, he wouldnt have much saved in his private account. The savings would not be sufficient to support his survivors during their vulnerable years. So, privatizing social security would mean requiring workers to purchase life insurance, too.

Fourthly, the current system subsidizes those who make small contributions to the public program, each year, and work for perhaps 10 - 20 years. They are subsidized by those who earn a lot, from the start, and work until retirement. If this subsidy has been designed into the public program, because it has political support, to decrease the income disparity in America, then clearly it would be lost if the system were to be privatized. On the other hand, if people know that they could not rely on the public program, entirely, to support them during their old-age, they would try to work for more hours each year and work for more years and try to save more. This would be an advantage of privatizing Social Security. Nevertheless, there would be millions of people who wont find full-time work for 40+ years, even if they try really hard to find work for example, those with low-value skills or with poor health.

It's important to ask: how would the government monitor and enforce its requirements i.e., requiring individuals to purchase an annuity, disability and life insurance policies? And, what about the individuals, who are poor, and do not secure the insurances, under the privatized system, but become disabled or live longer than expected, or die prematurely but have survivors? Would the government rescue them? How and to what extent?


In the private system people would either hire an expert or would have to learn too much detail about insurance plans to generate the benefits that the public program provides. The cumulative costs incurred by all the workers, to set up individual personal accounts, with the three insurance schemes, far exceed the costs of administering the public program. This is because the public program indiscriminately provides automatic insurance to everyone by pooling hundreds of millions of people who will encounter different predicaments during their lives. Moreover, the monitoring, enforcing and reporting costs of the private system are prohibitive, whereas, they are non-existent for the public program. Furthermore, it would be costly to maintain records and report the transactions to the IRS. Clearly, the administrative costs for the public fund are miniscule relative to the cumulative costs that would be incurred by the individuals and by the government (monitoring, enforcing and in many cases picking up the tab for those in desperate situations), for the privatized system, which we can be sure would have many regulations. The president wants to simplify the tax code and speaks about economic freedom and accountability, but privatizing social security would require individuals to comply with many requirements, which would not simplify the tax code or liberate the people.

In the end, undoubtedly, the government will have to rescue the poor who fail to comply with the complex regulations that would be imposed under the private system.

Paraphrasing Mortimer Zuckerman, "Social" implies a contract to manage poverty among the old, the disabled and the vulnerable survivors of the deceased and to know that our society provides a minimum income for all of our citizens. And, "Security" means buffering the cruelty of the markets that fail the very people who need Social Security benefits the most. Social Security was intended to insure against the cruelties of the market and to permit Americans to count on the next generation to take care of the old-aged; a time-honored tradition that exists in all societies.

klughs

Becker's comments completely ignore the fact that Social Security is more than a retirement system. It also provides payments to workers who can no longer work due to a disability. No private equity or debt investment can possibly provide a lifetime income for a 30-year-old worker who cannot earn a living due to a permanent physical disablement. How does he intend to cover these people?

joeblow

"It also provides payments to workers who can no longer work due to a disability. "

That's no reason to oppose reforming the retirement portion of SS. In 2005, of the 15.3% FICA you pay, 10.6% is earmarked for retirement benefits, 1.8% for disability, and 2.9% for Medicare.

It's easy to accuse reformers of wanting to put disabled people out on the streets, but that's simply not the case.

jb

joe blow

Corey: "I refuse to accept that there should even BE billionaires in the first place. "

That is what religion requires, a refusal to accept reality. Think a bit about what kind of system you'd put in place to prevent billionaires from occuring and get back to us. Even the borderline socialist economies in Europe produce billionaires, so I'm curious as to how you would prevent this evil while creating a strong economy with jobs for everyone.

The fact remains that low capital gains tax is good for everyone. All economic models support this. But partisanship motivated by class envy is sometimes hard to get past.

jb

Lincoln

I'd like to place a couple of comments in play.First,everyone(I think) agrees the current surplus in social security payments goes into the general fund/lowers the deficit.This overlapped in time with the lowering of income tax payments on the lower end of the income scale.People were still paying a significant part of their income for federal programs -i.e.14%-but they thought they were saving the money in some kind of an account.Thus it was more palatable than income taxes.What seems obvious to me is in 2030 or so a majority of Americans will vote their economic self interests and not raise taxes on themselves to continue levels of social security payouts.Also,Corey seems to be fixated on others'net worth as an indictment of something or other.Please consider my father's comments on things like this;if you're going to compare your penis to everyone else's in the locker room,sooner or later you're going to lose.

monkyboy

It's a good thing the economic models agree, JB.

I assume the private SS accounts will be tax free. In the long run, all capital gains will go to the private accounts. How will the government make up this lost revenue? Raise taxes on people who have to work for a living, I guess.

Corey

"Even the borderline socialist economies in Europe produce billionaires, so I'm curious as to how you would prevent this evil while creating a strong economy with jobs for everyone."

First off, the economies you speak of illustrate how you can create a strong economy with jobs for nearly everyone. It is the same thing the U.S. had last time we had a strong economy with jobs for nearly everyone... 70% top tax rate, progressive social insurance programs.

Ta da! Less billionaires, free on demand health care for all. That was easy. And you, as a member of the perpetual middle class, pay just a couple hundred extra tax dollars a year, but remember the free health care! You are actually saving!
Paul Allen might have to sell one of his 300 foot yachts, but I think he'll be able to recover from the loss.

If you have $1000 cash in your wallet and you refuse to give a homeless person a quarter, I'm sorry but you are a moral cretin. This has nothing to do with the size of my penis or bank account, it has to do with the moral (or social) utility of hoarding cash that comes to you via luck. It is "from each according to his good fortune, to each according to his need."

And if you don't think government regulation is necessary to guarantee minimum economic freedoms to the entire population, I give you... the Walton Family, and their untaxable undonated hundred billion.

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