« Who will replace "The Maestro"? | Main | In praise of markets »
January 26, 2005
Maybe what I really want is fully funded Social Security
PGL, whose posts I frequently read at Angry Bear, was kind enough to read my blog and comment on my last Social Security post. This weekend, I was preoccupied with a combination of work and college basketball, but I have been meaning take this up again. You can read the original post, with the comment here.
Basically, my point is that if bonds (like TIPS) were available for people to put into their private accounts, they probably would. Private accounts would become diversified. Then, Krugman's argument that there would have to be some fool out there willing to sell stocks to those private accounts loses some of its bite.
PGL writes that if people already have balanced portfolios, including the bonds implicit in the Trust Fund and their 401(k)s and they suddenly receive the Trust Fund, they will not buy stocks. The implication is that they would buy bonds, effectively replacing the bonds in the Trust Fund and keeping their risk/return ratio the same.
Our logic is pretty much the same. If Social Security was fully funded, I would absolutely 100% agree. But it's not. So I don't. Not 100% anyway. I have to ask myself this question. Suppose the government gave me a $1000 refund on my FICA tax for this year and offered me two options. 1) Give it back to Social Security and forget the whole thing ever happened or 2) buy a $1000 government bond (TIPS, so I don't have to worry about inflation) and keep rolling it over until I retire.
I choose door number 2. In a heartbeat. In other words, I don't think that the bonds implicit in the Trust Fund are the same as a bond in my hand (or my private account). If I did think that they were the same, I wouldn't care--option 1 and option 2 would be equivalent. (UPDATE/CLARIFICATION: It's not by a wide margin that I choose door number 2, but I would choose it. The implication that has for PGL's comment is that while I don't agree 100%, I think he's close. Close enough that there should be more discussion on this point.)
All of this makes me think that perhaps the best fix for Social Security would be a very gradual transition to a fully funded system restricted to holding government bonds. The outcome of a pay-as-you-go system like we have is determined by demographics and Congress. The former we have a fairly good handle on; the latter is unpredictable. After all, Congress switched from price indexing to wage indexing in 1977. Bush wants to switch us back. Both represent efforts to curb the growth of benefits (first in a high inflation environment, second in a low inflation environment). Nothing says they couldn't change it again, or do something else. Pay-as-you-go encourages both political gamesmanship and sloppy government accounting.
Ok. That said, the debate is heating up. I'm generally pretty open to well thought out ideas for privatization (though I do not endorse any specific proposals yet). And I think the wage/price indexing debate should be kept separate and thought out very carefully before we do anything. I realize that separating the two issues might make it harder to enact the reform that the Bush administration seems to want. (And I accept that.)
And because I think a good debate is important, I am grateful for PGL's comment, and for his recent posts at Angry Bear here and here. Also deserving mention are posts by Angry Bear and The Lowest Deep. The last of these is worth a careful look if you are really into this debate.
Posted by William Polley at January 26, 2005 01:41 AM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/52
Comments
If only President Bush would listen to reasonable folks like Andrew Samwick, David Altig, and yourself. This was a VERY good post that is making points very similar to ones I'm trying to make over at Angrybear!
Posted by: pgl at January 26, 2005 01:06 PM