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January 14, 2005
More on voluntary private accounts
Dave at macroblog posts an excellent response to my question on voluntary private accounts for Social Security. He concludes his post with the following:
The rub, of course, was that the results from this type of exercise depend -- sometimes critically -- on the assumptions that are made. Modesty (or self-defense) requires me to conclude that making a definitive judgment about the true return to the typical private account, for example, is just a bit beyond the rank of your standard well-meaning policymaker. The solution, so it seems to me still, is to make participation voluntary, and let people sort themselves into the plan that they deem best. If our guess is right, we will see a systematic sorting of younger people into the privatized system, and the pay-as-you-go world will slowly fade away. If they don't, well maybe the critics of privatization are right.
There will, of course, be an element of trial-and-error in all of this. Those in the privatized system still have to help pay the freight for the existing pay-as-you-go liabilities, and it will not be immediately apparent what tax rates settings will do the trick. That will be revealed in time, and adjustments will have to be made. But being a good conservative commentator, I live by a simple creed. Give the market a chance. It will probably give you the right answer.
Well said. The part about those in the privatized system paying the freight for the existing pay-as-you-go liabilities (including those young workers joining the system who choose pay-as-you-go over private accounts) is exactly what I'm concerned about. The more people who opt out of private accounts, the more freight there is to pay. I have confidence in the ability of the government's actuaries to work this out through a combination of the Law of Large Numbers and trial and error, but I think a split system would add significantly to the cost of administering the system as well as lowering the overall returns to the participants.
If the idea of voluntary accounts is to give people a choice over where to put their contributions (with the existing system being the safe choice), I would take a different approach. Give people the option of putting their contribution into TIPS (Treasury inflation protected securities). Risk would be extremely low, and the return would almost certainly dominate that of the pay-as-you-go system. If the government could guarantee that the return from TIPS would dominate what they would have received in the old system, we could dispense with the old system right away at least for brand new workers contributing for the first time.
I think this is the right kind of debate to have. I am looking forward to seeing more specifics from the administration and more discussion of the finer points.
UPDATE/CLARIFICATION: When I say "dispense with," I don't mean the whole system, of course, since the administration is only suggesting that part of the payroll tax would be allowed to go into the private accounts. In effect, what I want is for that portion of the payroll tax to be permanently and totally detached from the pay-as-you-go system.
UPDATE/CLARIFICATION: I'm assuming about a 1.8% real return on pay-as-you-go Social Security as suggested by Gokhale and Lansing. Real yields on TIPS less than that over a long period would be pretty unlikely--if it ever happened, we'd have more problems than just Social Security.
Posted by William Polley at January 14, 2005 6:15 PM
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