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February 15, 2005
The Economist on Social Security privatization
Not enough time for deep analysis tonight, but suffice to say that The Economist is supportive of privatization. They also provide a counterpoint to the many critics who point to the British experience as a reason to avoid privatization. More here.
If you don't have a subscription to The Economist, get thee to a library once a week. Good stuff.
UPDATE: Brad DeLong is not amused. Now, I should clarify that while I still think The Economist is good reading, I clearly don't follow them blindly.
While DeLong makes some good points, he doesn't address this article or these comments specifically.
However, in both Sweden and Australia, as in Chile, the new accounts are mandatory, while in America they will be voluntary. To find out how voluntary accounts have worked, Americans need to look at Britain, where Margaret Thatcher introduced them in 1988.
That should be enough to put them off the idea for good, according to Mr Bush's critics. In their version of history, Britain's experience was a disaster, in which people who opted for individual accounts were made worse-off by pension mis-selling. Fortunately, the critics are wrong.
To be sure, pensions were mis-sold in the late 1980s and early 1990s: the bill for putting things right was £12 billion ($22 billion). But the mis-selling was out of employers' defined-benefit plans, not out of the state system. Many people were lured away from generous employers' plans into funded individual pensions when they would have been better off staying with their employers' schemes. “Mis-selling was not about people being sold private pensions when state pensions would have been better for them,” says Philip Booth, the editorial director of the Institute of Economic Affairs, a think-tank.
Britain's mis-selling scandal occurred within a distinctive pension system that had long allowed employers to provide part of the overall state benefit in return for rebates on part of their payroll taxes. In the late 1980s, this right to “contract out” was extended to individuals, who were also given the right to leave their employers' plans. In America, as Olivia Mitchell, a member of Mr Bush's pensions commission in 2001, points out, there is no “contracting out” for private workers in Social Security and the new individual accounts will form part of Social Security.
I haven't heard that argument in the American media. I do hear all kinds of talk about how we shouldn't let our system be like Britain's. I'd welcome more on this point from those in the know.
DeLong concludes, quite fairly,
To head off this moral hazard meltdown, a plan should--and the Bush plan appears to--very tightly constrain where the investments can go.
The moral hazard is the temptation to bail out the private accounts whose investments go bad.
I agree, and I did read some of the Bush plan tonight too. He's right. It does appear to offer some safeguards. I'm not completely sold on the Bush plan though. It seems different from the three proposals that had been discussed earlier (maybe just more detailed--I didn't sit with all of them side by side). I think we need to scrutinize it more carefully. And that's what I intend to do. I hope you will join me over the next few months.
I still learn more from one issue of The Economist than from (at least) two issues of American newsmagazines.
Posted by William Polley at February 15, 2005 8:28 PM
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» More International Experience With Social Security Reform. from WILLisms.com
Opponents of Social Security reform frequently attempt to bring up examples of market reforms in other countries as evidence that the U.S. should NOT reform its Social Security plan. Unfortunately for them, the facts do not square with their claims.... [Read More]
Tracked on February 18, 2005 3:34 AM
Comments
Well, I still learn more from one issue of the Economist than from five issues of American news magazines...
The problem with the Bush plan is that it isn't a *plan*: there are lots of important details on which the thing stands or falls--like what are the safeguards against the churning of private accounts, and do you provide insurance against the private account doing badly, and how do you then deal with moral hazard--that we know nothing about. And as Jason Furman points out, the quality of the staffwork on things we do know about is very bad.
Posted by: Brad DeLong at February 16, 2005 11:06 AM
We're in total agreement on the moral hazard problem. And I worry as much (or more) about the overall cost of the bureaucracy associated with managing the private accounts as I worry about the churning itself.
So while I am sympathetic to the idea of privatization, I want it done well. One problem with the current proposal is that I think it moves too fast. The more gradual the change, the better. There is still a lot of time to be gradual before we hit crisis mode.
Posted by: William Polley at February 16, 2005 1:09 PM