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Perhaps the Best Reason for Private Accounts

May 6, 2005, 9:54 am

Frequent readers will know that I have little patience with the argument against private Social Security accounts that goes something like "Americans are too dumb to be trusted with their own retirement funds".  Today, however, I am going to put that aside for perhaps a better question:

Can the government be trusted with our retirement funds?

This is the argument made by Brad DeLong and quoted in Marginal Revolution:

We need to raise our national savings rate. But if we just raise Social Security
taxes, Congress will treat these taxes as general revenue and spend them. Only
by funneling Social Security contributions into some vehicle that Congressional
representatives cannot interpret as a resource available to fund current
spending can we raise the national savings rate. And private accounts are the
best vehicle we can find to (a) accumulate contributions without (b) allowing
Congressional representatives to seize them as resources available to fund
current federal spending.

Congress has taken all the savings surpluses built up by Social Security over the past decades and it has spent them.  Republicans have spent the money.  Democrats have spent the money.  It is gone, spent on cruise missiles and welfare moms and ethanol subsidies and PBS broadcasts and snail darter studies.  No matter what verbal acrobatics people try to engage in to argue that there is a real "trust fund", the fact of the matter is that all that is in the Social Security till are IOU's that can only be redeemed by raising taxes. 

The situation with Social Security is entirely equivalent to having invested your money in a mutual fund and only later finding the directors of the fund spent your money on themeselves rather than investing it in redeemable securities.  The only differences are that:

  • The proprietors of that bogus mutual fund may go to jail, but Congress won't
  • Congress can raise taxes to get the money to bail themselves out of their malfeasance

Think of it this way: 

  • There were more real assets of value remaining in Enron in its bankruptcy to divide up among investors and creditors than remain in the Social Security "trust fund" to divide up among program contributors.
  • There were more real assets of value remaining in the Teamsters retirement fund after years of being raped by organized crime than remain in the Social Security "trust fund"

Stop handing over our savings to such unsavory racketeers (ie. Congress).  We certainly can't do a worse job for ourselves.

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Category: Taxes
  • http://lazax.com/blog Zoran Lazarevic

    If the Social Security program was ideal, and there was no demographic change (e.g. steady state), the "trust fund" should have zero balance. That is because all the contributions for the current month would be paid out as benefits to the retirees.

    Even if all the money from the trust fund was looted, the beneficiaries would still get 100% of the promised benefits today and for the next 10 years. Comparing that to Enron is a bit in disingenuous. Return on Enron investment was 10%.

    On another note, advocating private accounts goes something like this: "Americans are too dumb to be trusted with their own money, so we will force them to invest into a private retirement account instead of a business, house, or a new SUV".

    There has been so much fact-twisting around social security, that it is hard to find good data (let alone "estimates of the future financials"). Quick search gave:
    http://www.ssa.gov/OACT/TRSUM/trsummary.html
    http://news.findlaw.com/hdocs/docs/enron/abrmsenron111301cmp.pdf

  • http://politics.lel-hosting.com/ Matt

    It's true...private accounts within Social Security are not the true libertarian answer. Completely abolishing Social Security is the true libertarian answer.

    And I'd really love to live in a country where that was possible. Meanwhile, back in the _real_ world, here in the United States of America, private accounts within Social Security are the most libertarian solution we have any prayer of actually seeing until the overwhelming majority of everyone currently over the age of 35 is dead. I'll be pretty old by the time that happens, but I might live to see it, assuming we find our way to whistle past the political and economic crisis that's coming in (at best guess) 12 years.

    If we'd implemented private accounts 25 years ago, there would be a substantial constituency today for whom "eliminate Social Security" would be a politically tolerable option (not to mention how the crisis that the program currently faces would have been much lessened). But we didn't, and there isn't...and so anyone talking that way in public is _at best_ going to sound like part of the lunatic fringe.

    The overwhelming majority of the people who vote in this country grew up believing in the fiscal fairy tale that told them Social Security was safe. Our choice is not between elected officials who tell the truth and elected officials who lie...it's between elected officials who tell a half-truth and move us in the right direction, and elected officials who spoon out baldfaced whoppers to keep themselves in power until the situation gets so bad we end up with riots and blood in the streets. I'd prefer people who told the whole truth...but I'll take half, seeing that the alternative is none at all.

  • markm

    Actually, raising taxes past a certain point reduces the amount collected. But the gov't always has another option: reduce the value of the currency. This happened during the 1920's in several European countries that had followed up huge borrowing for WWI with more borrowing for social programs. The worst hit was Germany, where currency devaluation didn't help the government's debt situation much - because the major debt load was war reparations owed in real money to foreign governments. But if I understand correctly, France was the canonical case of a government getting into domestic over its head. Eventually they realized that it was simply impossible to collect enough taxes to cover the interest - so they devalued the Franc at least 90%, and then replaced the old Francs with New Francs. If you had a 1,000 Franc government bond more than a couple of years old, it was now a 100 New Franc bond, with 1 New Franc being worth no more than 1 old Franc had been when you bought the bond. But the government could easily afford to pay the reduced interest! Many French retirees had their entire pension fund invested in government bonds. So the effect was to cut their pensions 90% in value.

  • http://www.etubloge.blogspot.com Neal Phenes

    Great analogy of the pilfered trust funds. However, we are too easy on the retirees who have consistently voted for representatives and programs that spent the funds. The funds were not spent by Congressmen on themselves. They were spent on the electorate who were quite happy to gorge themselves today on the futures of their children and grandchildren.

    Maybe Congressmen were too bloated to say no or sought easy re-election, but the money generally went to pet projects or back into the hands of today's retirees in a variety of hand-outs over the past 40 years.

    So, maybe "Americans" fell for the "the fiscal fairy tale that told them Social Security was safe". It was their belief that they'd never have to pay back what they borrowed that is the fairy tale. Now, they are fighting the right of the younger generations to own private accounts. To cut their benefits going forward is justice.