Month: December 2004

NOTE: I’d like to preface this post by noting that I’ve been highly impressed with the quality of the debate about Social Security reform on this blog. I credit von, Sebastian, hilzoy and countless readers with offering what I’ve been tempted to edit and send to Congress as "Highly Recommended Reading" as they prepare to hash out the details themselves. Truly, regardless of what you think of his plan, it’s a testament to the value of Bush’s suggestion that we have a national debate on the topic. I hope our elected officials are as thoughtful when it’s their turn.

Having said that…

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I’ve been following Marshall’s argument that the Bush administration is using the same formula to get buy-in for their Social Security overhaul that they used to win support for the Iraq invasion, but now the meme is gaining wider attention. First, Marshall’s observation:

The president and the White House have now compared their build-up to the Iraq war with their push to phase out Social Security enough times that it seems worth creating a detailed taxonomy of the Bush White House approach to major policy initiatives in order to predict their efforts over the next two years. The Journal said last week …

The president has yet to lay out specific ideas for changing the entitlement program; he and his aides are focused first on selling the idea of change. "For a while, I think it’s important for me to continue to work with members of both parties to explain the problem," he said in a Monday news conference. This would suggest that we’re now in the lying and fear-mongering phase of the campaign, which would be followed of course by a later phase in which a specific policy remedy is brought forward, nominally meant to address the fake problem.

Perhaps if folks could note beginning and end points of various phases of the Iraq war mumbojumbo that could help us pinpoint signs to look for in the unfolding Social Security debate.

Now, as Marshall notes, the Boston Globe "gets it":

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DeLong makes part of my point (see below, including comments) regarding the benefits of Social Security reform, and makes it better that I did (or could).  Discussing Martin Feldstein’s perceived views on Social Security privatization, DeLong writes:

These days [Feldstein] is more likely to stress not the reduction in personal savings that may be generated by expectations of the continuation of the pay-as-you-go Social Security system, but the gap between stock and bond returns. Marty’s argument these days is much more likely to be the claim (with which I have a lot of sympathy) that the stock market does a lousy job of mobilizing society’s risk-bearing resources. Stocks appear to be priced as though the marginal investor is a rich 62-year old with some clogged arteries and a fifteen-year life expectancy who is not expecting to leave a fortune to his descendants. But if the stock market were working well, the marginal investor would be a 40-year old in his or her peak earning years looking out to retirement spending 40 years in the future–an investor much less averse to risk than the 62-year old.

Turning Social Security into a forced-equity-savings program would, Marty believes, not only produce huge profits for the system but also materially improve the efficiency of U.S. financial markets.

(Emphasis mine.)

Kevin Drum wonders if this means that the stock market is underperforming (his phase is a "massive, persistent, and inexplicable market failure").  The short answer is, probably.  For whatever reason, folks tend to be more conservative in their investments than they should be.  That is, most folks should be holding riskier investments than they currently are because, over time, they are likely to be rewarded by their risk taking.  (Or, to bastardize DeLong, forty-year olds are holding the portfolios of sixty-two year olds when they should be holding the portfolios of forty-year olds.)   

Thus, one argument in favor of privatizing part of Social Security is that it will force more money into the market and capture the "equity premium" — the money that is being lost because folks ain’t investing the way that they should.  I say "one argument" because, as Tyler Cowen has noted, this is not the only or best argument in favor of Social Security.  A better argument is that Social Security privatization will increase the national savings rate and make investors and owners out of a whole buncha folks who don’t have the opportunity under the present system.  To create an ownership society, wherein everyone has a stake in the corporate world.

By the bye, DeLong is absolutely right to call privatized social security accounts "forced equity savings."  The goal of privatizing Social Security is to replace the current generational transfer system with a national savings and investment system.

Now DeLong and I part company with respect to who should control the investment portfolio.  DeLong "would rather see this forced equity savings done not through private accounts but through allowing the Secretary of the Treasury to invest the Trust Fund in equities."  I’d prefer that the investors themselves control their own retirement portfolios, choosing from among a series of (no load) index and other funds.  But I hope to take up this debate a bit later.

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