Monday, February 07, 2005

I prefer private accounts 

Last Thursday during the NARN's sitting in for Hugh Hewitt, the gang interviewed Peter Beinart (are you going to the forum? Fools! You need tickets!). The question was Social Security, and Peter tried to draw out Mitch and the others by saying (paraphrasing, but I'll change this to exact dialogue when I transcribe the recording) "Be honest, you guys don't want to save Social Security by privatizing it. You want to gut Social Security because you don't think it's the responsibility of society to help the elderly." Mitch demurred.

I'm going to partially agree with Beinart. (This is a special day, I guess.)

I have thought for awhile that the Bush Administration's approach to selling Social Security reform was poor. Relying on solvency measures for a date thirty-some years from now is unlikely to get anyone gung-ho over reform. I have a hard time getting Mrs. Scholar excited over retirement planning, and I'm already over 45 (she's not, and she wants damn sure that you know that.) Getting people to adopt private plans because some day in the fairly-distant future someone is going to get 70% of their promised benefits from a pay-as-you-go scheme is not going to turn people on no matter how many times you have Bush do the dog-and-pony.

I'm not saying he's wrong on the facts. He's probably right. But good wonkery gets trumped by good politics any day, and "there's no crisis!" sounds better than "there's a crisis 38 years from now; do something!!!" The Greenspan Commission that did the fix of Social Security in the 1980s was many years in the making; Bush has a short time within which to make the bold change he wishes.

The case, if he wants to make it, is in the better qualities that private accounts provide. Kevin Hassett explains.

Suppose that a "retirement genie" alighted on your doorstep and informed you that he had just taken the liberty of reorganizing your finances. To ensure your future safety, the genie transferred all of your savings into a special account with a number of features. First, you cannot touch the monies in the account until you retire. Second, if you and your spouse die, the money is lost unless you have school-aged children. Third, the minute that you retire you will be forced to convert your entire accumulation into an annuity that dribbles the cash out at a low monthly rate. Fourth, the account funds cannot be invested in a well-diversified portfolio of stocks and bonds, but must be parked in a single low-yield government instrument. Finally, you must contribute 12.4% of your earnings into the account every year.

It is hard to imagine that anyone would view these machinations as good news.

Right: No rainy day money to draw on, no asset that builds for your benefit. And the money is in an undiversified fund that would be laughed out of the room if your financial planner suggested it to you. In other words, Social Security is a bad investment vehicle as current constructed. A recent paper also shows this to be true. In essence, you have people who are borrowing money at 10% and forced to save at a rate of less than 2%. How much sense does this make? Hassett makes another great point:

A supporter of the status quo might respond that Social Security was not designed to make rational individuals better off. It forces irresponsible "grasshopper" individuals to save for their retirement along with responsible "ants." This way, the ants will not have to feed the grasshoppers when they are old. But recent estimates suggest that about 80% of Americans behave quite rationally, saving much the way the economic models say they should. Economic research has revealed that 80% of Americans are ants. Consequently, today's system forces the vast majority to endure a straight-jacketed program that reduces their lifetime welfare significantly, all for the benefit of a small minority.

I particularly wish this point was the point Bush would defend. We are asking Prudence to pay for Folly, which leads only to more Folly.

Don't reform Social Security because money will run out in 20xx. Reform it because there's a better plan that improves people's well-being. If Bush wants to be the great visionary, that should be his vision.