Wednesday, April 27, 2005

Are we smart enough for Social Security reform? 

I just got back from class, where I talked about an article that covers a survey of economic literacy done by the National Center for Economic Education. The paragraphs that caught my eye, given a discussion about Social Security reform (and this article):

Other analysts said they thought that the findings added to a growing body of evidence that the typical American is poorly equipped to take advantage of what proponents call the ownership society: a future in which individuals are free to invest their own retirement money, rather than having to accept the returns offered by the Social Security program or a group retirement program at work, like a pension plan. Many surveys have shown the public has doubts about the Social Security program, with young people, in particular, confident that they could do better by investing on their own.

Yet even their concern is poorly informed, according to the Employee Benefits Research Institute, a nonpartisan research organization that is financed by companies and labor unions. The institute's own research showed that fewer than 20 percent of workers thought that Social Security would be their primary source of income in retirement, even though Social Security is currently the primary income source for more than two-thirds of retirees.

William Polley points out that this is a misleading piece.
Is it realistic in the current environment with 401(k) plans, IRAs and so on, to expect that the number of future retirees (current workers in the survey) whose primary income source will be Social Security will equal the portion of current retirees who rely so heavily on Social Security? I don't think so. Now, do I think there will be as massive a shift as the survey implies? Of course not. Would a shift be a good thing? I think so. This story just doesn't give me enough information to say any more than this...

Mark Thoma is skeptical that the shift will be enough. It comes down, as we said in class today, to questions of myopia, and how people respond to incentives. It is like a game of chicken: Individuals are more profligate when they expect they can compel others to pay for their profligacy. If baby boomers think they can always force the political system to redistribute income to them in retirement, there is little incentive to save more. Can a democratic system that has old-age pensions ever commit to the "tough love" of telling profligate sixty-year-olds that they must lie in ill-appointed beds of their own making as pension reform occurs? These folks hope so.