Becker On Privatized Social Security

Gary Becker, a Nobel laureate in economics and professor at the University of Chicago, writing in the Wall Street Journal (editorial) gives his support to privatizing social security:

Republicans and Democrats are arguing passionately about the future of Social Security, and the argument, at its core, is about privatization. It is true, as some critics observe, that there is no magical gain in privatizing Social Security, since all systems have to provide incomes for retired persons. By that token, however, there’s no gain in privatizing a government steel plant either, since steel still has to be produced, too. Yet there are very good reasons — with roots in political economy — to privatize steel. And as with steel (and the like), there are excellent reasons for a privatized individual-account Social Security system.

I believe the advantages are mainly political, not “economic,” and that privatization helps to separate saving for retirement from interest-group politics, from taxation, and from government spending.

Just as important are the political implications of federal fiscal behavior. Revenue from Social Security taxes at present exceeds payments to retirees. This excess is counted as part of the growing Social Security Trust Fund, but in fact also enters into the consolidated federal budget account, and helps reduce the reported spending deficit. Reported deficits during the past decade would have been much larger if Social Security were not running a surplus during this whole time period.

Social Security tax revenues are expected to fall below spending on retirees in less than 20 years. If we simply raised Social Security taxes now — say by two percentage points — consolidated federal deficits would appear much smaller, and the federal government would be under less constraint to reduce spending. Both theory and evidence indicate that a good fraction of the additional revenue would indeed be spent. “Putting aside” assets for the future is very difficult for all governments, subject as they are to immense demands for spending now from various interest groups.

A good individual-funded savings system would require individuals to save 4% to 6% of their incomes (President Bush suggests 4%), and to invest these savings in private individual accounts that would meet certain government-established criteria. At the same time, Social Security taxes should be cut by a couple of percentage points from the present level to ease the burden on workers. These taxes could be cut since under this saving system younger workers would be contributing to their own retirement. Moreover, a tax cut would reduce the Social Security surplus, so the government would be less tempted to spend more by rapidly growing Social Security “reserves.”

These private accounts would accumulate tax-free until individuals decide to retire. The age of retirement, within broad limits, would be left to individuals; but like IRAs now, these funds would continue to grow with savings for persons who retire at later ages because they like their work, and are in good health. At retirement, individuals would get access to their assets either in a lump sum or as annualized income, and would pay taxes on their withdrawals.

So the really strong arguments for privatization are that they reduce the role of government in determining retirement ages and incomes, and improve government accounting of revenues and spending obligations. All the other issues are really diversions, because neither advocates nor opponents of privatizing Social Security generally answer the most meaningful question: Is there as strong a political economy case for eliminating government management of the retirement industry as there is for eliminating its management of most other industries?

My answer is “yes.”

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