Tuesday, March 29, 2005

Do away with SS entirely?

Arnold Kling points to a Barro article (pdf) where Barro says he was in favor of private accounts in social security, but no longer is:
I once thought personal accounts for Social Security were a good idea but have changed my mind. Personal accounts have some virtues, but the common arguments, both pro and con, are myths. Overall the accounts are a bad idea...

The strongest points for personal accounts... mean that, unlike the current program, the contributions are not a tax that discourages work.

Another myth is that these accounts enhance saving and economic growth. In fact, tinkering with Social Security won't have major effects on national saving, investment, or growth.

A SERIOUS ANALYSIS STARTS with asking why we have Social Security. If we were not so used to it, we would find it odd for the government to collect money from young workers and give it to the old (mostly workers' parents). One rationale is that the government should help people who lack discipline to save for old age. I have never embraced this paternalistic view. It's true that society will inevitably provide welfare to the needy elderly. Knowing this, some people will save too little and rely on public support when old. Thus, there is reason to require workers to save for retirement. How much depends on what is viewed as a minimal standard of living; suppose it is $1,000 per person per month. (Currently, a person with the median earnings history gets $1,200 from Social Security.)

Contributions that fund just the minimum cannot go into a meaningful personal account. People would opt for too much risk, knowing they would be bailed out if they fell short. Also, contributions that cover the minimum provide no individual return and, therefore, amount to a tax that discourages work.

Personal accounts have to supplement the minimum payout. But then why have a public program at all, rather than relying on individual choices on saving? I think there is no good reason to go beyond the minimum standard; that is why I view personal accounts as a mistake -- they enlarge a Social Security program that already promises too much.


I cannot reconcile Barro's view that taxes on wages discourage working (which they do, and which social security tax does) AND the position that private accounts (which are not a tax) would not reduce this discouragement and so encourage growth. I think moving all of SS into personal accounts would greatly reduce marginal taxes and therefore have a significant impact on productivity and growth. I also think the personal nature of personal accounts would encourage growth by inducing ppl to retire later.

If the reduction in marginal rates and the encouragement to work for longer are the greatest contribution of SS, why not eliminate it altogether and just have private savings? Barro would be OK with this, because he beleives that arguing that people do not save for retirement enough is paternalistic. He is correct, it is paternalistic, but you are still left with the fact that people do not save for retirement enough. I'm a big individual liberties kinda economist, but I think people make wrong decisions about saving and I think mandatory savings is a good idea.

Barro would also limit benefits to $1,200/month, which is the current average, but only for people who needed it.

The Reality-Based but otherworldly Brad DeLong mocks those who claim Social Security is a welfare program when it is clearly an insurance program. Last I checked old age was not a risk it was a certainty, so I don't see how any cash stream that kicks in when a sure thing happens and involves no risk pooling can possibly be called insurance. Ah, must be that Berkeley water. I do agree that it is not welfare though, since it takes from poor people (especially blacks) and gives to richer people. A program like Barro's -- means tested minimum payments for old people -- *would* be welfare, but even that I don't think would be insurance.

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