Arnold Kling  

Forced Savings vs. Social Security

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Brad DeLong endorses privatized Social Security, if what you mean by that is forced savings.


Too many households are myopic: they do not save enough. Households resist increases in Social Security taxes--they see no link between the taxes and their future benefits. But if Social Security were privatized so that households saw their Social Security contributions as their own, in the future there would be much less objection to upping the contribution rate--and so creating a real and more effective forced saving program to raise the national savings rate.

...privatization is a necessary first step to create the possibility of doing the moral thing--making the boomers build up the assets needed so that they can shoulder a greater share of the burden of financing their own retirement.

We need to raise our national savings rate. But if we just raise Social Security taxes, Congress will treat these taxes as general revenue and spend them.


He also agrees with my Ultimate Lockbox argument. Brad writes,

At present, your Social Security benefits are yours only by grace of Congress: Congress could cut them if it wished. But if your privatized Social Security account were *yours*, then it would be yours not by grace of Congress but by right of property: courts would stand ready to defend it against any casual attempt to cut or confiscate it.

Reflexively, Tyler Cowen disagrees.

I wish to privatize many things, but forced savings is not one of them.

Most of all, I am worried about the fiscal implications of this privatization. Current plans need not, in the long run, cost us any money, as Arnold Kling reminds us. But they do require a big tax increase in the short to medium run.


No they don't. The government could borrow the money, and shift the burden into the future, just as it does now. I'm not saying that's the right thing to do. I'm just saying that it can be done, if you don't want a huge short-term tax increase.

Tyler goes on:


So let's push for means-tested benefits, and hope that social security slowly but surely shrinks and evolves to a welfare system for the needy elderly. It should not be a stranglehold over every mainstream employment relationship.

I would argue for the forced savings. First, let me point out that from a purely libertarian point of view, we are arguing over second-best sorts of solutions. As Robert Barro once pointed out, second-best tends to be a rationale for "anything goes."

I believe that the need for saving has grown tremendously over the past century, primarily because the lifespan has lengthened and more medical care for the elderly is available and desired. I don't think that as individuals or as public policy advocates we have come to terms with this increased need for savings.

Also, we have very different propensities to save. Given the huge need for savings, what this could lead to is a world where the savers subsidize the spendthrifts. I don't think it's fair that if I consume temperately and save carefully for future contingencies that I should then be viewed as a "soft target" for soak-the-rich tax policies. I want to force other people to save, so that they do not come whining to me (or to the government) when they don't have money to pay their health bills when they get older.

For Discussion. Which current government policies do the most to discourage thrift?


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CATEGORIES: Social Security



TRACKBACKS (9 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/133
The author at LazaX in a related article titled Privatization of Social Security, and why not to do it writes:
    I have been following discussions about economics and privatization of Social Security. What might be a streight forward economics, it was a revelation to me that Social Security is no better and no worse economically after being privatized. (In short,... [Tracked on October 18, 2004 4:29 PM]
The author at LazaX in a related article titled Privatization of Social Security, and why not to do it writes:
    I have been following discussions about economics and privatization of Social Security. What might be a streight forward economics, it was a revelation to me that Social Security is no better and no worse economically after being privatized. (In short,... [Tracked on October 18, 2004 4:32 PM]
The author at The Fly Bottle in a related article titled Financial Paternalism as Self-Defense writes:
    I'm intrigued with this line of thought from Arnold Kling in terms of political theory: I believe that the need for saving has grown tremendously over the past century, primarily because the lifespan has lengthened and more medical care for... [Tracked on October 19, 2004 1:18 PM]
COMMENTS (9 to date)
Joe Kristan writes:

I would start with the byzantine college aid rules - the more you save for college, the more you pay for tuition - to subsidize parents who buy new cars every year and have no savings when the kids get out of hight school.

shamus writes:

Taxes on wages and income discourage saving. Money in T-bills earns an average of -0.5% per annum after inflation and taxes. Money saved in bonds earns 0.5% after inflation and taxes. And stocks only average 4% after inflation and taxes.

These kinds of returns encourage people to spend.

Boonton writes:
I believe that the need for saving has grown tremendously over the past century, primarily because the lifespan has lengthened and more medical care for the elderly is available and desired. I don't think that as individuals or as public policy advocates we have come to terms with this increased need for savings.

If the need for savings has increased dramatically then why wouldn't the market increase the rewards for savings sufficiently?

For example, look at cemetaries. It is cheaper to buy a plot when you are young than when a family member has just died. In effect, buying the plot is a type of savings where the cemetary owner is paying the plot owner 'interest' for 'savings' in his young years. A hospital, likewise, could sell a ticket for a CAT scan 10 years from now at a reduced price. A person buying such a ticket would be 'saving' and the reduced price would be the interest or reward for saving.

For Discussion. Which current government policies do the most to discourage thrift?

How about the numerous gov't policies to create rewards above and beyond the market reward for saving? For example, income from savings (capital gains) is taxed at a lower rate than other income. There are two major types of accounts to save for retirement (Roth IRAs and 401K's). There are tax free accounts to save for college for your kids. Saving thru property has tax incentives....

So we have a market reward for saving PLUS numerous tax based rewards for saving. If anything the economy should be suffering from too much savings yet it is asserted that we need yet more savings. Why and why is the market unable to properly reward savins?

quan nguyen writes:

As long as the government, or some faceless entity like a corporation, picks up the bills, personal responsibility for one's own well being (living expense or health care cost) is reduced instead of enhanced, thus a dis-incentive to saving.

To encourage saving and responsible personal behavior, the government and employers should provide only the programs of last resource, a "safety net" type of program, with a heavy dose of stigmata of personal failure or misfortune when an individual has to depend on these programs

Dave Schuler writes:

Mr. Kling:

You, Mr. DeLong, and Mr. Cowen all miss a key fact: regardless of what approach is used to address problems caused by the retirement of the Baby Boomers (do nothing and use some combination of tax increases, borrowing, and cutting spending in other areas to pay for the shortfall between FICA receipts and Social Security benefit payouts; privatize Social Security in whole or in part and use some combination of tax increases, borrowing, and cutting spending in other areas to pay for the immediate transition costs; means testing of Social Security; some combination of the above; some other means) there will be a dramatic re-ordering of spending priorities in either the public sector, the private sector, or both.

That's the price we're going to pay for failing to save or invest the monies coming in from FICA when there were substantial surpluses. Said another way, it's the price we have to pay for the society we have now. It will be paying the piper.

Lawrance George Lux writes:

I agree with Cowan, We must start Means-Testing for award of benefits. Privatization will never lead to the aggregation of Capital necessary to fund an effective Social net for the Elderly (especially with Us Baby Boomers). I laugh at Conservatives who say they wish to be free of Government interference, but refuse to Means-Test for Government-sponsored welfare programs. It is the old 'We are Conservative, unless We lose money by it!'

A previous Post mentioned the Roth I.R.A. and 401k plans for tax credits for Savings. Any Economist believing in Market value-setting will tell you these two elements have destroyed the rate of Return on Investments and Savings. The rate of Return on Saving would probably be triple the current level, if these elements were nonexistent. lgl

Bernard Yomtov writes:

I tend to agree with Arnold on the forced savings issue. Look at Cowen's argument. He wants SS to be a safety net for the needy elderly.

Now one of the criticisms we hear of SS is that it was intended to be just that (albeit not means-tested); that it was supposed provide subsistence-level benefits, which have grown beyond the original intent. So why wouldn't that happen again?

As with mandatory health insurance, which I also support, the problem here is that we are not heartless social Darwinists. So those who don't save, or are uninsured, effectively do have claim, like it or not. So let's have a plan that deals with reality rather than imagining some sort of silly Randian world.

Jim Glass writes:

Means testing and forced savings are not mutually exclusive and one can bet that they are both coming, as they address different problems.

Means testing solves the insolvency problem and it is coming for sure -- in fact it already started with the Greenspan Commission changes. These made an increasing protion of SS benefits subject to income tax as income rises. Moreover the "income tax" bit was a conscious ruse to cover the fact that the tax wasn't really a tax but a benefit reduction. I.e., a real income tax goes to the Treasury for spending as general revenue, but the income tax on SS benefits is instead returned to the SSA, and so is indistingushable in effect from a means-tested benefit reduction. A carefully disguised one.

More will be coming along these lines as when the monster entitlement deficits hit it will be politically impossible to raise taxes even higher than they are going to have to go anyhow to provide "social insurance" to the Bill Gateses of the world to protect them against poverty.

Moreover, as seniors who are already the richest demographic class get even richer compared to everyone else, means testing only the millionaire top 20% among them out of their "social insurance" benefits will be sufficient to solve the SS financing problem.

Forced savings won't solve the financing gap, it is too late for that, but will resolve what is even a bigger problems for SS -- it is entering an era when it will provide big *negative* returns to participants.

SS became hugely poplular in past times for one reason and one reason only -- it provided far *above market* returns to generations, effectively *free money* for everybody. What political program that gives free money to everyone in a generation isn't going to be hugely popular??

But this process is now going into reverse -- SS's legislated benefit formula now provides below-market returns (below gov't bonds, not equities) to almost all young workers, and outright negative returns to millions. And this legislated formula is itself 20% underfunded. Adjust for that reality and SS will provide outright negative returns to almost all the young.

Now, what kind of goverment programs that *costs everyone money*, that *makes them poorer* is going to maintain its politically popularity? And SS is a political program.

But private accounts in real owned investments within SS (even just 2 points of savings over 40 years) with a safe bond/stock mix is enough to give a positive return from SS to all in the long run on net.

So by 2030 one can wager that SS's immediate financing crunch will be mitigated by means testing and its long-term financing will have shifted to include significant real mandatory private savings. Bet the kids' retirement benefits on it.

Now, as to Medicare...

Jason Ligon writes:

"Now, what kind of goverment programs that *costs everyone money*, that *makes them poorer* is going to maintain its politically popularity? And SS is a political program."

Such a program will maintain its popularity as long as there are more voting beneficiaries of the program than voting people it is making poor. The same is true with Medicare or any other redistributive program.

For this reason, I strongly suspect that means testing will start only after many of the boomers have passed away.

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