Bryan Caplan  

Social Security Privatization: History of an Idea

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Yesterday's Washington Post had a fascinating history of proposals for Social Security privatization. Admittedly, it's probably more fascinating to me than to most people, because I know most of the people mentioned in the article! Some highlights:

Twenty-five years ago, Peter J. Ferrara was a Harvard Law School student with what he called "the craziest idea in the world." In a paper he wrote before graduating, he suggested converting the government-run Social Security program into a web of private investments.

The paper caught the eye of Edward H. Crane, a former head of the Libertarian Party who had recently started the Cato Institute, which has a stated mission of encouraging "limited government." To him, Ferrara's idea wasn't crazy at all, but a way to challenge Washington's largest and most revered social program.
...

Crane, Ferrara and the business interests that have become the effort's primary financial supporters are at each other's throats over how to structure and promote the accounts.

"Ed Crane and I don't talk anymore," Ferrara said. "Cato wants to get rid of the entire Social Security system, and I don't."

Cato's privatization effort was aimed from the start not just at dismantling Social Security but also at making major inroads against what it considered an overweening central government. "Social Security," said David Boaz, Cato's executive vice president, "is the linchpin of the welfare state."

To Cato critics like the Brookings Institution's Henry J. Aaron, Cato's goal was to "topple the great monument of 20th-century liberalism."

...

[Ferrara] also scolded his former colleagues at Cato. "They are misreading public opinion if they think people want a laissez-faire, tear-it-down system."

My take: Ferrara is right about public opinion, but Cato is right to want to topple Social Security. If you don't have the common sense to save for your own retirement, you shouldn't come crying to the taxpayers when your hair turns gray. (Like I said, unlike Arnold Kling, I'm no Bleeding-Heart Libertarian).

This does not mean, however, that the half-measure of letting tax-payers divert their funds to a private account is a bad idea. Not only does it expand our choice set; it may also push "the great monument of 20th-century liberalism" down the slippery slope to abolition.


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COMMENTS (4 to date)
Scott writes:

The problem as I see it is that many, many people don't have common sense and they are going to come crying and what are we going to do about it?

What are you going to do about these people? Are you really going to let them starve? Or will everyone magically start behaving rationally in this brave new world?

Lawrance George Lux writes:

Bryan,
The panecea of Privatizing Social Security has hazards mostly uninvestigated. A list:
1) Can Private investment keep up with Cost inflation?
2) What will this level of investment do to Dividend spreads, under conditions that hard capital construction opprotunities are limited?
3) Will withdrawal from Welfare programs deflate the current Program User markets, or will it lead to double-digit Inflation as Government suppression of Prices is removed? lgl

James writes:

I'm all for as many cuts to Social Security as are practical, but when I read Scott's post I actually said "Ding!" out loud. The problem is that people get the "old-age 'insurance'" (notice I had to put a separate set of quotes around 'insurance' -- Arnold would be proud) part of Social Security confused with the welfare/disability part of Social Security.

The current system where benefits are intentionally decoupled from contributions has got to go. Keep welfare, by all means -- as I've said before, it's like I'm paying the state to keep the streets safe, but instead of locking up criminals after the fact, it's getting rid of homeless people before they have to turn to crime -- but make people at least try to finiance their own retirement, to the best of their abilities. And if they fail to save, hey, who says you have a right to retire in the first place? I'm not thrilled at making 80-year-olds work, but you know, Wal-Mart is always hiring.

mark writes:

Actually, it could be rational not to save for retirement. If I save, and others don't, I will have deferred the pleasure of spending today, enabling me to pay higher taxes in the future to support the non-savers, who had their pleasure.

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