Privatizing Social Security

In general I have been in favor of privatizing Social Security on the same terms as I approve of vouchers: a compromise along the road to ultimately eliminating government involvement altogether. But this report by the Christian Science Monitor gives me pause:

Meanwhile, White House spokesman Scott McClellan this week publicly acknowledged something obvious: The government would have to borrow large amounts of money to finance any switch to private accounts.

Some private estimates have put the potential borrowed amount at $1 trillion or more. Mr. McClellan declined to specify a figure, but said if the program was not restructured to handle the coming wave of baby-boom retirees, additional costs could hit $10 trillion. "There will be some upfront transition financing that will be needed to move towards a better system," said McClellan.

The word "transition" is key here, say proponents. Theoretically, in the long run it should not cost the US any more to shift to a system in which a small percentage of Social Security payroll taxes, 2 to 3 percent, are deposited in private retirement accounts. Since the Social Security checks of today's retirees are financed by current taxes, siphoning off 2 to 3 percent would indeed cause a shortfall. The US would have to borrow more to make the system's ends meet.

But those younger workers busy building their private accounts would be getting smaller benefits from the US when they retire, because they are keeping control of some of their dollars. Uncle Sam's liabilities would thus be lower. In theory, when the shift ends decades from now, the net cost would be zero.

It seems obvious that in order to transition from the current ponzi-scheme (where current taxes pay for current benefits) to one which is an actual savings account will require large short-term expenses. But if the expenses are so high -- or to look at it another way, if the break-even point is so far in the future -- it seems likely that the intense political pressure to scrap the reform will have a much greater chance of succeeding before any benefits are actually realized.

I am still somewhat inclined to give the idea the benefit of the doubt, but somewhat less so than previously. Now that people are talking actual numbers, it does seem that this is a longer shot than I had realized.

My personal preference for Social Security reform would be to announce a gradual phase-out of the benefits, so that people who are currently 40 or less would expect to receive no Social Security when they retire. Many of us don't expect the system to survive that long anyway and have already made other plans and people who haven't will have 25 years to begin saving. (This would be popular with Republicans.) In order to avoid appearing to take money from people who will not receive benefits, eliminate the payroll taxes immediately and pay all benefits out of the general tax. (This would be popular with Democrats.) Within a generation, we will have eliminated the greatest burden on the political system, and returned the country to an attitude of self-reliance and fiscal responsibility. And, as Arnold King points out at Tech Central Station, this will remove a very regressive tax on lower income people, who are the least likely to benefit from it.