Social Security: Reform, Refund, or Opt Out? (Part 4)

The aging burden is upon us and solutions are required quickly.  People are living longer.  There are three responses households face: consume less and save more when young, consume more and have lower monthly benefits when older, or work longer.   They should make these decisions with a combination of their own savings and employer savings plans.  They should plan retirement based on their preference to work and their health.  They should also be able to rely on a minimal public pension plan so that no one fears dying a bag lady. 

Government should respond when the public pension system is out of balance.  There should be a mandated cycle of revision.  The plan should be evaluated at least every five years and changes should be recommended by professionals to policymakers. Responses include: cutting benefits, raising taxes or contributions, subsidizing the program from general revenues or by issuing some form of debt, and generating a higher rate of return on the Trust Fund’s assets.  There is still the question of generational risk-bearing and redistribution answered by the pre-funded or PAYG choice.  Will the bigger burden lie with future generations or current generations?  It appears we must deal with the PAYG choice made during the depression years one way or another.

There is an appalling lack of self-control to save for old age here in the United States.  For the first time since the Great Depression, we have a negative savings rate. There are many savings and investment assets available in the private sector.  Only the richest take full advantage of them.  For most individuals, their homes and Social Security represent their entire retirement savings.   Recent trends show individuals willing to take loans out on the full market value of their homes.  They will borrow or cash out investment plans if the option is readily available.  The entire society faces unpleasant repercussions from these bad decision-makers.  Unfortunately, they are also the majority of U.S. citizens.

Economists usually value choice.  This is a situation where limited choices may be the best scenario.  While it is ideologically unpleasant to think that the government must stop people from self-destruction, this argument is not without precedent.  The U.S. does make drug use illegal, as an example.  Because government has unique powers, they are frequently in the position of stopping folks from making life-threatening decisions. This is especially true when these bad decisions impact others.

Government has a monopoly on taxes and can force old age saving.  It can also put the entire country into a universal risk pool.  It can economically provide households with insurance against earnings, longevity, and inflation.  It can realize economies of scale by administering a generic pension plan.  It has no pressure to return any kind of profit.  Government activities are highly audited.  Because of this, privatization seems an expensive option. 

Empirical evidence demonstrates that private plans eat up returns through administrative fees as observed in Chile.  Private plans must be regulated and can go bankrupt as observed in Japan.  When they do go bankrupt, the taxpayer must cover the costs of the plan and its mismanagement.  Private plans—because of risk and transition costs—do not provide higher rates of return.  Even conservative, Harvard economist Robert Barro and economist Olivia Mitchell, a member of the President’ Bush’s Commission to Strengthen Social security who supports private accounts argue this.   An additional reason is the social and personal costs of permitting workers to make “unwise’ portfolio chances as well as the randomness of what the equity markets may be like when a worker reaches retirement age.

It might be a positive step to turn the Social Security Administration into a quasi-government agency like the Fed and remove it from the political arena.   That would eliminate the perception that Congress borrows from the Trust Fund.  Allow the Trust Fund to invest in something other than strict Treasuries.

It may be wise to diversify the fund’s investments; however, investing the fund in equities should be off-limits.  The rationale is the same used to keep banks from investing in equities.  There is a fiduciary responsibility here.

Giving folks a blended account with investment options would lead to ‘winners’ and ‘losers.’   While all types of savings should be encouraged by tax policy, a government plan should not encourage risky choices that require more information than most people have. Diversification should be done by plan managers across the entire fund not by individual households.

Financing pensions by debt is an economically unsound idea. It increases costs and decreases IRRS.  If the system requires additional funding, the last choice should be issuing more debt.  The legacy debt could be retired through bonds that can be repaid by general revenues if subsidization seems necessary. However, this is not U.S. during the Clinton years with budget surpluses.   During the wild spending Bush/Cheney years, it is unclear how much more debt the U.S. can reasonably handle without impacting the market for treasuries and the dollar.  Retiring the legacy debt would be the only reason to support any type of borrowing.  The best way by far to increase contributions is to eliminate the high income earner exemption.  If this is indeed a public pension, then all public pension funds—including those of congress and other government entities—should go into the plan.  No one should be exempt and no income should be exempt.  Any attempt to eliminate the progressivity in the U.S. Social Security program should be defeated.  Working at low wages should not be rewarded by poverty at old age.   The U.S. Social Security System benefits and taxes should be progressive.