Thursday, April 2, 2009

Conservatives Still Want to Privatize Social Security?

Bad ideas die hard, apparently. You might think that the whole global financial crisis thing would make conservatives rethink the wisdom of putting even a portion of Social Security into the markets. You would be wrong. Over at AEI, Andrew Biggs, for one, is still trumpeting the supposed superiority of the would-be Bush private accounts over Social Security. Biggs observes that under the Bush scheme
Total Social Security benefits would increase if personal accounts returned more than the interest rate on government bonds.
Is it so hard to imagine a scenario where Treasuries would beat the stock market? Of course not - we're in such a period right now! (note: the below chart compares the S&P 500 vs 3-month Treasuries. Longer term government bonds would obviously look even better).

Over the last five, ten, and twenty-five years, government bonds have beaten the S&P 500. Furthermore, imagine a situation (let's call it Japan), where there's a huge asset and stock bubble. Twenty years later, stock prices are roughly a quarter of their highs. Workers with private accounts who entered the workforce a few years before the crash would have their holdings wiped out and remain depressed. And even if the stock market began to recover after twenty odd years, because the private accounts have a "life-cycle portfolio" that phases out stocks as retirement nears, these workers would not even catch the upside. They would be better off with the guaranteed benefit of Social Security.

Providing a modicum of economic security in old age is the purpose of Social Security. After all, that's why it's called "Social Security". Why scrap a system that successfully does this for one that might do it? Social Security itself does not face nearly the funding problem its critics like to claim it does. All that's required to fix its long term problems is a payroll tax hike and perhaps some sort of benefit cut. This isn't rocket science. You might even say it's bedrock conservatism - after all, it's what Ronald Reagan did in 1983.

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