Sunday, June 7, 2009

Privatizing Social Security is a Good Idea - Still

In Richard Posner's book A Failure of Captilism (a great book I'll blog more about in the future), Judge Posner listed lessons this crisis has taught us. One thing he mentioned is that privatizing Social Security would have been a bad idea. He never explained his rationale (perhaps he thought it was self-evident?), and, for the reasons listed below, I don't agree with his claim.

First, it would initially seem that the people who would have been hurt the most by privatization are those (a) who had heavily invested their money in the stock market, and (b) who are close to retirement. But privatized accounts would likely work much like 401(k)'s. People could choose to invest in stocks, bonds, or some preset mix. As people approached retirement, most would shift their money to bonds, where funds have largely been sheltered. Most soon-to-be retirees wouldn't have been significantly affected by the crisis.

Secondly, it’s true that crisis would have harmed anyone who had invested in stocks. Still, I expect the return on stocks over the next decade or two to exceed the current return on Social Security contributions (which is close to two percent). Even those who would have been significantly hurt in the short-run would be better off by investing in stocks than by "investing" in Social Security - as long as they aren't looking to retire in the next couple of years.

Finally, privatizing social security would have encouraged higher savings rates, so people would have saved more in the early 2000s. Thus, when the crisis hit, people could have drawn on their savings, mitigating the sharp decline in consumption. Much of the savings, of course, would have gone to untouchable 401(k)-type accounts, but Congress could have simply passed a law allowing people to withdraw early without the standard penalty. Because the value of stocks will likely grow faster than two percent, people who withdrew early would still have money for retirement.

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