Since the end of impeachment ordeal, Social Security reform has been threatening to take center stage. As such - and since economists have spent enormous amounts of time investigating the economics of the program - I have been expecting to see, hear, and read from a parade of economists on the relative merits of various proposals.

Wishful thinking, I suppose.

Instead, it seems as though the debate is on the politics of reform - which policy is more "politically feasible" or "politically stable". My reading comes down to this: politically speaking, if there is any other option available, you can't substantially cut benefits or raise taxes. By process of elimination, this leaves privatization -- investing a chunk of money in the stock market -- as the only real political alternative.

Besides, if the privatization plan doesn't work, the failure will be many years from now, which means that current policy makers will be able to claim success today.

However, there are political pitfalls with each of the two main privatization proposals.

1) Investing the Social Security Trust Fund

"I doubt if it would be feasible to insulate, over the long run, the trust funds from political pressures -- direct and indirect -- to allocate capital to less than its most productive use." Alan Greenspan Testimony from 01/28/1999.

Alan Greenspan, among others, have criticized this plan on political grounds - arguing that the invested funds would represent a pool of money that would tempt future lawmakers to either spend the money, or to direct the investments into politically popular companies or investment areas.

The government run investments, even if they were be invested wisely now, could not be guaranteed to be invested wisely in the future. The system would, in this sense, be politically unstable.

Proponents of the plan argue that an independent agency could be set up to insulate the regulation of the funds from the political process. (The irony of the situation is that the Chairman of the Federal Reserve is arguing that it would be politically impossible - or at least unlikely - that such an institution, with qualities nearly identical to the Federal Reserve, could be set up and maintain its independence.)

2) Individual Accounts

"Early access to individual accounts and the receipt of benefits as a lump-sum might not preserve adequate benefits for workers and for surviving spouses." From the NASI - Report of the Panel on Privatization of Social Security

There will be winners and losers in the stock market game - a large number of losers could form enough of a political will to compensate them for their misfortunes, then we may wind up with a bailout of the social security system that would make the S&L bailout look like a drop in the bucket. The program would then have to be reexamined again in the future.

(This point, of course, depends upon the specific individual account plan adopted - if retirement accounts required are in addition to a base level of benefits, there would not be as much instability. However, the higher the base benefits, the lower the gain from investing in the stock markets higher returns. Also, if guaranteed benefits are high, there is the obvious and explicit moral hazard problem - people will become extremely risky in their investment decisions. Even if there are no explicit guaranteed minimum benefits, there may actually be an implicit guarantee, hence the political instability.)

A second source of political instability comes from the fact that people will have an account with their name explicitly written on it. When people retire, many will demand the cash up front leading to a loss of the benefits from real annuities - including the implicit insurance on running out of money before dying. The political demand for leaving the money in the accounts as bequests will most likely rise also.

The ultimate political consequences of each of these factors is at best uncertain.

Next on CNN...

I keep hoping to see more economists on TV talking about the reforms (hey, we're not that ugly!), but if not us, then maybe they can get some political scientists to talk about how the program might be reformed the next time we have to address a Social Security crisis.

I won't hold my breath for that either.
 

Comment via the Bulletin Board.

See also:

• Social Security: Readings
• Social Security: Links
• Social Security: Public Opinion
• For some of the better TV coverage, see the NewsHour coverage of Social Security.
• Henry Aaron and Martin Feldstein on investing social security.
• Edward M. Gramlich: The budget surplus and social security
• Alan Greenspan: Social security
• NASI on Individual Accounts vs. Collective Fund

Dynamic Consistency and Social Security Since the end of impeachment ordeal, Social Security reform has been threatening to take center... | Posted March 3, 1999 03:06 PM by John Irons