Friday, March 05, 2004

P.S. on Privatizing Social Security

The plan I outlined in the previous post assumes that the government will force people to save for their retirement. Why should the government do that? Any forced savings plan, be it traditional Social Security or private accounts, implies a governmental obligation to bail out those who make imprudent investment decisions. If very many private accounts go sour because of imprudent decisions, there will be a hue and cry to bail out the holders of those accounts. (If it was done for Chrysler it will certainly be done for a bloc of voters.)

When individuals are confronted with the consequences of their actions -- as they still are to some extent under criminal law -- they tend to make better decisions. A case in point: I took my private retirement savings out of the stock market before the bubble burst in 2000. I, like many contemporary observers, could see that there was a bubble. If more investors had been like me, the bubble wouldn't have been as large and there would have been less damage when it burst.

Government guarantees -- implicit or explicit -- have perverse results. They foster imprudent decisions and transfer the cost of those decisions to the taxpaying public.