Saturday, February 05, 2005

The Problem with Voluntary Personal Accounts

A "senior administration official," speaking on background before President Bush's State of the Union speech on February 2, said this:
For individuals who were born in 1950 or later, they would have the opportunity -- the voluntary opportunity -- to participate in personal accounts. If they wished, they could not choose a personal account and they could stay entirely within the current system. The President has said we want to make sure that system is reformed to be fiscally sustainable. Certainly, though, individuals have the option of not taking a personal account and [receiving] the benefits that the traditional system would be able to pay.
What will happen, of course, is that those who choose to participate in personal accounts will draw larger benefits than those who choose to rely on solely on the traditional system. Why? The "return" on "contributions" to the traditional system will continue to shrink as the worker:retiree ratio shrinks. That "return" will be far less than the return earned on personal accounts, even those personal accounts that are invested solely in government bonds.

I predict that those who are foolish enough to remain in the traditional system will complain about the "unfairness" of it all when they reach retirement age and realize that they made a mistake. Congress, bowing inevitably to pressure from the powerful and ever-growing ranks of the elderly, will raise benefits payable on traditional accounts to a level consistent with the benefits payable on personal accounts invested in government bonds. That will necessitate higher payroll taxes, thus negating two important objectives of privatization: (1) to diminish, if not eliminate, the growing burden on workers, and (2) to stimulate economic growth by injecting more money into capital markets.

Privatization will fail to meet its objectives unless everyone who is eligible to open a personal account is required to do so, even if the account is invested only in government bonds.

I'd rather see Social Security abolished, of course, after paying off those who are collecting benefits or have "contributed" to the system. But abolition seems to be out of the question, so the next best thing is to convert Social Security from a transfer-payment Ponzi scheme to something resembling a real retirement plan.