Radly Balko argues that the government should implement “private” Social Security accounts, despite the recent financial difficulties. The subtitle of the article (as it appears at Reason) reads, “Why the market meltdown doesn’t negate the case for privatizing Social Security.” The meltdown itself does not negate that case; it was negated long ago, and the meltdown only reinforces the negation.
The first problem is that Balko calls them “private” accounts. They are no such thing. Under the Bush/Cato plan, people are forced to contribute to these accounts, and, as Balko hints, the accounts are controlled by federal politicians and bureaucrats. The plan wells from fascism, not the free market. It is perfectly in line with Bush’s partial nationalization of the financial sector with his bailout and buyouts. Federally directed investment in the stock market via Social Security would automatically expand federal control over the market, and it would invite ever more controls to “protect” people’s money. (I feel a blunt assessment is in order here, despite the fact that I’m usually a fan of Balko’s work.)
The Bush/Cato plan relies on an accounting fraud to gain initial plausibility. The key problem is that money directed toward the accounts would in no way reduce the existing liability for Social Security, until those with the accounts started to retire. The result is that those with accounts would end up paying the same amount into Social Security, directly or indirectly, in addition to the money they’d be forced to spend on the accounts.
To get a better sense of this, consider the simple fact that the accounts are inessential. If people could spend less directly on Social Security, they could simply be allowed to keep that money, rather than forced to invest it in federally-controlled accounts, and their Social Security payoff could be reduced commensurately. But, as noted, that would do nothing to address Social Security shortfalls in the interim, so that money would have to be raised somehow, whether through direct taxes or more deficit spending. Alternately, Social Security benefits could be reduced, but if so they could be reduced without creating the federally-controlled accounts.
There is certainly a transition problem with Social Security. Many people in and near retirement rely on that money for their basic needs. It would be unjust as well as politically infeasible to cut off those benefits. As I’ve argued, the best way to phase out the system with the least amount of pain for all involved would be to slowly raise the retirement age. This would leave the benefits of those already on Social Security unchanged, and it would give those far from retirement many years to adjust their plans.
The central political problem of our day is that the failure of federal controls in the financial markets is being blamed on nonexistent free markets. By pretending that federally mandated and controlled accounts are somehow “private,” Balko et al contribute to the charade.