June 03, 2005

Mmmm.... Lunch

Daniel Gross loves a free lunch but can't seem to find one anywhere. For my part, American Express was offering free lunch down the street today in exchange for all my personal info, and I was happy to oblige. But I seem to be the only one. Here are a few more folks who can't find the free lunch:
Analyses by some of the nation's leading economists have convincingly demonstrated that the comparisons which private-account proponents often make of rates of return in Social Security to past rates of return in private capital markets are apples-to-oranges comparisons and do not withstand scrutiny.

For example, a landmark paper co-authored by economists Olivia Mitchell, a member of the President Bush’s Commission to Strengthen Social Security and a supporter of private accounts, John Geanakopolos, and Stephen Zeldes found that "the popular argument that Social Security privatization would provide higher returns for all current and future workers is misleading, because it ignores transition costs and differences across programs in the allocation of aggregate and household risk." The paper states: "A popular argument suggests that if Social Security were privatized, everyone could earn higher returns. We show that this is false."

A recent analysis that the investment firm Goldman Sachs sent to its subscribers explains these basic economic findings. The analysis, entitled "Seven Myths About Social Security Reform," includes as a leading myth that "Privatization is a much better 'deal' for Social Security participants." Goldman Sachs explains that "after adjusting for these two factors [transition costs and risk, which are described below], the difference in returns between personal saving accounts and the current system disappears. There is no free lunch available via privatization."
Meanwhile, I agree with much of what Megan McArdle's saying here: it would be nice if we could stop Congress from raiding our prefunded retirement plan. But we can't. So the thing to do, I guess, is not to privatize Social Security but to shy away from prefunding whenever possible. Maybe I'm joking, but probably not. At any rate, I don't see how private accounts are supposed to protect our retirement funds from politicians and their grubby fingers. It would be easy for Congress to raid private accounts. They could tax the disbursement. Or the government could just tax those financial brokers that are allowed to manage our Social Security accounts, who in turn raise our fees. Or, since the government decides where and how you invest your private account, it could simply force everyone to invest in those "mere IOUs" we like to call Treasury Bonds, and then run up all the debt it wants. That last little trick doesn't seem any more difficult than raiding the Trust Fund, does it?

No one would "own" their private account any more than they "own" their Social Security benefits right now. Congress can give and take away. The only solution, clearly, is to educate our kids and send them off to liberal colleges where they can be brainwashed into voting for the sort of politicians who won't run up staggering deficits the way the current regime has.
-- Brad Plumer 8:19 PM || ||