Saturday, February 12, 2005


Nobel Prize winner (Economics, 1992), Gary Becker, writes on "Why I Support a Privatized Individual Account Social Security System." Richard Posner, his counterpart on their blog writes his views too. Gary Becker's thoughts:

Today both Republicans and Democrats are passionately arguing about the future of social security. Although there is merit in each side’s argument, neither side is portraying the situation accurately. In my view, movement toward a privatized individual account social security system offers the best option, where individuals save and accumulate assets to provide for their retirement.

It is true, as the critics correctly observe, that there is no magical gain in privatizing since all systems have to provide incomes for retired persons. But there is also no magical gain in privatizing a government steel plant since steel still has to be produced, yet there are good reasons to privatize steel. I also believe that there are excellent reasons to aim for a privatized individual account social
security system.

Pay as you go social security started first in Europe as a relatively easy way to provide a minimum standard of living for the elderly. It was introduced in the United States during the 1930’s partly also to discourage the elderly from competing for jobs when unemployment of younger workers was staggeringly high. It was a cheap system then because there were more than 10 workers per retired person, so the social security tax could be small relative to the benefits received by retirees. Indeed, the first several generations of retirees earned very high returns in retirement income on their accumulated social security tax payments.
(full post)

Richard Posners thoughts:
One of the commonest objections to President Bush’s proposal for reform of social security is that there is no need to act now because there is no “crisis.” Yet the same people who say this are wont to say that a weakness of government is its failure to take the long view. Politicians have a short time horizon because they have limited terms of office and are therefore reluctant to address a problem that lies in the future even if the problem could be solved more easily before it assumes crisis proportions. The increasing burden of social security, owing to the declining ratio of workers to retirees, is a problem easier to solve now than when a continued decline in that ratio (it was 3.3 in 1996 and is expected to be only 2 by 2030) brings on a fiscal crisis necessitating either steep tax increases or drastic benefits cuts (one form of which would be raising the retirement age), or both.

In 1983 Congress raised the retirement age for full social security benefits from 65 to 67, thus reducing liftetime benefits. But the legislation provided for phasing in the increase over a 22–year period beginning in 2003, which made the discounted present cost of the reduction in benefits negligible for prospective retirees.

With the social security “crisis” still in the future, it is possible to begin now to change the system in the direction of a genuine retirement program, that is, one in which people pay for their own retirement rather than having it paid for by current workers. With that shift, it would no longer matter what the ratio of workers to
retirees was. (full post)

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