Monday, October 1, 2012

One more argument for the list

I think that this argument is the weakest valid one for preserving Social Security that I am aware of:

One thing it made me realize is that I was (I think) wrong to support full social security privatization. Of course, that's a cheap concession for me to make, since nothing like that is on the horizon. But this has relevance to other potential issues, so it's worth thinking through.

When social security privatization was being debated, I looked at successful schemes like the ones in Chile and, er, Sweden. And of course, sovereign wealth funds like Norway's. But I didn't think about the vast gulf between us and them. The US has the largest, deepest, most liquid capital markets in the world, by a fair margin. Small countries can safely invest in our markets (and others) without moving prices or outcomes much.

The unfunded liability of social security, by contrast, is in the tens of trillions (net present value). Where would we put enough investment to cover that kind of liability? Our investments would swamp markets, including our own, in a way that Sweden's just don't. And if they were directed by a single government entity, that swamping effect would hand a disastrous amount of power to the investment committee.
But it does point out the huge issues that setting such a project up would involve.  Notice, as well, that the safest investments (like government bonds) are just as subject to political risk as social security.  Governments renegotiate bonds all of the time.  Not usually the United States, I agree, but then they haven't been defaulting on social security payments either.

That said, I am much more interested in the implicit insurance that being able to tax the US population gives the payments.  Even if the return is lower than in the private market (qustionable at today's yields), being protected against fraud or large losses is very, very valuable.  

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