Lawrence White responded to my post on Social Security with a number of good points, but I want to quibble with one of his arguments. He posits:
Professor Bainbridge adds:
Even proponents of private accounts concede that the transition costs will require trillions of dollars of government borrowing. Do we conservatives really want revenge on FDR and the New Deal at that price? Personally, speaking as a small government fiscal conservative kind of guy, I'd give up personal accounts if any money thereby saved was spent on deficit reduction or, better yet, an income tax rate cut.
The good professor is simply confused about the "price" of personal accounts here. As even opponents of private accounts concede, the proposed move to personal accounts, with workers who opt-in paying an appropriate price in reduced benefits, is self- financing. It will require borrowing, yes, but it will not require additional taxes or benefit cuts to repay the transitional debt. The debt will be repaid with the cash freed up by the voluntary benefit reductions for those who opt in. Conversely, giving up the Bush proposal for personal accounts will not make a single dollar available for deficit reduction or an income tax rate cut.
As I understand it, Social Security is effectively funded on a pay as you go basis in which current workers taxes are not saved but rather are used to pay benefits to current retirees (ignoring the voodoo economics of the trust fund). Accordingly, switching to private accounts will immediately reduce Social Security revenues as some current workers opt for them. As a result, the government will have to borrow now. The government will also have to pay interest on the debt starting immediately. In contrast, the offsetting reduction in benefits will not take effect for many years, when those workers who opted for private accounts finally retire. So here's my question for White: do you have hard data showing that the present discounted value of the future reduction in benefits at least equals the present discounted value of the bonds and interest paid on them? If not, what I learned about capital budgeting tells me it's a bad deal. No?
Anyway, does anybody really think that you can sell this idea to the public? The pro-private account Economist($) reports good reasons to think Social Security reform is going to be a very tough sell and, perhaps worse, that making a deal will probably require higher taxes:
Social Security reform, for now, is losing rather than gaining political momentum in Washington. Despite several presidential sales-trips to the heartland, Americans have not embraced private accounts. A Wall Street Journal/NBC poll in early February suggested that support for private accounts has fallen from 46% to 40% in recent weeks. More important, opponents of private accounts, particularly older people, care more, shout louder and vote more than younger supporters.
Republican congressmen are therefore loth to endorse pension reform unless they are sure it will pass the Senate. And so far virtually all Senate Democrats are categorically opposed to the idea. More important, it is becoming clearer that the kind of compromises necessary to prise away the necessary Democrat votes will appal conservative Republicans. ...
On February 16th, Mr Bush said that although he was implacably opposed to raising the payroll-tax rate, all other options? including raising the payroll-tax cap?were on the table.
Conservative tax-cutters were horrified. ?I, for one, am one of those that didn't come here to raise taxes,? fumed Tom DeLay, the majority leader in the House. Republican activists could not understand the logic, or the timing, of Mr Bush's concession.
I still think the best solution would be to raise the retirement age and switch the benefit calculation to price indexing. I'd gladly swap no new taxes for no private accounts.
