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Cato's Proposed Social Security Reform

By way of EconLog I've read the Cato Institute's proposal (PDF) to address the staggering catastrophe that is the long-term financial outlook of Social Security. The linked document has details about how bad the problem truly is, so I won't bother rehashing that information here.

The Cato plan is to let individuals invest their half of the SS payroll taxes (6.2%) in heavily restricted but nominally private accounts, with the other half of the payroll taxes (the employer's) still going to the government to cover current retirees. People who choose this new and optional arrangement would cease accruing benefits under the standard SS program but would be compensated for past contributions. There are other details too, but this should be enough to illustrate the basic idea for people who don't follow links. (And you should feel ashamed of yourselves. <g>)

What do I think about this proposal? Not good enough.

Social Security is a program of dubious constitutionality (which even the government admits) which is nothing more than an intergenerational wealth transfer. It is in no sense a savings or investment or insurance program. It is explicitly not an insurance program, contrary to propaganda, a fact established by the government's own lawyers when the matter came before the Supreme Court. It is not investment because (1) current revenues mostly go toward current payments and (2) whatever surplus exists is "invested" in non-marketable government bonds (which incidentally reduce the apparent size of the budget deficit.) The government spends all the money it takes in from payroll taxes, but government spending is fundamentally unlike business spending because the government generates almost no sales revenue. When the government spends money it doesn't do so for the purpose of making a profit and providing a return for investors — it's consumptive spending, not productive spending.

The Cato proposal would be an improvement over the current situation but it's still a forced savings plan and therefore doesn't fix the information problem that individuals have more knowledge about their particular financial circumstances and are therefore better equipped to make savings decisions than the government is. It would allow individuals some flexibility over their investment options, which is good, but the basic problem remains.

I don't want Social Security to be saved. I want it to be dismantled. If I had the choice, I would eagerly opt out of the system completely and abandon all the money I've paid into it so far. I don't need or want the government's help to save for retirement. I have great contempt for the system and regard it as grossly immoral.

I'm very pessimistic about the future solvency of Social Security. I believe medical science will advance very quickly and it will soon become common for people to live to extremely old ages, such as 130, which under the existing system would entitle them to collect Social Security for half their lives! Defined-benefit programs of all forms will face significant stress due to increases in lifespan. That's why I prefer individual ownership of assets, so people with long lifespans have both the means and the incentive to manage their finances throughout their long lives. But it is wrong to force people into savings programs.

It's scandalous that this country treats people as if they're not responsible enough to take care of their own lives, but somehow responsible enough to vote to control the lives of others.

Tiny Island