Wednesday, February 27, 2008

Taking the personal out of personal accounts

Given my comments on Magin's argument that personal accounts essentially offer a free lunch, why do I favor personal accounts as part of Social Security? While arguments for accounts focus on the "personal" -- can I get a better rate of return? Can I leave the money to my kids? etc. -- the main argument of personal accounts has very little to do with what they can do for individuals and a lot to do with helping out the government.

Put it this way: if we wanted individuals to get higher returns (with higher risk) within Social Security, we could do that by investing the trust fund in stocks. Alternately, if we wanted individuals to be able to leave money behind we could simply increase the traditional program's survivor benefits. Most of the good things attributed to personal accounts could be accomplished through the current program.

But one thing can't: effectively saving excess contributions today to help pay benefits in the future. Magin comments on the argument first made by Smetters, then confirmed by Shoven and Nataraj and by Burtless and Bosworth, that Social Security surpluses since the 1980s have not translated into unified budget surpluses. Put another way, in a macro sense, the Social Security surplus has been "spent" rather than "saved," such that the government's net asset position and the country's capital stock are no larger than they would have been in the absence of the trust fund accumulation. So the trust fund's holdings, while assets to the program, have not been matched by an increase in the ability to repay those assets.

Given that, the choices appear to be between prefunding via accounts held outside the government or not prefunding at all. Given that Social Security reform is pretty much all about redistributing the net burdens inherited from prior generations -- the so-called "legacy debt" -- giving up on prefunding effectively means giving up on a significant part of what reform should be. Prefunding through accounts can be through a "carve out" or an "add on" -- each can be judged only in conjunction with other elements of the reform.

Now, from a given current individual's perspective, he probably doesn't care much much whether there's prefunding or not. He cares whether he's going to get what he's promised. And for current individuals, prefunding can mean a worse "deal" from Social Security rather than a better one.

But for policymakers attempting to balance the interests of both current and future generations, prefunding is an important tool and one that appears most likely to be effected through and accounts structure.

This isn't to say that accounts have no benefits for individuals. Transparency is greater, political risk is reduced, and so forth. But the major action regarding personal accounts really has very little to do with the person holding the account.

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