16 December 2004
Paying for Social Security
The privatization of Social Security may be thought of as a way to discipline the federal government by removing a large portion of payroll tax revenues from its budget. The resistance by Democrats to this move is grounded on their faith in the reliability of the government as a provider of old age pensions. However, financial markets may not allow the government to deliver on that promise if deficit spending and trade imbalances continue to distort the U.S. economy and devalue the dollar.
Offering wage earners and entrepreneurs the option to devote their Social Security payments to privately managed funds can be a practical alternative for many of them only if those annuities are protected against negligence or fraud. In some measure, this will require precisely the level of regulation that free marketers deplore. It displays a frustration with the spend thriftiness of elected officials that conservative politicians have been reluctant to admit openly.
If a sea-change has indeed happened in American politics, ending the inevitability of liberalism, then Democrats may have to face the fact that they may not soon regain control of the Congress or the Administration. In that case, it may be wiser to entrust social security revenues to the management of private advisors and to dispense with reliance on the government to act responsibly. Democrats must focus their attention not on defeating privatization; they need to insist on guiding that privatization with institutionalized integrity.
There will be a large cost to this transition – some estimate a need for the Treasury to borrow $2 trillion in order to finance it. That will certainly bring a need for fiscal discipline in order to make capital costs affordable. In the end, it seems to be a back-door way to make politicians act the way individuals are expected to – living within their means.
The privatization of Social Security may be thought of as a way to discipline the federal government by removing a large portion of payroll tax revenues from its budget. The resistance by Democrats to this move is grounded on their faith in the reliability of the government as a provider of old age pensions. However, financial markets may not allow the government to deliver on that promise if deficit spending and trade imbalances continue to distort the U.S. economy and devalue the dollar.
Offering wage earners and entrepreneurs the option to devote their Social Security payments to privately managed funds can be a practical alternative for many of them only if those annuities are protected against negligence or fraud. In some measure, this will require precisely the level of regulation that free marketers deplore. It displays a frustration with the spend thriftiness of elected officials that conservative politicians have been reluctant to admit openly.
If a sea-change has indeed happened in American politics, ending the inevitability of liberalism, then Democrats may have to face the fact that they may not soon regain control of the Congress or the Administration. In that case, it may be wiser to entrust social security revenues to the management of private advisors and to dispense with reliance on the government to act responsibly. Democrats must focus their attention not on defeating privatization; they need to insist on guiding that privatization with institutionalized integrity.
There will be a large cost to this transition – some estimate a need for the Treasury to borrow $2 trillion in order to finance it. That will certainly bring a need for fiscal discipline in order to make capital costs affordable. In the end, it seems to be a back-door way to make politicians act the way individuals are expected to – living within their means.
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