PRIVATIZING SOCIAL SECURITY….Let’s face it: there are few topics more eye glazing than Social Security reform. Still, we bloggers have to play the hands we’re dealt, and George Bush apparently plans to make Social Security his signature issue in 2005. So Social Security it is.

Now, there are many things to say about Social Security privatization, but I want to focus on just one thing in this post, courtesy of Brad DeLong. Here’s what Brad has to say today:

I can imagine private account plans that I would think are worth risking. I’m impressed enough by the large size of the equity premium to think that there are some $1,000 bills left on the table here that the Social Security system might as well try to sweep up. Propose a private accounts plan by which Social Security beneficiaries’ private accounts are managed by the Treasury employee’s Thrift Savings Plan, and according to which accounts cannot be tapped or pledged before retirement, and you could get me to sign on.

Brad is talking about something that’s central to the idea of Social Security privatization. For some reason that no one really understands (though not for lack of trying), investment returns in the stock market are substantially higher than anyone thinks they rationally ought to be. So why not take advantage of it? Instead of just mindlessly transferring tax dollars from workers to retirees every year, why not invest money in the stock market, wait 40 years, and then withdraw huge sums to pay off retirees? There would be a messy transition period, of course, but once we got past it the miracle of compound interest would allow Social Security benefits to stay high even with a lower initial tax rate.

In the interest of full disclosure, I should confess at this point that I don’t actually believe in the equity premium over the long term, for the same reason that I don’t believe in perpetual motion machines. But I’m not an economist and Brad is. If he’s persuaded there might be something to this, then maybe there really is.

But here’s my question: even if the equity premium really exists, does it matter? When we discuss Social Security, we usually talk in terms of money-related numbers: tax rates, benefit levels, investment returns, etc. This is useful because numbers can be added and subtracted and fed into formulas that spit out other numbers. Very handy.

But in the end it’s not really about money. It’s about the fact that at any given point in time, there are a certain number of workers who produce stuff, and a certain amount of this stuff is turned over to the nonworking elderly. It’s true that the elderly use money to buy this stuff, but it doesn’t really matter where the money comes from. All that matters is that they’re hoovering up a certain percentage of the goods and services that workers create. As the number of elderly increases, this means that individual workers are forced to give up a larger and larger percentage of the stuff they create.

So suppose the whole thing works swimmingly. The government invests payroll taxes in the stock market and gets spectacular returns. This money is turned over to retirees. Result: tax rates stay low, but the elderly have as much money to spend as ever.

Which in turn means that workers are still forking over the same amount of goods and services as ever. So what’s the difference? Who cares whether the money comes from tax payments or from government mandated investment income? One way or another, workers are still being forced to give up the same percentage of the stuff they produce to retirees. And it’s stuff, not money, that ultimately matters.

And so, in the end, I don’t get it. Even if the whole privatization scheme works, who cares?

Can anyone explain this to me?

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