Arnold Kling opens Why the Left Should Favor Social Security Privatization (and the Right Should Oppose It) with an amusing allusion:
The debate over Social Security privatization is starting to remind me of my favorite Winnie-the-Pooh story, In Which Piglet Meets a Heffalump. At one point in the story, Pooh and Piglet are discussing the best bait to use in a trap for a Heffalump (author A. A. Milne’s deliberate mispronunciation of elephant). Pooh, who likes honey, starts arguing for honey as bait. Meanwhile Piglet, who likes acorns, starts arguing for acorns. Suddenly, each of them realizes that he is arguing against his own interest: if acorns are chosen for the trap, then Piglet will have to supply them; whereas if honey is chosen for the trap, then Pooh will have to supply it. So the argument ends, with Piglet giving in first.I think something similar would happen if the Left and the Right were to think through the consequences of Social Security privatization. Krugman and others on the Left would suddenly realize that they are in favor of it, and conservatives might decide that they should be against it.
The Left is against the regressive payroll tax that is currently used to fund Social Security. The Right, of course, doesn’t want to see the transition costs of privatization (the interest on all those bonds) paid out of general revenues.
At any rate, Social Security’s role has changed since the 1930s:
Today, we refer to Social Security as an “entitlement.” In the 1930′s, however, that was not the case. It was thought of as social insurance. The difference is significant.In the 1930′s, relatively few people lived significantly past the retirement age of 65. In those days, it would have been foolhardy to save enough to last until you were 80. But if everyone contributed to a collective pool, then we could insure that the few who lived long past retirement would not be destitute.
Since the 1930′s, longevity has increased by more than a decade. However, the Social Security retirement age has been raised only a few years. As a result, Social Security no longer represents insurance for the unusually long-lived. It is now an “entitlement” for everyone.
Back when it was insurance, Social Security’s tax burden was low, and the benefits clearly flowed to people in need. Today, the tax burden is high, and benefits go mostly to people who had the means, if not the incentive, to save to provide for themselves.
I would like to see us bring back the Social Security of the 1930′s. Actually, the benefit increases that have been enacted since then strike me as humane. But I would like to bring back the principle of insurance, by raising the retirement age to account for the increase in longevity, and by indexing the retirement age to longevity going forward. Raising the retirement age would increase the portion of retirement funded by personal saving and reduce the portion that needs to be funded by taxes.