INVESTING YOUR SOCIAL SECURITY "CONTRIBUTIONS." Deinonychus antirrhopus links to a proposal by recent Nobelist Edward Prescott for the creation of a savings fund rather than the current (mislabeled, in the Superintendent's view) trust fund.
Prescott favors augmenting Social Security with forced savings plan that would put the savings into something like the Federal Thrift Savings Plan. The plan would institute graduated payroll taxes with the money going into these private accounts.

The benefits is that since the workers taxes really aren't taxes, but forced savings the negative impact of higher taxes is minimized or even eliminated. In fact, labor force participation might increase and savings should increase as well, according to Prescott.

My only issue, is that a forced savings plan might be offset savings by people who are currently saving via 401ks. However, those workers who do not have access to such retirement accounts would now be saving. So on the whole I'd say that savings would probably increase.

Also, the increased savings would mean higher investment and capital, which could very well translate into higher wages. Also, more productive capital will mean a more productive economy, which is also good for the current Social Security system.

Nathan Newman has given some thought to the management of such a fund as well, and proposes that it be managed directly by the government. Why?(these are the points, go to Mr Newman's site for the details.)

(1) Greater efficiency: Administering personal accounts that function like 401(k)s for 150 million social security beneficiars would be an administrative nightmare.

(2) Risks are distributed through collective investments: The point of any insurance system is to distribute risk.

At the heart of these proposals are two basic policy ideas: horizontal equity and natural monopoly. The horizontal equity argument cuts two ways. All participants in a single public program will be equally exposed to risks in a single National Retirement Mutual Fund would do; as participants might differ in their risk preferences, however, all participants will be exposed to the risk preferences of the fund managers, who might, or might not (but I'm getting ahead of my story) reflect the preferences of the median voter (or will it be the marginal voter, or the most vociferous voter?) The natural monopoly argument suggests that the cost of administering and partitioning a larger pool of money imposes a smaller burden on each account holder than would be true of smaller pools of money with fewer account holders and more reallocations by each account holder. But is that true of mutual funds? An investor has a choice among mutual funds that have similar investment objectives if different managers. Mightn't it be simpler to obtain a break for the small investors that won't come up with a big grubstake out of 4% of a minimum wage part time job by holding a Demsetz auction for the right to manage one of four to ten approved mutual funds?

There is a third point Mr Newman offers in favor of a government-managed trust fund.
(3) Government investments could be directed to investments that strengthen wage growth: The idea that the government might actually use all this capital in the social security trust fund in a pro-active manner gives rightwing economists hives, but it makes a lot of sense.
One does not have to invoke the specter of socialism to raise questions about this proposal.
While social security investments would not give the government control of existing industrial production, the government could strategically direct those investments to companies and industries that strengthen job growth and the wage base of the american economy, which in turn would expand the payroll taxes being paid into the social security system. Such Economically Targetted Investments (ETIs) are used by state and city pensions funds to strengthen their local economies on the same principle. See here, here and here for examples of such programs in pension funds around the country.
That sounds a lot like industrial policy, or perhaps like the so-called socially responsible investment funds that act on the aesthetics, or perhaps the prejudices, of some investors. We are, however, talking about investment managers that serve at the pleasure of the President, or who might be subject to vetting by the Senate (much as Federal Trade Commissioners?) The administrative costs that are saved in pooling all the moneys might be dissipated in rent-seeking over who shall be appointed as commissioners and what investments are in the national interest in addition to offering lower returns than mutual funds less constrained. The suggestion is interesting, but leaves open future criticism of the national investment monopoly for robbing poorer workers of returns they could have under a competition for the right to invest their forced savings in several funds.

It might be wise for Mr Newman to rethink income accounting. Consider this.

Privatizers want to talk about "returns on investment" from social security, while ignoring the fact that social insurance systems are not like regular investments. Individuals start out with a fixed amount of capital and the only returns that matter are from annual investment returns. But governments investing their capital have two sources of economic returns from those investments -- conventional returns from equity or bond markets PLUS the taxes derived from the domestic economic growth fueled by those government investments.

Given that the strength of the social security system is going to be heavily influenced by domestic growth rates over the next 75 years, to ignore the second part of that equation in developing an investment policy for social security would be completely irrational.

The concluding operation is correct: any public project that relies on taxing gains from trade (that, kiddies, is what any consumption or income tax, including a payroll tax does, and a head tax relies indirectly on gains from trade) is only as effective as the ability of the economy to generate gains from trade. A tax is a wedge between productivity and return, and to suggest that there is somehow a free lunch to taxing returns, or to using tax revenue to support local but less productive activities, weakens some of the observations that precede it.

Alex at Marginal Revolution has some clarifying thoughts on the distinction between investments and insurance that are worth your perusal.

RUNNING EXTRA: Nathan Newman has responses to this post, as well as responses to View from a Height and Deinonychus antirrhopus.

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