LIVING AT THE EXPENSE OF OTHERS. This Cox and Forkum cartoon perfectly summarizes current Social Security funding.

A few days ago, Andrew Sullivan posted a Mike Kinsley challenge to the idea that some Social Security taxes be invested directly in retirement accounts owned by taxpayers. There are more responses to the challenge than I am able to evaluate this afternoon, but herewith an abridged summary.

Arnold Kling took up the challenge the same day; certainly go there first. (He has subsequently posted an update on Econ Log.) In my view, Mr Kling did not draw sufficient distinctions between a transfer (see the above cartoon) in which a young person forgoes a consumption or investment opportunity today in order that a pensioner gets that consumption or investment opportunity instead, and an investment, in which that young person forgoes consumption today in order to enjoy greater consumption in the future (that's the technological superiority of future over current methods of production at work, otherwise known as capital formation and economic growth.) Max Speak notes the possibility of greater economic growth, but generally concurs with Mr Kinsley.

So if there is no change in economic growth, greater consumption for PRA holders comes at the expense of somebody else. But who? And how? Workers still get paid whatever they are going to be paid and spend for themselves and their children accordingly. Investment is the same. What's left is consumption of the elderly. If PRA holders' consumption is somehow augmented, some other elderly oxen get gored. If there is no less saving outside the PRAs, how would that be possible? As MK notes, returns to non-PRA savings would have to be reduced. Possible but not likely.

So MK's argument works better assuming no change in growth than in proving no change in growth. But I agree with him anyway.

(This post, from the same site, offers useful cautionary information for those who would pin their hopes on higher stock-market returns.) The assumption that changing a contingent liability (as the Social Security trust fund is drawn down, the Treasury must either cash bonds, issue new bonds, or borrow from the Fed) into a securitized liability is non-trivial. Mickey Kaus's memory for that part of the debate is pretty good.

I assume the answer to Kinsley's conundrum is that defenders of privatization think switching from a pay-as-you-go system (in which each generation pays for its elders' retirement) to a pay-for-yourself system (in which each generation sets aside money to pay for its own retirement) will boost the national savings rate and result in greater economic growth. Why might this happen? Because Social Security's current pay-as-you-go benefits--though merely transfer payments and not a return on actual savings--eliminate some of the need to save for retirement. Why set aside money for your golden years when the government will supply that money later by taxing younger workers and sending you checks? According to this argument, Social Security's faux-savings have depressed the national savings rate--an effect that will presumably be reversed if today's young workers are required to set aside cash in personal accounts to pay for their own benefits. This increased savings will mean increased investment which should translate into higher economic growth. I seem to recall studies by Martin Feldstein that purport to show such an effect.

(scroll down to 0126 entry. Econo Pundit clarifies the meaning of Professor Feldstein's abstract.)

My Stupid Dog (hat tip: Just One Minute, who has clearly devoted more than one minute to following the thread) explains why the nature of the liability matters to younger workers.

For example, Kinsley states that "Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these." This blanket assertion nicely sidesteps the question of whether individuals should be allowed to invest their money as they see fit. (After all, if government bureaucrats can invest my money better than I can, it would hardly be in my best interest to tell them no.) But many investors are not so certain that the money we deposit into Social Security will yield any return at all. Unless something happens to thin the ranks of baby boomers in the next few years, we're going to end up paying for a lot of Wal-Mart greeters and Florida condo colonies, none of which will have any bearing on what will happen to us when we retire.

Kinsley never addresses the main issue about our current system of "collectivized" Social Security -- namely, that most Americans under thirty-five strongly suspect that the system will collapse at about the time we're eligible to draw from it. We're not talking about a zero-percent rate of return: We're talking about no return whatsoever. If Kinsley worries that a privatized Social Security will give Americans a reduced rate of return in the short term, he never addresses the question of looming disaster under our present system in the long term.

Especially if the Treasury uses the nuclear option and borrows from the Fed (remember, kiddies, that's the gentleman's way of printing money.)

To provide a sampling of what else is out there: Steve Verdon has been busy. Just keep scrolling. Follow his links. There will be a quiz on it later. Todd at Volokh Conspiracy has some thoughts on the paternalism inherent in Social Security (best question: what prevents a pensioner from squandering his benefits?) Getting to the heart of the matter,

What matters is that they both worked hard for the requisite number of years—if you work, you get it and if you don't work you don't get it. Paternalism and protecting old people from destitution have nothing to do with this. Thus, the program is in fact designed to have some redistributionist, or perhaps more accurately stated, "equalizing" component to it.

Perhaps so, but doesn't that fall back on the traditional defense of Social Security as a bad pension investment bundled with a bad insurance policy, where, rhetoric about defined benefits to the contrary, the benefits paid either to pensioners or to survivors can be subject to abridgement by Congress at any time.

There's more of the old-time religion at Mark Kleiman's.

[Semi-technical point: As Max Sawicky and others have pointed out, the assumptions behind the Bush plan are inconsistent. The stock market can't continue to yield excess returns unless the economy grows quickly. But if the economy grows quickly, there's no fiscal crisis to deal with (unless, that is we continue to pursue reckless Bushite policies of cutting taxes for some while spending money like water). So either there's no real problem, or the private accounts aren't the solution.]

Although it is true that a growing economy provides additional gains from trade to tax in order to provide benefits, the intergenerational equity question remains: what gives the current crop of retirees (today: too young for Korea but too old to be called up for Vietnam) the right to deprive today's youngsters of the greater economic growth they might enjoy with a pension plan that provided for more investment. Ultimately the source of revenue for any pension plan is economic growth: why continue to stifle it by transferring consumption?

The real old-time religion, of course, is at The Nation.