Privatization: Becker v. Snow & A Dead Parrot

Jck the Hack Snow appeared on ABC’s This Week and made it clear that the Bush White House is interested in the carve-out version of privatization and not the add-on version of personal accounts. He claimed that this plan, which takes away some of your retirement funds, can make you better off because of the magic of compounding. Never mind the fact that the bonds in the Trust Fund earn interest. And in case, the Cato crowd wishes to claim that returns on private accounts are higher than returns in government accounts, let’s check out what conservative economist Gary Becker recently wrote:

Contrary to the Bush position, however, I do not believe that the main advantage of a private-account system is that individuals can get a higher return on their old-age savings by investing in stocks. There are no freebies from such investments since the higher return on stocks is related to their greater risk and other trade-offs between stocks and different assets.. Retirees for whom Social Security income is not a major part of their retired assets will invest much of their own savings in stocks. Studies indicate that this is precisely what they generally do with their IRAs in order to have a balanced portfolio between stocks and the implicit Social Security assets guaranteed them. Since lower-income persons accumulate few assets other than their Social Security assets, a fully funded system through personal savings would enable them to have more balanced portfolios between stocks and bonds.

Becker’s position is in line with Robert Barro’s: no free lunch so their call for privatization is a political one – not an economic one. A Dead Parrot tries to argue that privatization would raise national savings:

Overall, conservatives hope that national savings will increase in the long-run, however, because (a) this will encourage everyone to become an investor and (b) this is the first step toward moving from a mostly pay-as-you-go system to a fully funded system. If there is one thing that economists seem to agree on, it is that a fully-funded system likely helps fuel growth.

In their shooting down of the Parrot’s argument (a), Brad DeLong and Robert Waldman argue the offsetting income effect:

Now conservatives like to go on and on about how offering a better return on savings will cause increased savings due to the substitution effect. They have noticed that no one has noticed that there is also an income effect so the sign of the total effect is ambiguous.

In other words – if there is this free lunch benefit, households might consume more. Becker and Barro, however, argue there is no such free lunch benefit. Alas, Becker does spend a lot of time with the pay as you go argument as does the Dead Parrot. Has the Parrot been asleep since 1982? What was that Social Security reform in 1983, which Sen. Kennedy praised on This Week, supposed to do if not prefund the retirement benefits of the Baby Boom generation? Maybe the argument is that Reagan and Bush has squandered it to subsidize the massive General Fund deficits, but I wish conservatives would just say that. Besides, why not fix the General Fund by reversing the income tax cuts rather than stealing from our retirement accounts?