Editore"s Note
Tilting at Windmills

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November 12, 2004
By: Kevin Drum

TWO MORE QUESTIONS ABOUT PRIVATE ACCOUNTS....A few days ago I posed a question about why private accounts are any better than payroll taxes as a way of funding Social Security. Assuming for the moment that the actual amount of money retirees get is the same in both cases, who cares where the money comes from?

Brad DeLong provides two answers, but for now I'm only interested in answer #1:

First, to the extent that any of these Clever Schemes are adopted and actually work, we boost national savings. We thus arrive at 2050 with a bigger pie to slice and divide between workers and retirees. That's probably a good thing.

Megan McArdle makes the same argument today I think. Basically, she says, savings are good and government spending is bad. So let's force people to save.

However, I still have two questions:

  1. The reality under this administration is that private accounts will be funded by increasing the federal deficit. Can it really be the case that if the government increases the deficit and then invests that deficit in the stock market, it's a net long term positive for the economy? That strikes me as....unlikely.

  2. Putting question #1 aside, isn't it still the case that private accounts are strictly a temporary economic boost? In 30 or 40 years time, after all, retirees will start drawing down their private accounts. At that point, the amount of money being drawn out by retirees will be about the same as the amount being invested by young people, and the net effect on national savings is zero.

    So all this extra invesment has a positive effect, but only for a few decades or so. And even during that period, this additional investment has to come from either (a) increasing taxes or (b) increasing the federal deficit, both of which have a negative effect. If you add these two together, are private accounts still a net positive?

There are all sorts of reasons to think private accounts are a bad idea, but there's no way to balance them against the economic benefits unless we know if there really are any economic benefits in the first place.

So I'm left still wondering: are there?

Kevin Drum 9:22 PM Permalink | Trackbacks

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