Private Accounts

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Kevin Drum bolsters his “reasonable liberal” credentials by explaining that he’d be fine with the idea of “add-on” Social Security private accounts, he just objects to the kind of magical accounting that tends to be associated with privatization proposals.

This is not an idea I’m enthusiastic about. A large body of research indicates that individuals are not well-equipped to engage in speculative investments, and experience teaches that financial managers are moderately well-equipped to duping people into paying management fees. What I would be interested in is copying the classical implementation of Singapore’s Central Provident Fund, which I often hear cited as an inspiration for privatization proposals but is really quite different. The way the CPF traditionally worked was that everyone had to make mandatory “contributions” to their “account” but the actual investment of the money was all handled centrally by the Central Provident Fund Board. More recently, I believe the CPFB has acted to allow private financial managers to try to persuade people to take their CPF money and give it over to them, which strikes me as unwise.

At any rate, privatization proponents seem to me to often confuse between arguing the general merits of prefunding of a retirement scheme (large) and arguing the merits of having your prefunded retirement scheme take the form of private accounts (nonexistent). On top of all that, the transition issues can’t simply be waived away. The best way to capture many of the benefits of the Singaporean system would be to go back in time to the early 1980s and start investing the Social Security Trust Fund in assets other than federal debt. But since that’s not what we did back then, turning the SSTF into something more CPF-like today would create a huge problem for the rest of the federal budget. This exact same difficulty would occur, however, under any plan to replace the current system with private accounts.