Social Security is not a retirement system. It is an intergenerational transfer program. Our 21st century economy is marked by a global economy and multiple zigs and zags in the typical career path. Today’s 401(k) funds, diverse mutual fund market, and the low cost of access to financial information is fundamentally different than even a generation ago. In 1937, Social Security collected a combined two percent of an employee’s income; today it collects more than 12 percent.
Until we move toward ownership of large personal accounts, “reform” of the current program requires one of two responses. Congress will raise taxes or reduce benefits. Neither is politically palatable. Over time, personal ownership would transform the program’s $12 trillion unfunded liability into individually owned assets. This would be the single largest debt reduction in history.
Armey is onto something here, although perhaps not exactly what he thinks he’s onto. The two best national retirement systems of any size (that is, the only two really good ones in countries that have more than four or five million inhabitants) are those of Australia and the Netherlands. Both countries start with government old-age payouts that make no pretense of being any kind of retirement account; they’re smaller as a percentage of GDP than Social Security, funded out of regular income tax revenue, and highly progressive (if you’re poor, you get a significant payout; if you’re not, you don’t).
On top of those come much larger retirement savings plans. In the Netherlands they’re structured as pension funds and in Australia as personal accounts. But in both cases they’re invested in stocks and bonds and other such things (private equity, timber, toll roads, whatever), managed by professionals, and portable from job to job.
So the idea of a Social Security that gets smaller and more progressive over time, coupled with some sort of large, government-mandated private retirement accounts (or “opt-out” private accounts, where money is deducted from your paycheck but you can get it back at tax time if you’re willing to jump through a few hoops) isn’t crazy or regressive at all. The concern of lots of Social Security supporters in the U.S. is that if you make the program any more progressive than it is now it will begin to be perceived as welfare and shortchanged and neglected. Which strikes me as a valid worry but not necessarily a deal killer.
There’s also the issue of how the money in the retirement accounts would be managed. Armey appears to be okay with the limits imposed by the federal Thrift Savings Plan. The TSP is essentially a really well-thought-out 401(k), so it’s not the worst thing in the world to emulate. But there’s pretty strong evidence that professional pension fund managers get higher returns over time than individuals managing their own 401(k)s. So we probably ought to be discussing if there’s any way to get the people who run TIAA-CREF and CalPERS and GM’s pension fund involved. Or maybe we should just put David Swensen in charge of the whole thing and forget about it. What we absolutely shouldn’t do is put the for-profit mutual fund industry in charge. Not quite sure how we’ll manage that.
(Much of the reasoning above is borrowed from pensions guru Keith Ambachtsheer. Don’t blame him for any mistakes, though.)