Thursday, 03 February, 2005

Why Social Security reform won't work

In Chapter 2 of The 9/11 Commission Report, when discussing the social and economic model that helped popularize Usama bin Laden's particular brand of Islamic fundamentalism, the authors write:

In the 1970s and early 1980s, an unprecedented flood of wealth led the then largely unmodernized oil states to attempt to shortcut decades of development.  They funded huge infrastructure projects, vastly expanded education, and created subsidized social welfare programs.  These programs established a wide-spread feeling of entitlement without a corresponding sense of social obligations.  By the late 1980s, diminishing oil revenues, the economic drain from many unprofitable development projects, and population growth made these entitlement programs unsustainable.  The resulting cutbacks created enormous resentment among recipients who had come to see government largesse as their right.

So what does this have to do with Social Security?  The tendency to become dependent on a handout if it's given often enough is universal.  We now have three generations who have been (or are being) brought up to believe that it's government's responsibility to provide for them in their old age.  Social Security, which began as a "safety net," has become every American's "right."  Never mind that the system is poorly managed, has a horrible return on investment, and cannot be sustained without either raising the tax rate (very unpopular and only postpones the problem) or increasing the retirement age (also very unpopular).

The idea of privately managed retirement funds to replace Social Security is interesting and even attractive in some ways.  If people actually invested 4% of their gross income responsibly, they would have a nice cushion for retirement after 40 or 50 years of work.  Properly controlled over the long term, that would solve the Social Security problem quite nicely.  However, the potential for abuse is high and we'll still have to mantain the old Social Security system for those people who don't want to invest on their own and would rather trust government to do it for them  (yes, I'm as surprised as you are that such people exist), or who invest foolishly or otherwise squander thier 4% and come looking for a handout later.

In other words, the President's proposal creates another bureaucracy within the Social Security Administration, reduces the amount of money going into a system that's already bleeding profusely, and ultimately wouldn't save us a thing.  Economists and policymakers might think it will work, but they're notoriously bad at taking human nature into account.

Of course, that's all just my opinion and I could be wrong.