From Privatization To Socialism

So I'm reading Delong on Feldstein on social security and I'm thinking once again that the logic of the economist's case for social security privatization actually provides better support for the contention that the state ought to simply take on (partial) ownership of the means of production. What's good about a privatization plan that avoids transition costs is that the relatively high returns you can get in the stock market allow us to magically conjure up enough expected value to cover the transaction costs. But there are two downsides -- one is that if the expected value of private accounts equals the expected value of social security benefits under current law then some accounts will overperform the market and other accounts will underperform it. This is contrary to the underlying logic of social security as a social insurance scheme which is supposed to diffuse risk among the population. Or, to put it more bluntly, we instituted social security because we didn't like to see old people starving, but under private accounts at least some people will make foolish or unlucky investments and wind up starving, which is precisely what we were trying to avoid. The other thing, as Brad says, is that at certain points in time the market as a whole will be underperforming vis-à-vis the long term trend. Unfortunately, these times will be the exact same time that large numbers of seniors need to rely on social security benefits to avoid the aforementioned starvation problem.

In short, as is always the case with the stock market, we're conjuring up additional expected value by taking on more risk.

Fortunately, since social security is a government program (and even a system of government-mandated savings accounts would still be a government program) we have at our disposal the ultimate risk manager -- the government of the United States of America. If, instead of diverting money out of the social security trust fund (i.e., if instead of loaning the money to the "on-budget" portion of the government) and into millions of little private accounts, we simply diverted into one giant government account owning the broadest possible index of American stocks, then we could gin up the exact same overall amount of additional expected value (markets being rational and all, a massive government purchase of an index fund should generate the precise same outcome as millions of people trying to play the market) but maintain the same benefit structure so that stupid and/or unlucky seniors don't wind up starving. At the same time, the government has the capacity to borrow money at a much cheaper rate than would any private senior citizen in order to ride out whatever cyclical rough patches might emerge, secure in the knowledge that over the long term the market will be up.