Should the United States Privatize Social Security?

By Henry J. Aaron; John B. Shoven et al. | Go to book overview
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Several proposals call for distributing the current budget surplus to Social Security accounts. This proposal only adds positively to the economy if the government would otherwise have spent the money and thus it would not have been saved.


Kotlikoff, Laurence J., Kent A. Smetters, and Jan Walliser. 1998. "Social Security: Privatization and Progressivity." NBER working paper no. 6428.

Samuelson, Paul. 1958. "An Exact Consumption -- Loan Model of Interest with or without the Social Contrivance of Money." Journal of Political Economy 66: 467-482.


Although Shoven and Aaron both profess the same goals for Social Security, Aaron's proposal gets us there and Shoven's does not. The question is where -- with such laudable objectives -- does Shoven go wrong. In my view, he and others who propose cutting back on Social Security to make room for privatized accounts make five errors. First, they fail to consider the most serious alternative to privatized accounts -- namely, a partially funded defined-benefit plan. Second, they dismiss in far too cavalier a fashion the possibility of equity investment through the Trust Funds. Third, they have a completely unrealistic notion about the predictability of benefits under a defined-contribution plan. Fourth, they make a priority of increasing efficiency but do not properly evaluate the outcome of their proposals. Fifth, they believe that changing a benefit structure from a defined- benefit plan to a defined-contribution plan can make a tax not a tax.


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