Piketty and Social Security

Interesting post by Kevin Williamson.  I did not check the math.

The basis of Piketty’s book is that r>g, and this historical fact is the cause of income and wealth inequality, and is self perpetuating (where r is the return on capital, meaning investment in productive assets, and g is the growth rate of the overall economy).  If you can buy into his logic here, which I think is pretty good, it follows kind of obviously that it makes more sense for the government to require everyone to invest in productive assets rather than handing social security payments over to the government (which can be expected to grow no faster than the overall economy, right?).  So Williamson does the math, and comes up with this:

Professor Piketty estimates that the return on capital over the coming decades will be between 4 percent and 5 percent; historical returns to equity investments run about 7 percent, but let’s be conservative and split Professor Piketty’s estimate, assuming a 4.5 percent return. And in keeping with the first theorem of English-major math, let’s replace that 12.4 percent Social Security tax with a poet-friendly 10 percent. Investing 10 percent of your income at a 4.5 percent return over the course of a 45-year working life produces a higher income in retirement than you enjoyed in your working life, regardless of your income level.

Of course, the problem with this is the sheer impracticality of how this would work in practice.  Williamson notes these issues:

There are all sorts of caveats to be issued here, of course: The transition to an asset-based system rather than a cash-flow-based system would be hairy indeed, and such a system would create some opportunities for cupidity, stupidity, fecklessness, recklessness, and more, although it should be borne in mind that — the three most important words in political economy being “Compared with what?” — those opportunities for trouble would constitute a substantial improvement on our current Social Security program, the failure of which is an inevitability.

And I would add, the biggest problem of all is that Congress would be the ones setting up the program.  Which means they would build a system at the direction of those with the most influence, which right now appears to be big banks and large corporations.  So the system might be set up with individual accounts that allow trading (ideal, you say? think of the churning opportunity).  Or maybe you would be forced to buy a certain percentage US Treasuries.   Or even a specified or limited portfolio, which would cause massive distortion in the markets.  Or some kind of pay-to-play advisor scheme, where you can have an advisor, but that person or firm must meet some federal requirement or acquire a license.  So many awful possibilities.

Although I agree that the actual investment of forced savings would be hugely preferable to today’s system, and not just due to returns to the savers, I have very little faith that Congress would set it up in a way that would leave those returns unmolested.

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