Private Accounts

My mentor and hero, Larry Kudlow is concerned that Senator Chuck Grassley is discussing a Social Security reform plan that would restore solvency, “with, or without, private accounts.”

Respectfully, I would suggest to Mr. Grassley, and to the White House, that you cannot solve the pending financial storm in social security without personal savings accounts.

The reason? The private account option would finance benefits through stock and bond market returns. Without private accounts, benefits will be funded only by higher tax payments from the government.

Higher taxes will stall the economy and benefits will suffer accordingly. But the thrift savings account model of benefits throws off a 6.7% yearly inflation-adjusted return, far superior to the 1.8% post-inflation estimate of future social security.

The market is more reliable over the long run than the government. As more and more people choose market benefits from private accounts, fewer and fewer will demand government benefits. Over 50 years, government benefits will shrink from lack of demand. And so will the unfunded future liabilities of the system.

Call it the substitution effect. Not until the White House or Congress moves to private accounts will social security insolvency ever be solved.

As usual with economic issues, Mr. Kudlow is spot on. Politically it has been pointed out that freedom is more desirable than solvency. Private accounts are part and parcel of the ownership society and the President should not proceed without them.

Second Bush Administration Posted by jk at April 27, 2005 4:47 PM