Miron
by Jeffrey A. Miron*
July 16, 2001
n recent years, criticism of Social Security has escalated enormously. In part this reflects Social
Security's impending insolvency; under current law, the Social Security Trust Fund is likely to
be exhausted by mid-century. But more fundamentally, economists and others have highlighted
a range of negative effects due to Social Security. These include the distortion of labor markets
caused by high rates of taxation and the arbitrary redistributions both within and across age
cohorts that inevitably arise in a Pay-As-You-Go system. On top of all this, Social Security is a
complicated and costly system to administer.
In response to these problems, many critics have advocated the privatization of Social Security.
This means that participants would have portions of their income withheld and deposited in
standard saving vehicles, such as stock or bond mutual funds, rather than having these monies
paid as taxes into the Social Security Trust Fund. At the same time, the promises of Social
Security benefits in retirement would be eliminated; instead, retirees would consume out of the
savings accumulated in their private accounts.
In other words, privatization means both the elimination of Social Security and the creation of a
mandatory savings program. Thus, privatization as that term is currently being used does not
end government intervention in savings and retirement decisions; it instead accepts a
government role in dictating minimum savings rates, setting an age at which such savings can be
withdrawn to fund retirement, and limiting savings choices to particular savings vehicles.
Yet the justifications for government intervention in savings and retirement decisions are not
compelling. To the extent there is a role for government, mandatory savings programs (not to
mention Social Security) are far more interventionist than economic analysis suggests is
necessary. The arguments for a government role suggest instead that the maximum desirable
intervention is narrowly targeted, low-income insurance.
The problem with the paternalism approach is that it can be applied in a broad range of contexts.
In the name of protecting people from themselves, governments might ban certain books, outlaw
foods with saturated fat, mandate exercise and sleeping schedules, or prohibit "bad" television
and myriad other activities. It is possible that some persons would benefit from certain
paternalistic policies, but the potential for benevolent paternalism to evolve into totalitarian
government is obvious. Even if one puts aside such concerns, paternalistic policies typically
penalize responsible persons in the name of helping the myopic.
An alternative argument is that myopic behavior in fact imposes externalities if society cannot
restrain itself from bailing out those whose myopic behavior leaves them in dire straits. The
magnitude of this effect is usually overstated. In the absence of government policies to aid the
profligate, there would be private mechanisms to aid many of these persons. For example,
charities and relatives helped many such persons in the era before Social Security, just as they
now help those in countries without government safety nets.
Most importantly, myopia does not justify creating a mandatory savings program. The goal of
helping the myopic can be accomplished with a low-income insurance program. Such
programs use funds from general revenues to provide a minimal income to those beyond a
certain age. By so doing, these programs both protect the profligate against the effects of their
myopia and insure that everyone contributes to helping such persons.
A second possible justification for government intervention in savings and retirement decisions
is that low-income persons cannot save enough for their retirement because their income during
working years must be spent entirely on necessities. There are certainly some persons in this
category, but again low-income insurance is a far better targeted response than a mandatory
savings program. Indeed, for persons who cannot easily save for retirement, mandatory savings
programs are a particular burden since they reduce disposable income during working years.
The third standard justification for government intervention in savings and retirement decisions
is that, even in the absence of myopic or low-income households, some people experience bad
luck and see their wealth fall drastically near retirement. Since these risks are significant at the
individual level but far smaller at the aggregate level, society can reduce these risks by sharing
them across individuals. Again, private mechanisms can mitigate this problem: by saving
intelligently, purchasing life, medical, and accident insurance, and relying on relatives or
charities, most persons can protect themselves against the worst-case scenarios. But even if this
is not the case, policy can address this problem via low-income insurance; nothing as expansive
as a mandatory savings program is required.
persons who expect to work longer than average rather than retiring early,
those who know their kids will care for them in retirement,
This problem can be ameliorated by making the mandated savings rate sufficiently low, but if a
mandatory savings program rarely binds, it makes no sense in the first place.
Even if the mandated savings rates are approximately right for most persons, mandatory savings
programs also dictate that savings rates are the same every year. This requirement is likely to
harm a broad range of households. Consider a family attempting to accumulate the downpayment on a house. During the early years of working life, the sensible strategy is to use liquid
assets that can be readily converted to cash at the time of house purchase. Yet if these earners are
forced to save via the mandatory savings accounts, those funds are not available for a downpayment. Alternatively, consider an aspiring entrepreneur who wishes to invest all her savings in
a small business. This person is constrained from using the funds in the mandated savings
accounts even when the small business is a better investment. And anyone who suffers an
accident or medical emergency might want access to some of his mandated savings.
A different distortion caused by mandatory savings programs is that they limit the set of savings
vehicles to standard, relatively safe instruments such as broad-based mutual funds. Such
vehicles are sensible choices for many persons, but for others it is appropriate to take additional
risks, such as investing in one's own business.
And there many further problems with mandatory savings programs. Accumulations in the
"private" accounts are tempting targets for taxation. The implied promise of retirement income
gives government an additional excuse to regulate "risk" in financial markets. Mandatory
savings programs promote an economy-wide retirement age, despite the fact that length of
productive life varies widely. Plus, such programs have substantial administrative costs.
Beyond these tangible negatives of mandatory savings programs, there is a crucial intangible
effect of establishing a government program that says, in effect, every household in the country
is incapable of making sensible savings and retirement decisions. By so doing, society
strengthens the presumption that people should rely on government to make decisions for them,
rather than taking responsibility for their own well-being.
unpleasant. It is true that some persons will take advantage of a low-income insurance program,
even if the level of guaranteed income is low; that is indeed a cost of such a program. But at
least this approach is the minimal intervention necessary to accomplish the stated objective of
helping the myopic, the poor, or the truly unlucky.
* Jeffrey A. Miron is Professor of Economics, Boston University, and President, Bastiat Institute. His
email address is bastiat@mediaone.net.