Should we opt for forced savings?

by on November 13, 2004 at 2:12 pm in Economics | Permalink

Arnold Kling, Brad DeLong, Jane Galt, Matthew Yglesias, Ed Prescott all flirt with various versions of the forced saving idea, typically in the context of social security reform.  Should government, even as a second best solution, require individuals to put aside a certain percentage of their funds for retirement?  This is not "pay as you go," we are talking about individual lockboxes.

The idea tempts me but I must decline.

First, how much can our government force people to save in the first place?  You can make them lock up funds in an account, but they can respond by borrowing more on their credit cards, taking out a bigger mortgage, and in general investing less in their future.  The net increase in savings will be much less than the mandated increase.  And this will make it much harder to avoid the welfare aspect of social security.

When do the savers receive true property rights over the funds?  Surely not at 65.  They could then spend it all and apply for the dole.  We are back to letting people starve or constructing a secondary safety net; the latter is almost certain to happen, although that was precisely what the forced saving scheme was trying to avoid.  Alternatively, the government could regulate how much a person can spend from the lockbox each year (must it limit your borrowing too?).  Imagine being on the verge of death and petitioning the government to spend down your account to meet your medical bills or make a large donation.  The complications are not encouraging.

Let’s put aside the parallels with IRAs and the like.  Those plans work as they do because we already have a safety net in place for the elderly.  And note that Chile (and many other countries), which has "privatized" its social security plan, maintains a secondary safety net as well.

Private accounts meet further problems if people live for a long time.  What about the woman who survives to 105?  It is impractical to force everyone to save enough to last until that age.  So either the 105 year olds starve or we are back to the secondary safety net.  Perhaps you are a libertarian who thinks none of these people will starve; still I predict that the political pressures for public assistance will be overwhelming.  We will end up with both forced savings and a welfare system.   

Ed Prescott suggests that private accounts would lower marginal tax rates on labor by lowering the current payroll tax.  But while the payroll tax is lower, the newly created "forced savings tax" is higher.  Fewer toys, less hard work.  The net tax distortion likely falls to the extent that the private accounts do not occasion any redistribution of wealth (impatient or not, you keep what you put in, instead of losing it altogether).  But then Prescott’s real point becomes transparent.  A social security system with no transfer aspect involves a lower resource burden.  This is true, but hardly news and hardly a strong argument against welfare per se.  Put the transfers back in, and there is no guarantee that the real resource burden falls.

Yes there are some good arguments for forced savings, as Brad DeLong has pointed out.  But they are the least libertarian arguments available, namely that we should have forced savings, as a means of instituting government allocation of capital, and a large safety net.  The most robust libertarian argument is simply the view that we should not coercively transfer wealth to the elderly poor.  And this I cannot imagine sticking as policy.  I stand where I started, namely that social security should evolve into a welfare system for the elderly, but without the forced savings component.

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