Progressivity in Social Security Reform

In a recent post (and an article at TechCentralStation), Arnold Kling wonders whether the Left and the Right should switch their positions on Social Security reform financed by debt. Quoting from the article:

However, there is one important difference between keeping Social Security as it is and switching to privatization. Under the current system, Social Security's liabilities will continue to be funded by payroll taxes. However, under privatization, the transitional debt would be repaid using -- guess what? General revenues! In other words, privatization is a vehicle for changing Social Security's medium-term funding mechanism from payroll taxes to income taxes. It is exactly what the Left presumably wants, and what the Right presumably opposes.

Following up in his post, he notes:

The Left complains about "diverting" payroll taxes into private accounts. But that means that other taxes, mostly income taxes, would be needed to cover current benefits. From the standpoint of the supporters of progressive taxation, that would seem to be an improvement. I honestly do not believe that either side has really thought this through.

Actually, this need not be the case. For example, suppose the reform turned out to be exactly Commission Model 2 with all near-term cash flow deficits covered by borrowing. As I noted in an earlier post, all of the debt issued to cover these deficits is repaid out of reduced future expenditures of the pay-as-you-go system. (As interest accrues on the debt, more debt is issued to cover that expense, and all of it is eventually paid back.) At no point in this decades-long transition do income taxes have to rise to retire this debt.



So I don't think that people on the Left would believe that any reform on the horizon necessarily would have this "salutary" benefit that Arnold is ascribing to it.



In his question for discussion, Arnold asks:

Has there been an analysis undertaken of the distributional effects of a shift toward privatization?

Yes. A very good collection of analyses are presented in The Distributional Aspects of Investment Based Social Security Reform, edited by Martin Feldstein and Jeffrey Liebman. The editors served in the Reagan and Clinton administrations, respectively, and the contributors reflect a wide range of opinions.



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