Saving Social Security

It’s interesting that when people talk about the ‘crisis' confronting Social Security, they talk about the fact that people are living longer, not that people are dying, said Kevin M. Murphy, George J. Stigler Professor of Economics. Citing demographics as a primary driver in the issues swirling around the debate on Social Security privatization, Murphy addressed students at an event sponsored by the Milton Friedman Group (MFG) on November 19.

Murphy said the growing chorus advocating full or partial privatization of Social Security usually make the case that privatization would potentially provide a greater rate of return, especially for younger workers. That argument is completely wrong, he said. Social Security is a pay-as-you-go system in which taxes collected from workers are immediately paid out as benefits to retirees; they are not saved or invested. Thus, they do not earn any returnhigh or low.

Murphy made the case that if privatization would occur, a transition tax would be needed to support iteither a direct tax, like what currently exists, or an indirect tax levied by delivering a lower rate of return. Just changing from one to the other would not give younger people a net higher return, nor solve the coming crisis. People talk about this gap in rates of return as some sort of silver bullet. It’s not at allit doesn’t exist, he said.

 

Donna Eckert