Issues in Privatizing Social Security: Report of an Expert Panel of the National Academy of Social Insurance.

• Author: Ghilarducci, Teresa
• Position: Review

Edited by Peter A. Diamond.

Cambridge, MA: MIT Press, 1999. Pp. xvii, 168. $25.00.

This report shows that economists can write clearly about complicated macroeconomic and highly charged political issues. MIT professor Peter Diamond summarizes the findings and deliberations of a 20-member, high-powered panel reviewing several questions pertinent to how Social Security should be privatized--transformed into private individual accounts or advanced funding through a government authority.

Bottom line? The panel recommends permanently advance funding Social Security, investing Social Security assets in the stock market, and moving fast. If nothing were done, the Social Security payroll tax would increase from the current 12.4% tax on payroll (shared equally by employers and employees) to 17% in 2030 and to 19% by 2075. However, if in 1999 the tax rate is hiked by 2.2 percentage points, to 14.6%, the system is solvent for 75 years in its current pay-as-you-go structure. One-sixth of current revenue accumulates in the $1 trillion trust fund; however, the fund is designed to be spent down after the baby boomers retire. The panel argues that a permanent trust fund would put the system on very different footing. Money accumulating now could stave off future tax increases, over and above the 14.6%, and be able to increase benefits with lower tax hikes in the future.

The book is jam-packed with macroeconomic possibilities--such as how advance funding a permanent trust fund to about $1 billion a year with stocks and corporate bonds affects supply and demand and thus relative asset prices--without resorting to equations or mathematical flare. Another discussion is the refreshing and balanced examination of how advance funding the Social Security system, either through individual accounts or through a trust fund, may or may not increase savings in such a way as to increase investment.

The panel carefully parses the events that could lead to how advance funding Social Security could have the opposite effect and decrease savings. Savings swaps could occur. Corporations may pull back on their advance funded pensions and individuals might reduce their other forms of savings as Social Security taxes increase. In addition, as the trust fund accumulates assets, the government might be tempted to use the trust fund to hide deficit spending and thus neutralize the boost in accumulation.

The panel rightly observed that payroll tax hikes will increase low and middle...