Tyler Cowen Changes James Glassman’s Mind on Social Security

Anytime you get your opponent, particularly one from AEI, to adopt your position after a debate, you ought to be declared the winner.  By that standard, Tyler Cowen at Marginal Revolution won this debate over Social Security handily. 

According to Glassman, "innovative economist Tyler Cowen of George Mason University" convinced him to drop privatization and focus solely on solvency.  Thus, Tyler convinced Glassman to disagree with Ben Bernanke and the White House who will insist that both solvency and privatization be part of any reform proposal.  Glassman believes solvency is the primary issue and private accounts will emerge naturally as benefits are reduced to achieve solvency.  Though I see the solvency issue as less pressing than the rhetoric surrounding reform implies, impressive win in the debate!

How to save Social Security reform, By James K. Glassman, Scripps Howard News Service: Since his re-election, President Bush has pushed hard for reform of Social Security, but he's made little headway on his proposal to let Americans divert part of their payroll taxes to personal investment accounts. … It's time for a new approach. ... Personal accounts won't prevent Social Security's impending bankruptcy. Personal accounts are great for other reasons: they will encourage savings, provide a more comfortable retirement, give people a nest egg they can own and increase personal responsibility. But the accounts won't solve the insolvency problem.  Bush should stop talking about these two issues — insolvency and personal accounts — as though they are connected. He needs to concentrate on one or the other to start. Which?

You probably think I'll say "personal accounts." I might have, but a few months ago I took the administration's position in a debate in Reason magazine with innovative economist Tyler Cowen of George Mason University. Sometimes, you learn something from such an encounter. I now see that Tyler was right … I believe the president should focus on putting Social Security on a sound footing. The best way to do that is to adjust benefits by increasing the retirement age, cutting back payments further for those who choose to retire early and indexing the growth in benefits to the consumer price index (that is, inflation) rather than to wages. … Should we give up on personal accounts?  Not at all. Those accounts will grow organically as Social Security withers. The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme. The system would become more of a safety net. Retirees would, very naturally, fill in the gap by saving more.  The vehicle for those savings would be personal stock and bond accounts — which already exist!  There are 401(k) plans, IRAs, Roth IRAs, Keoghs, 403(b) plans and other tax-advantaged accounts. ... My preference is a universal, unlimited IRA — income that you put into savings is not taxed at all. When you withdraw the money, at, say, age 60 or later, then you pay capital-gains taxes on it.  ... we take steps to make Social Security solvent, personal investment accounts will blossom naturally, without the sorts of government rules and restrictions that would be inevitable under the plan envisioned by Bush. Investment firms will get on board, AARP will be disarmed and reform will actually happen. And not a moment too soon.

I don’t share Glassman’s optimism that add-on type accounts will blossom naturally, a point addressed here. Government intervention of some sort appears necessary to overcome important market failures in the retirement saving  market.