If U.S. Social Security was completely privatized immediately...?

Question

...would not the notorious -1% personal savings rate instantly flip around to a +14% savings rate -- making the U.S. excellent savers (with no actual change in behavior at all)?

Note: "Personal Savings" as computed by the US BEA is not affected by government borrowing, so the contra-obligation issue is not relevant (it refers to household personal savings). Besides, by "privatization" we usually mean converting to a 401-K style account with a menu of mutual funds.

Answer 1

Yes that would work but you'd have huge unemployment because many of the people who are now collecting social security would have to start seeking work. Privatization needs to be a slow gradual process where you reduce and delay benefits slowly while at the same time slowly move money from socialism to capitalism one percent at a time. Eventually the private part would dwarf the socialism part and you could drop that part all together. The rate would be less than 14 percent though. This would take about 20 years I'd guess without pulling out the calculator. That's long enough for people's savings to mean something.

If you count the increase in spending for intangible assets, you could say that we don't even have a reverse savings rate. Companies invest billions of dollars in anything that will return sufficiently more billions of dollars in a short enough time span. If they invest in property, plant, and equipment it doesn't count as spending. If they invest in R&D or Brand building it does count as spending. Therfore Brands and techology are considerred intangible assets because they have real value but not book value. As far as the investor is conserned, it doesn't matter if it is on the books or not. Lately we are investing more in the intangibles than in the past. This is pushing our observed savings rate down but not the real savings rate.

Answer 2

No, although I see where your thinking is going.

Social Security assets (ie, the money you and I put in from our paychecks) is not a part of the national savings because it is a contra-liability. Ie, social security funds represent offsets against future liabilities (what must be paid to social security recipients).

You may point out that under such a private system, people would only get back what they put in. For you and I, looking at retirement 30+ years down the line, this might make sense. But this is not possible for those currently on social security. Their obligations still must be met, and they are currently met by our contributions (ahem...withholdings).

For something to truly be considered "savings" it must be an asset not set against a corresponding liability for the same agent (ie, your bank account is an asset on your balance sheet but a liability on your credit union's since they have to repay you the money on demand; but it does not represent a liability for you to repay). Otherwise, it's just a pre-payment.

Answer 3

No because government borrowing would increase by the amount of the current social security surplus. - Right now the government is spending the surplus - President Bush would like to divert some of the surplus to private accounts- but none Bush's privatization plans involve increasing taxes - so if the surplus were not available to borrow and spend - the rest of the government would just borrow more from the Chinese and other people who are still willing to lend our government money. - The result: No net increase in savings.