Tuesday, February 08, 2005

An early proposal for private accounts outside of Social Security

David Brooks becomes one of the early movers in the "What do we do now?" debate arising out of the ongoing collapse of President Bush's plan to fund private accounts by diverting Social Security taxes. He suggests reviving a late-1990s proposal called KidSave, under which "the government would open tax-deferred savings accounts for each American child, making a $1,000 deposit at birth, and $500 deposits in each of the next five years. That money could be invested in a limited number of mutual funds, but it couldn't be withdrawn until retirement. Over decades, it would grow and grow, thanks to the wonders of compound interest, so that by the time workers retired, they would each have a substantial nest egg, over $100,000, waiting for them."
This type of thing - although probably not this variant - is a potential political winner for a couple of reasons. The first is that many Democrats like private account add-ons so long as they don't come out of Social Security's dedicated financing. The second is that, if there is no stated financing, it looks like free money. Everyone likes free money.
In fairness to Brooks, he offers a little bit of financing: indexing Social Security benefits to prices not wages, and agreeing not to extend the Bush tax cuts. But this would still leave the fiscal gap, at a rough guess, in excess of $60 trillion even before we consider the cost of the KidSave accounts. So this is a dubious proposal from the standpoint of fiscal sustainability.
From a generational standpoint, the proposal is a bit ironic. Younger generations are given an unfunded benefit that they of course will have to pay for in the fullness of time.
From the standpoint of increasing national saving, the proposal is likewise a dud. It doesn't increase national saving, any more than you increase your own net saving by borrowing to invest. (Not continuing the Bush tax cuts would, however, do a bit of good here.)
The proposal is potentially quite progressive within a given age cohort, however. In effect, it is a uniform transfer or demogrant that eventually would be funded, presumably, by means-related taxes such as the income or payroll tax or a VAT. (Even flat tax funding would be progressive since rich people earn and consume more but get the same-size account.) So we can give Brooks points for that, noting that he is actually willing to aid poorer people in pursuit of his "ownership society" goals, although without credible financing one wonders how much it is really worth.
I have suspected for a while that the action is going to end up in this type of territory, although more likely with accounts for current workers (who vote) than for children. That is, the most conceivable bipartisan deal involves savings accounts outside of Social Security but still without new net government funding, meaning that they are unlikely to make our overall policy more sustainable or to increase national saving or to aid younger generations relative to older ones.

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