In the Fehr, et al paper, “Will China Eat Our Lunch or Take us to Dinner?,” the authors discuss various ways for the government to finance the welfare programs promised to the retiring baby boomers. One analysis looked at the privatization of pensions, modeled by “the elimination of any new public pension benefit accrual coupled with the establishment of individual accounts.” Basically, this privatization of pensions relies heavily on the effectiveness of free markets, as well as an “intergenerational redistribution.” The privatization of pensions would place the burden on the current elderly, as they would be “forced to pay for their benefits via the consumption tax.” Instead, “younger and future generations benefit enormously” because their wages are much higher without the payroll tax burden. While the Fehr papers notes that “the poor initially experience larger welfare losses,” Allan Meltzer thinks differently.
In his paper, “Privatizing Social Security,” he claims that “private accounts are a much greater benefit for the poor than for the rich.” Because most of the poor do not have private pensions, they would “gain the most from the opportunity to get higher returns, if part of social security is privatized.” Meltzer advocates for complete privatization of social security, leaving the government no room to manage any of the redistribution. Meltzer notes that “the appeal of privatization…is that it avoids some of the need for higher tax rates or lower benefits to balance future accounts.” He places full confidence that the free market economy would most efficiently deal with social security. Of course, there is no mention in either of these papers on how a damaged market economy, in the midst of a slow recovery from a considerable recession, could efficiently handle the privatization of social security. Would US citizens be willing to trust that their future benefits will be safe in the hands of the volatile financial market?