Alan Reynolds

The Washington Post editorial page has taken to arguing with itself over the merits of Social Security privatization. "How, exactly, would private accounts 'solve' the Social Security funding problem?" asked a Dec. 19 editorial. "Mr. Bush doesn't say, and for good reason: In and of themselves, they don't."

 On Aug. 15, however, a different editorial in the same paper answered this supposedly unanswerable question: "Privatization could ... stimulate economic growth," the editors explained, "boosting tax revenues and so strengthening the nation's fiscal prospects. ... By converting the payroll tax into contributions to personal accounts, government could reduce the tax burden on workers, thereby boosting incentives."

 Recent research by Edward Prescott, the newest Nobel Laureate in economics, strongly supports the editors' August answer to their December question. He shows that peoples' willingness to work full time for many years is quite responsive ("elastic") to marginal income and payroll tax rates.

 "The large labor supply elasticity," Prescott explained, "means that as populations age, promises of payments to the current and future old cannot be financed by increasing tax rates. These promises can be honored by reducing the effective marginal tax rate on labor and moving toward retirement systems with the property that benefits on margin increase proportionally to contributions. Requiring people to save for their retirement years is not a tax and does not reduce labor supply. My example establishes that reforms are possible that benefit the current young workers and future workers, while honoring promises made to the old. ... It is clear, given the high responsiveness of labor supply to marginal labor tax rates, that the potential gains are great."

 Better work incentives are the biggest single benefit of privatization, in my view, but more effective savings and investment is another. On Dec. 21, however, another Washington Post editorial contradicted what the same paper wrote in August. "Mr. Bush said yesterday that the creation of private accounts would boost national savings," complained the editors. "But ... the essence of privatization is that part of the payroll tax gets shifted into private accounts, a change that's savings-neutral."

Alan Reynolds

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