Policymakers always look back, but this tendency is rooted in the entirely false belief that they are smarter than the market. No, they are not. This is true even when policymakers are free-market oriented. They too often fail to see that the people are the market, and that the people are always much smarter than they are. This is why central planning always and everywhere fails.
The former Soviet Union, North Korea, and Cuba had no shortage of experts, and they still do, but one genius can never overtake the market. Social Security reformers will soon be forced to admit this truth. While they sought laudable solutions from the government, the market continued to function as it always had. To understand why, consider the current state of affairs for people over 55 in the United States.
According to a recent report: The Wall Street JournalAmericans over the age of 55 control roughly 70% of the wealth in the United States. That alone is interesting, but it gets even more intriguing when you consider that in 1989, when this type of data was first tracked, that figure was closer to 50%. Think about these statistics for a moment.
When you think about them, think carefully about why Social Security used to be the political “third wire.” The answer is that in the not-too-distant past, retired and near-retired people had a lot less money. The reason Social Security was important to them was simply because it was a big factor in their retirement budget plans.
Perhaps even more importantly, the fact that Social Security was once a big part of the future changed the way individuals envisioned retirement: People recognized that they wanted to live longer, to be well taken care of while they lived longer, and they understood with some clarity that Social Security was not going to be the source of a lavish lifestyle in retirement.
At this point, they did for themselves what policymakers were trying to do for them through public policy: they saved in private accounts that had more exposure to real market securities, especially stocks. Policymakers have long encouraged private accounts loaded with high-yield fixed-income securities and stocks with much higher returns (over the long term), but that accomplished nothing in Washington, as evidenced by the rigidity to this day of Social Security payments (and accounts that past and future recipients did not and will not constitutionally own).
The good news, as the wealthy over 55 can attest, is that the solutions proposed by policymakers are long overdue. Markets wait for no one, including nominally free-market solutions like privatized Social Security accounts.
Nothing written here is to discount policy solutions, but rather to say that farsighted academics and politicians have improved the terms of the retirement debate, but the solutions will only be implemented in real markets. In 2024, retirees and those approaching retirement age will have a lot of money. They have essentially privatized themselves.
In response, many in the free market camp in policy and politics would say that the answer to all of retiree private wealth is to reform programs like Social Security, which are no longer as necessary as they once were. No, they’re not. Policies are grossly overvalued. Programs like Social Security tell us why.
They all start small and grow big. Assuming Social Security is “reformed” as fiscal hawks claim, government won’t shrink as much because the money saved will flow into new programs that will start small like Social Security. Fine. Keep Social Security and “eliminate” the terrible programs that followed it. The market privatized Social Security, so don’t let it privatize another bad government idea.
