Prescott on Rebuilding Social Security

It's a shame that this Edward Prescott op-ed is behind the WSJ wall. Prescott (who won the economics Nobel this year)argues that mandatory investment accounts with limited investment options are necessary to solve the time inconsistency problem with savings.

Readers of this page will recall that I have made this proposal in a previous essay, but readers may also recall a letter that questioned an assumption I make about consumer behavior. In effect, the reader asked how, on the one hand, I consider people so irrational that they have to be forced to save, and, on the other hand, I consider people rational enough to manage their own retirement accounts.

But this question reveals a misunderstanding of the time inconsistency problem. The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational–they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age–even if they don't save a nickel–then what is their incentive to save that nickel? Wouldn't it be rational to spend that nickel instead.

Of course, a libertarian would prefer a system of neither mandatory investment nor wealth transfer. But if we're going to get one or the other, I think the paternalism of mandatory investment is better on libertarian terms than expropriation and redistribution. Property rights are not unitary; they are a bundle. Mandatory investment restricts liberty over some sticks in the bundle, but the overall right to one's earnings are preserved. In redistribution, one's right is just straightforwardly violated–one loses the whole bundle. If we have the chance to implement a policy that involves a small violation of liberty but which will replace or prevent the implementation of a policy that would involve a larger violation of liberty, we should do it. Mandatory accounts help preseve an ethos of self-responsibility, which I think is crucial for a healthy society. And if the policy has overall superior economic consequences to the alternatives, as does mandatory investment, that is another strong reason to support it.
The rest of Prescott's op-ed is full of plain good sense. He deflates worries about truck drivers runing themselves by “gambling” on the market, and Wall Street firms gouging the naive folk with gigantic fees. And he points out the ridiculousness of “Cassandra[s] screeching about evil policy makers and cranky politicians who are out to destroy Social Security.” As Prescott rightly notes, Social Security is simply bad policy. We have the opportunity to replace it with a better policy. So we should replace it.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center

21 thoughts

  1. I haven’t watched the video. And I support gay marriage. But I do note one mistake in the comment.
    Marriage is not a purely private interaction. Marriage is fundamentally a public matter. Marriage is the way that society identifies whether or not a family link has been forged between two people (or more generally, more people) even if they are not blood relatives. The whole point in getting married is to make that link clear to society. And traditionally the reason that society cared was that it was a way of determining which man was responsible for which children and thus bringing social pressure to bear on men who shirked their fatherly duties.
    Furthermore in every modern society that I know about, who the state recognises as married or not married has legal implications. Examples include inheritance laws and next-of-kin laws. Take a case where a person is in a coma, their flatmate claims that they are married, the parents say no marriage ever took place, and the flatmate and the parents differ sharply about the best course of medical treatment. This is not a purely private interaction – the staff at the hospital need to know whose instructions to follow.
    Or take a case where a rich old man hires a live-in housekeeper. After his death of natural causes, the housekeeper claims that they were secretly married and as such she is entitled to the wife’s share of his property. His children say this is nuts, no such marriage ever took place. The decision by the courts as to whether the marriage existed is not a purely private interaction, the executor of the estate needs to know where the assets should go (although there’s a certain risk that the decision will be moot if all the inheritance will go on legal costs).
    Furthermore, legal rights are often given to those who are married, such as tax laws (for example, under NZ law on the one hand you can transfer any amount of money you like to your spouse without paying gift duty, on the other hand if you hire your spouse to work for your company for a ridiculously large amount of money which saves you a lot on taxes IRD will investigate in the way they would for a close blood relative but not for a stranger). Immigration laws also differ. These laws could be changed of course, but at the moment their existance means that marriage is not merely private.
    Look at it another way, if marriage is purely a private interaction, why would anyone care whether the state legally recognised same-sex marriages?

  2. Talk about dishonesty. Churches that want to perform gay marriages are not having their religious freedom infringed on by current law.
    1. The current law doesn’t a church from performing a marriage ceremony for gay couples. Churches can perform any ceremonies they want. They can use any words at those ceremonies that they want (e.g. “marriage”). They can sign any papers at those ceremonies. HOWEVER, whatever is done at those ceremonies will not be recognized by the state. No church is being told what it can or cannot do. Its just that the state will legally recognize what was perfomred there.
    The general argument seems to be “but the religious convictions of these liberal churches’ require them to perform x and the state won’t allow them to perform x, so the church’s religious freedom is being infringed on.” The church can perform x but religious freedom doesn’t require the government to recognize the results of the ceremony. The government doesn’t recognize the results of a Bar Mitzvah. It doesn’t count the 13 year-old Jewish boy as a legal adult just because his religion says he is an adult. Is this failure to legally recognize the results of a Bar Mitzvah discriminatory? The government doesn’t recognize my baptism (and the official church certificate signed by the pastor and elders). So, what? Religious freedom doesn’t demand that religious ceremonies be officially recognized by government.
    2. Further, it is obvious that it is not RELIGIOUS discrimination that prevents liberal churches having gay marriage performed at their church recognized by the government. If such ceremonies are performed by a judge, a ship’s captain, or some other non-religious official who can perform marriage ceremonies, the results of those ceremonies will also not be recognize. So it is not that religious practice and belief that is being focused on an singled out for discrimination. It is gay marriage–whether performed by a priest, judge, or captain. It also doesn’t discriminate between churches. ANY church, liberal or conservative, that performs gay marriage will not have the results of that ceremony legally recognized. ANY church that performs a heterosexual ceremony, liberal or conservative, will have the ceremony be legally recognized.
    The argument that the fact that gay couples cannot be legally married amounts to religious discrimination is a BIG stretch at best. Nice try, though!

  3. Interesting thoughts here, but mostly wrong.
    “Suppose the government took away a student’s federally funded scholarship because he attended an anti-war protest. Does anyone want to argue that this wouldn’t be a violation of political freedom?”
    This analogy fails. If the the student did something ILLEGAL at the anti-war protest, then he might indeed lost his federal scholarship. Ocean Grove promised to abide by anti-discrimination laws when it applied for a property tax exemption on the basis that the pavilion was open to the public. (IMPORTANT: The tax exemption was not based on religious grounds.) When it failed to abide by those anti-discrimination laws, it lost its tax-exempt status. Similarly with the federal funds: why is the government giving taxpayer money to ANY organization that is breaking the law.?
    BTW, one thing not mentioned in the video: Ocean Grove has two chapels that don’t marry same-sex couples, and it hasn’t lost the exemption on those. Why not? Because those are church facilities, and the exemption on those is based on religious grounds, not on the promised that they’re open to the general public.
    And Jim, the video doesn’t make the point that “the fact that gay couples cannot be legally married amounts to religious discrimination.” Rather it says that it’s a violation of religious freedom. Opponents of gay marriage go to great lengths to claim that marriage is primarily a religious institution. If so, then not permitting churches to MARRY gay couples — i.e., permitting them to perform civil unions or commitment ceremonies but not MARRIAGE ceremonies — is a restriction of their religious freedom.

  4. Could never understand the religious position on this issue. Do the churches really want the government to define a sacrament, a sacred right of their faith?

  5. I think the whole “strings attached to govt money” issue is going to be one of the primary debate points over the next 10 years — you can already see it in the bailout stuff, and we’re going to have the debate over healthcare pretty quickly as well. It will only be exacerbated as we find less amounts of money to spread around — we’ll have to find ways to ration it, and this is how it’s going to happen: coming up withe rules that exclude people from receiving them.
    To what extent do governments have a right to regulate the actions of those who receive benefits? Which benefits count as ones that should impose these regulations?

  6. Religious freedom certainly is that. One’s religious belief is not enforced, and one can choose which one and to what degree of practice.
    The most hypocritical aspect fomented by those who are religious, is insisting that being gay is a choice and that it has no biological component.
    Yet, one’s religious background is protected under the Constitution. If religious people insist that mutability is ground to exclude someone from Constitutional protection, then they should be the first in line to relinquish their ‘religious freedom’ as Constitutionally protected as such. Go home and leave everyone else alone.
    However, if there is a reliance on ‘man’s laws’ for the protection of religious freedom, then there also should be respect in the law for gay people who are not the cultural invention religion is.
    The anti gay, despite their religious beliefs, benefit from gay people in society. And as gay people are engaged in the responsibilities of citizenship, that is not a matter of choice either that religious belief is.
    Why those who are religious feel there is no option to COEXIST on the same legal footing with gay people makes no sense at all. It’s possible to do it with other people who are different.
    Who have other religious choices and so on.
    Being mindful of other religious abuse in our society and support of terrible laws that stripped so many of their human rights here in America is why caution must be paid to using religious grounds to do it to another group of people for being different also.

  7. “If you’re privately funded, you should be free to do as you like. Want to discriminate? Fine. Just don’t take tax money to do it.”
    Neo-liberalist bullshit. As long as you’re not public, you can be totally unaccountable and exploit whole societies as much as you want, as long as you don’t “take tax money” (but you can lobby for new laws, secretely contract with foreign governments, buy slave labour, and so on).
    “And… if you support discrimination laws that touch purely private interactions and that benefit yourself, then you can hardly complain when others want those same benefits for their groups, too.”
    Hey, what about the discrimination made against unmarried people by marriage laws? How come gays shut up about that? Could it be because they want the money pot?

  8. Sanchez mentioned on his blog a while back that a marijuana legalization case was informally thought of as out of bounds on the college debate circuit, because there were no reasonable arguments against it. I wonder if gay marriage has assumed the same status in today’s debate circuit.

  9. Oh my god, can I marry this guy? You know, once we’re finally allowed? He’s dreamy. And so on point. God the best was the one about the photographer – can you imagine, refusing service to an evangelical couple because you disagree with their religious beliefs? Oh my god Limbaugh would rain fire down upon your house.

    1. Actually, the stories of discrimination against evangelicals include some that are worse then that.
      The worst that I can remember was a case of an evangelical being fired for “creating a hostile work environment” by ending an email with “God Bless”. The email was sent to the gay rights activist in the office asking to be taken off the list of people told about coming out parties. When she sued for religious discrimination she lost the case, despite the defense never showing for the mediation sessions. Her case worker dropped the case, and had posters on the walls in support of gay rights.
      I don’t know how much of this story is true, nor do I know what details were dropped. On the other hand, with a story like this making the rounds for some years resistance from evangelicals starts making sense.
      There are other stories, one from Canada closely parallels the case of the photographer that the video glossed over. A printer was sued for refusing to print posters supporting gay rights, which cause he actively opposed.

  10. “Just don’t take tax money to do it.”
    BS. That only applies if those people/groups don’t pay tax money. If a person or a group pays taxes, then they have every right to seek some of that money back.
    If you think it’s ok to have your hands in my pants and in my wallet, then I really don’t care if people are in your bedroom or in your marriage.
    Gay libertarians I have no problem with. Gay democrats? I hope they get hassled by the government on a consistent basis. The golden rule applies. You think it’s ok to interfere in my life? Thus, it’s ok to interfere in yours.

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