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April 26, 2005

Do Americans Support Privatization?

Mark Thoma gives the heads-up on Congressional hearings on the subject that begin today, noting this bad-sounding piece of news for the administration.

And despite the president's efforts to rally support for his Social Security plan, seven in ten Americans say they're uneasy about his approach to the issue.

More people (49 percent) say the president's plan to partially privatize the system is a bad idea than say it's a good idea (45 percent).

There is certainly news there about confidence in whatever the public perceives the adminstration's plan to be, but I'm not sure how much we learn about attitudes concerning privatization per se.  Is it not possible that one could be a proponent of reforms that include privatized accounts and still be profoundly uneasy about the administration's approach?

Paul Krugman, of course, thinks he's got it figured out.  In yesterday's column, to which Mark links, Krugman starts with the results from a Gallup poll question on the general state of the economy, throws in a little Terry Schaivo and Tom Delay red (er, blue) meat, before finally moving to the (ambiguous) CBS poll question and somehow concluding that the evil Bushies and their minions are about to shove privatization down the throats of a resistant public.

The truth about public sentiment is more complicated, I think.  Last month, I posted on a March Gallup poll on attitudes about privatization.  Here's a quick round-up of the responses.

-- 56% of respondents favored reform that included some provision for private accounts invested in the stock market
-- 58% of respondents favored legislation that would allow people who retire in future decades to invest some of their Social Security taxes in the stock market and bonds
-- 51% of respondents felt it was necessary to make changes to Social Security this year
-- a slim majority -- 50% vs. 46%  -- responded that they relying on the current system to delivered promised benefits was riskier than investing in stocks and bonds
-- A significant majority favored limiting benefits to wealthy retirees and eliminating the cap on wages subject to taxation as ways to address concerns about Social Security

Interestingly, today's Wall Street Journal reports that the wealthy may not be particularly enthusiastic about privatization.

... affluent Americans are split on the merits of Social Security overhaul, although about 45% of respondents believe that this move could boost stock-market returns...

[The April UBS/Gallup survey of investors] showed similar results, with 50% saying that the Social Security system should be kept as is, and 47% opting for personal savings accounts. This is the first time since June 2000 -- when respondents were first asked about their support for Social Security overhaul -- that more people preferred the status quo.

Do Americans support privatization?  Who knows?  I think what we are seeing in all these survey results is good old-fashioned common sense.  I'd bet that most Americans think some sort of privatized account option is a good thing, recognize that there is no free lunch, and know that the devil lives comfortably in the details.

UPDATE: John Irons has more on the survey of "affluent  Americans."

April 26, 2005 in Social Security | Permalink


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Tracked on Apr 28, 2005 6:39:07 PM


I'm not opposed to some reforms and would give a partial thumbs up to the suggestions from Tyler Cowen. And I have never had a beef with Robert Barro who used to advocate complete privatization. While I don't, I enjoy his intellectual honesty. I also enjoy yours, which was the real reason I posted all that Cato free lunch dreck. Some Angrybear readers incorrectly suggested honest conservative was an oxymoron. One reader thought that I lumped you into the free lunch crowd - to which I had to say that was never my intent. Fester was the one who got it right - there are honest conservatives like you and Barro who really should have their views, which are very different from the likes of Michael Tanner, heard. Thanks for this post and the opportunity to be more clear what I was trying to say yesterday. We economists really do need to step up and get these issues above the usual partisan nonsense.

Posted by: pgl | April 26, 2005 at 09:02 AM

For me, the issue has always been the way risk is handled, not the involvement of equities as a means of storing the surplus.

We can give everyone the mean return if risk is held collectively. Under the proposal, risk is held invidually and I see no need for that. Why not average over individuals so that there are no big winners and more importantly, no big losers? I suppose there is some sort of private propoerty individual reponsibility argument here, but as I see it the shocks that social insurance mitigates are not related to individual behavior (except through markeet failure mechanisms such as moral hazard).

I wonder if those being polled understand this difference? I would have preferred that back in 2001 the trust fund assets were channeled through intermediaries into the private market as a means of storing the surplus (annd we'd have more national saving...), taking advantage of returns on equities, and sharing the risk collectively. If that had happened, things would look far different today. But of course the objection was that the government would then be invlolved in the private market on too large a scale. I don't buy that and don't see how borrowing rather than lending trillions to the private sector makes a difference.

Posted by: Mark Thoma | April 26, 2005 at 01:58 PM

Mark seizes on the Smetters-DeLong idea! Ah, Cato trashed this idea but touts its own (weaker) version.

Posted by: pgl | April 26, 2005 at 03:18 PM

Mark --

What's to stop people from getting the mean return now? There is absolutely nothing to keep people from purchasing indexed-based mutual funds. Unless, of course, they do not have the funds to do so, in which case your proposal gives them access. But that's privatization!

As for having the government as the intermediary, I thought one of Brad Delong's objections to privatization has been that the government -- or at least the current administration -- would mess things up. Does putting them in charge of a giant private capital allocation scheme meet the comfort test?

Posted by: Dave Altig | April 26, 2005 at 09:23 PM

David - you just made my point, which is also the point being made by Barro and Becker. Yes, households have Soc. Sec. retirement benefits AND 401(K)s and if they wanted more expected return (along with the extra risk), they could just convert 401(K) bonds into stocks. Bush's privatization is not going to change overall asset allocation, which means NO FREE LUNCH! Glad we agree!

Posted by: pgl | April 27, 2005 at 02:30 PM


First, I want to carefully distinguish between the saving and the insurance component of retirement income. People can take as much risk as they desire, etc. with the savings component. My comments are limited to the insurance component.

I will take as given a societally determined minimum level of support for the elderly – anything below this and we help them. That is what the insurance against economic risk is for, insuring against falling below this minimum level.

Any risk around this mean at all risks having some individuals fall below the minimum acceptable level and their incomes will need to be augmented by everyone else – an income transfer system that many on the right disdain so much.

So, as I see it, the only acceptable level of risk around the insurance value is zero to avoid such transfers, and to avoid moral hazard behavior it needs to be governmentally regulated. How is perfect risk accomplished in the markets you suggest – index funds and the like – by creating a perfect hedge and duplicating the T-Bill rate.

Why go to all the trouble, pay all the transactions costs and fees to create a perfect hedge, when T-Bills and money market funds already exist?

Think of it this way. How does shifting financial risk to individuals help them insure against economic risk around the minimum level? It doesn’t.

We should have had this debate in a more public forum!

Posted by: Mark Thoma | April 27, 2005 at 07:31 PM

Reading over my last post, it isn't as clear as I'd hoped, there are a couple of confusing sentences. Apologies - I am willing to follow up...

Posted by: Mark Thoma | April 27, 2005 at 07:35 PM

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