March 25, 2005

GOOD ENOUGH FOR HARVARD:

Personal Dispute: WHY DEMOCRATS OPPOSE BUSH (N. Gregory Mankiw, 03.15.05, New Republic)

Harvard University is, by some measures, one of the most left-wing institutions on the face of the earth. So you may be surprised to hear that it has endorsed George W. Bush's proposal for Social Security reform. Literally, of course, that is not true. But the retirement plan Harvard has set up for faculty members like me bears a striking resemblance to what the Social Security system would become under the president's proposed changes.

Harvard's retirement plan is essentially the nonprofit sector's version of a 401(k). Each year, the university puts a certain percentage of my income into my retirement account. I then invest this money in low-cost mutual funds, which hold a diversified portfolio of stocks and bonds. I can choose a safer portfolio with a lower expected return or a riskier portfolio with a higher expected return. The money is mine, even if I decide to leave the university. If I die, I can leave it to my kids. When I retire, I can use it to buy an annuity to ensure a stream of income for the rest of my life.

Under Bush's proposal, you would have the option of diverting some of your payroll taxes into a personal retirement account. You would invest this money in low-cost mutual funds, which would hold a diversified portfolio of stocks and bonds. You could choose a safer portfolio with a lower expected return or a riskier portfolio with a higher expected return. The money would be yours, no matter how many times you changed jobs. If you died before collecting any money, you could leave your account to your kids. When you retired, you could use it to buy an annuity to ensure a stream of income for the rest of your life. [...]

This raises the question: If the liberal Harvard faculty is content with the defined-contribution structure for their private retirement income, why are liberals in Congress (and the liberal New Republic, for that matter) so appalled that Bush would propose moving the public retirement system in the same direction?

As far as I can tell, there are three reasons. The first is that the president proposed it, and some Democrats will oppose anything he advances. [...]

The second reason the left hates personal accounts is that, over the long term, they could destroy one of its favorite battle cries: the alleged conflict between evil capitalists and oppressed workers. [...]

The third reason for the left's opposition to personal accounts is simple paternalism. Liberal critics of the Bush plan may be willing to accept that Harvard professors are capable of investing sensibly for their own retirement, but they are not ready to trust the general public to do the same. Compared with Republicans, Democrats are more averse to an economic system in which people play a larger role in taking care of themselves. To be sure, the paternalists raise a valid concern--some segments of the population are not economically sophisticated--but this is not so much an argument against personal accounts as a reason why we need to get the details right. Any reform should include some restrictions to protect people from themselves. There should be limits on how much risk people can take in their portfolios, especially as they approach retirement. There should be requirements that people annuitize enough of their accumulation upon retirement to ensure they are kept out of poverty for the rest of their lives.

Of course, when Democrats speak publicly, they are rarely this frank.


That's maternalism, not paternalism.

Posted by Orrin Judd at March 25, 2005 5:20 PM
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