Over the past month, Democrats have begun to present their new big ideas for combatting income inequality as they jockey for position in the 2020 primary. Former Vice President Joe Biden talked a relatively moderate line in a recent speech at the Brookings Institution, calling for more infrastructure spending, a more progressive tax code, and stronger unions. Others, however, made more radical suggestions: Bernie Sanders has endorsed a universal jobs guarantee, as has Kirsten Gillibrand, while California Democrats have backed a universal basic income.
One way politicians could use to curb income inequality is to facilitate a more equal distribution of the gains of the stock market. While the stock market has roared since President Trump’s inauguration, not everyone has benefitted: only half of American families have 401(k)s, and the direct benefits of this stock market boom have gone predominantly to the wealthiest half of the income distribution. However, there’s an old, conservative policy idea that would help create a more equitable distribution of stock market gains: Social Security privatization.
Left-wing policy writers have made arguments for a social wealth fund: a government-run program in which the state would invest taxpayer money in a diverse array of financial assets in a fund in which each American would have an equal share. In Bloomberg, writer Noah Smith opines that this program would be a more effective way to alleviate the black-white wealth gap than reparations. Matt Bruenig, a champion of social wealth funds, describes the idea as “nickel and dime socialism,” given how it shifts part of the ownership of the means of production to public control.
That latter argument will make conservatives squeamish and wary (as it should!). But Social Security privatization will reach the same ends as such a proposal, namely a more equitable distribution of the gains from the stock market, albeit while lessening, rather than expanding, government involvement.
While older arguments for Social Security privatization still stand (private savings accounts will stimulate investment and long-term economic growth, fewer fiscal problems caused by demographic changes, and the less government intervention, the better), conservatives should seize this opportunity to make the case for some degree of Social Security privatization using similar moral arguments to the ones social wealth fund advocates make. Namely, that Social Security privatization will, in addition to those previously stated benefits, give lower-income people an easier path to reap earnings from the stock market.
Social Security privatization would dramatically increase benefits for low-income people. This improvement would be partially due to the higher rate of return on both stocks and bonds than Social Security payments, but it would also eliminate regressive elements of Social Security’s structure. Wealthier people tend to live longer, and hence spend more years receiving Social Security than lower-income people, making the distribution of benefits go inefficiently towards wealthy retirees who do not rely on these benefits to pay for their longer retirement. Conversely, with a private system, “an individual’s benefits would not be dependent on life expectancy,” as Cato scholar Michael Tanner points out.
Furthermore, turning Social Security into some form of opt-in or opt-out system of private saving and investment would, as a social wealth fund would, lead to a more equitable distribution of the gains of the stock market. Under the current system of 401(k)s and other retirement savings vehicles, wealthy people contribute disproportionately more to their saving accounts, and many low- and middle-income households do not have any stock market investments at all.
If people are nudged towards private savings accounts, the portion of lower-income people with money in the stock market would increase dramatically, meaning more low income people would have stakes in a booming stock market, hence reducing inequality while simultaneously shrinking government and stimulating private investment.
Anything described by its advocates as “nickel-and-dime socialism” is something to be wary of. However, at a point for the political right where, in the wake of Paul Ryan’s retirement, support for entitlement reform seems to have hit a nadir, it is worth considering the parallels between the effects of a social wealth fund and privatized Social Security.
Instead of backing away from the urgent cause of entitlement reforms, Republicans ought to embrace the moral arguments about reducing inequality usually used to defend social wealth funds to make a fresh case for the limited government, pro-market entitlement reform policies conservatives have always supported.