I haven’t spent much time writing about Thomas Piketty’s inequality book for the simple reason that my goal is economic liberty, not equality.
That being said, I think that Piketty is fundamentally misguided even if the goal is helping the poor. Simply stated, long-run growth is the best way of reducing poverty and boosting living standards. Piketty, by contrast, focuses on redistribution – even though this would require punitive taxation, thus undermining growth and hurting the less fortunate.
This is very obvious when we look at economic performance in market-oriented nations and compare it to economic performance in countries where government plays a bigger role.
Most recently, I showed how Poland is out-pacing Ukraine.
I’ve compared South Korea and North Korea.
The data for Chile, Argentina, and Venezuela is very powerful.
I’ve shown how Singapore has eclipsed Jamaica.
And we can see that Hong Kong has caught up with the United States.
As I often remark in my speeches, I’d much rather be a poor person in a jurisdiction such as Hong Kong or Singapore rather than in a “compassionate” country such as France.
France might give me lots of handouts, but I’d remain poor. In a free-market society, by contrast, I could climb out of poverty.
Anyhow, let’s return to Piketty’s thesis about the rich benefiting from capital accumulation. All sorts of scholars have called into question his theoretical model and his empirical data, but I don’t even care if Piketty’s right. In a free society, the worst thing that happens is that the rich get richer faster than the poor get richer.
That’s why we should concentrate on what we can do to boost growth.
And there is one economic reform that is good for growth, but would be especially beneficial for lower-income people. Merrill Matthews of the Institute for Policy Innovation, in a column for Forbes, makes a powerful case for Social Security reform.
He starts with the essential insight that policy makers should focus on helping the poor, not penalizing success.
French economist Thomas Piketty wants to attack the issue of income inequality by redistributing the wealth of the highest earners. Wouldn’t a better solution be to increase the wealth of the lowest earners?
Merrill says we should make it easier for the overall population to become capitalists.
…instead of taxing that success even more than we already do, which discourages capital development and investment, Washington can help lower- and middle-income workers acquire capital so they too can partake in those higher returns.
He then points out that workers are forced to participate in a Social Security system that imposes very high taxes in exchange for rather meager benefits.
Eugene Steuerle and Caleb Quakenbush of the Urban Institute publish an annual estimate of how much workers at different income levels and marriage status pay into Social Security and Medicare and how much they can expect to receive in benefits. Their 2013 report estimates that a single male worker earning the average income of $44,800 (in 2013 dollars) turning 65 in 2015 can expect to receive $287,000 in Social Security benefits. However, that worker paid in $337,000, for a net loss of about $50,000. Both estimates assume a growth rate of 2 percent, which happens to match Piketty’s projection of long-term GDP growth. That disparity between contributions and benefits declines significantly for women, who tend to live longer. A single female worker would have paid in the same amount, $337,000, but could expect to receive $314,000.
Now we get to his proposed reform.
…what if workers were able to put that same amount of money—their 12.4 percent Social Security (FICA) tax; $5,555 in Stererle’s example—into a personal retirement account that could be invested in broad-based equities?
With personal retirement accounts, ordinary workers can generate big nest eggs.
Using an interest calculator, a $5,555 annual contribution over 40 years at 6 percent grows to about $970,000. Factor in that wealth and income inequality largely evaporates. …if the left is really concerned about income inequality, the best way to end it is wealth creation, not redistribution. Replacing Social Security’s financially struggling system with personal retirement accounts would create real wealth for millions of working Americans.
As you can imagine, I heartily concur. Here’s the video I narrated on the topic for the Center for Freedom and Prosperity.
By the way, if you think the stock market is too risky, particularly after the recent financial crisis, one of my Cato colleagues produced a thorough study showing that people who retired right after the market fell still would have been better off with personal accounts.
P.S. If you want to understand why class-warfare tax policy will backfire, another one of my colleagues dismantled the work of Piketty and others.
P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though I’m not sure we should laugh considering that tens of millions of Americans will suffer when the system no longer can afford to pay promised benefits.
P.P.P.S. Obama’s supposed solution would be an even bigger move in the wrong direction.
P.P.P.P.S. Last but definitely not least, watch Margaret Thatcher destroy the left’s position on income distribution.
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So, when they “fix” Social Security, what happens to guys like me, 65 years old, little or no job prospects, collecting $920/month, with nothing else to fall back on? Don’t I deserve to at least get back what was confiscated from me from 1970 on?
A corollary is that saving can happen at every income level. Especially in America where “the poor” are still well in the top third of worldwide income and prosperity. Ironically, the same statists that say that the poor have not a dime to spare, are the same ones that force the poor to save 12% of their income — in government coffers, where it’s not even saved really.
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I don’t see where Piketty gets his long term projection of 2% GDP growth. The trendline growth of a free economy is more likely around 4-5%. France –which is the country closest to Piketty’s proposed redistribution policy — is lucky to get 1%. Yes indeed, in France, there IS a huge difference between GDP growth trendline and the return that French capital can earn invested in other, more dynamic and less welfare demotivated, parts of the planet. In France, the wealth of ordinary French, compared to those better healed and thus better able to invest in the more dynamic jurisdictions of this world will continue to diverge indeed. Picketty’s proposals will exacerbate the problem in a vicious cycle. Voters, of course, will go along… Singed wings and all, the moth keeps flying to the light to get more burned to his ultimate destruction. … oh I forgot, we banned incandescents, so I guess everything will be all right now.
Your comments are comments are great, but just think what would happen if employers contributed pension amounts to the individual accounts. Part of fixing Social Security is fixing ERISA.
This entire article is based on the bizarre premise that the desired goal is to make everyone richer. Why would we want to do that? The goal is to make everyone equal. If this means that everyone is starving and living in a cardboard box under a bridge, that’s fine, as long as everyone is equally miserable.
Seriously: I heard a lecture not long ago where the speaker said that if liberals are given a choice of everyone getting richer, but some getting richer than others, versus everyone remaining equally poor, they prefer equally poor. This sounded ridiculous to me, so the next day at work I asked several co-workers this hypothetical question: Suppose a magic genii appeared to you and gave you a choice: Either, (a) he will give half the people in your town $100,000 and the other half $10,000, or (b) he will give nothing to anyone. Everyone getting the same amount is not an option. Which would you choose? EVERY SINGLE ONE of my co-workers voted for (b). They all agreed, every one, that it was better for everyone to get nothing than for some to get more than others.
A prebate/basic income set at 100% of the poverty rate would be about 1/3 of current per retiree Entitlement payouts. This would guarantee subsistence for those that did not save. The current tax to pay for this would need be only 1/3 of current FICA. Higher take-home pay will allow for greater savings.
Since saving will require a behavioral adjustment, this program should be gradually phased in for those still in the workforce, based on time til retirement.
Not that I would recommend it, but personal accounts could have the option of investing in inflation adjusted US bonds. As long as the inflation adjustment was close to actual, they’d do better than current expectations.
While it is possible that an individual account might under-perform relative to Social Security, it would be easy to remedy that individual’s problem. However, Social Security is now a systemic problem that is almost impossible to resolve.
If on the other hand, if capitalism implodes; where will government get the resources to fulfill its Social Security commitments?
Reblogged this on Public Secrets and commented:
Privatized retirement accounts are such a sensible idea. No wonder Washington won’t agree to them.
Dan, I could not agree more! Too bad the redistributionists goal is not to enrich the poor but to control people.Their object is not to create wealth for all but dependency that gives the select few control.