Monday, September 19, 2005
The Need For Social Insurance: A Quick Observation
by Tom Bozzo
The hardcore privatizers would, after all, prefer a world in which private retirement accounts were the only source of retirement income. This may even work out, particularly for people who can start saving relatively large amounts of money early in life. Under a purely private system, though, withdrawals in face of emergencies become stark eat now vs. eat later dilemmas. As a practical matter, it's desirable to eat now and to eat later. Social insurance, then, is useful insofar as the "free market" will not inherently prevent anyone from needing to eat their capital in the event of a disaster.
(*) From the looks of H.R. 3768, allowing penalty-free withdrawals in the case of any federally-declared disaster would only require striking some "due to Hurricane Katrina" restrictions from the new statutory language.
In case you hadn't noticed, one of the features of the recently passed H.R. 3768 (the "Katrina Emergency Tax Relief Act of 2005;" PDF) is a one-year suspension of the 10% penalty on early withdrawals from tax-deferred retirement plans for residents of the Katrina disaster area. While it's tough to argue that people who've suffered enormous financial losses due to the disaster need higher tax bills (and I'm not arguing this), treating retirement accounts as rainy-day funds is nevertheless problematic (*).
The hardcore privatizers would, after all, prefer a world in which private retirement accounts were the only source of retirement income. This may even work out, particularly for people who can start saving relatively large amounts of money early in life. Under a purely private system, though, withdrawals in face of emergencies become stark eat now vs. eat later dilemmas. As a practical matter, it's desirable to eat now and to eat later. Social insurance, then, is useful insofar as the "free market" will not inherently prevent anyone from needing to eat their capital in the event of a disaster.
(*) From the looks of H.R. 3768, allowing penalty-free withdrawals in the case of any federally-declared disaster would only require striking some "due to Hurricane Katrina" restrictions from the new statutory language.
Comments:
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Tom, You are kind of expecting free marketers to all of the sudden solve problems that wouldn't have occurred had the free market actually been in place already. The federal government built up levees, etc. to allow people to live under sea level. A huge hurricane strikes and knocks out the levees that people thought would keep them safe, and you expect that the free market should come in and save the day or otherwise privitization is bunk? The government helped create the problem, and now the government has to help solve the problem. I agree with you that the gov't must help these people, but only because they screwed them in the first place.
# posted by 
: Mon Sep 19, 10:20:00 AM
: Mon Sep 19, 10:20:00 AM
I must have missed the Heritage Foundation report discouraging people from moving to the Gulf Coast or, say, the entire state of Florida (/sarcasm).
While it does look like certain Army Corps of Engineers projects made the Katrina disaster worse for New Orleans, that doesn't extend to the entire disaster area.
Anyway, I'd characterize the point as the free market *won't* always come in and save the day in emergencies, and filling the breach (in part) with retirement assets only makes the hypothetical privatized retirement problem worse, which is one of may reasons why privatization is bunk.
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While it does look like certain Army Corps of Engineers projects made the Katrina disaster worse for New Orleans, that doesn't extend to the entire disaster area.
Anyway, I'd characterize the point as the free market *won't* always come in and save the day in emergencies, and filling the breach (in part) with retirement assets only makes the hypothetical privatized retirement problem worse, which is one of may reasons why privatization is bunk.
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