As everyone now recognizes, the current 12.4% Social Security employer-employee payroll tax will not be enough to finance the benefits specified in current law as the population ages. Continuing to finance those benefits with a pure tax-financed system would require raising the payroll tax rate to more than 18%, or finding other ways to raise tax revenue.
Mark rebuts by turning the microphone over to Dean Baker:
The Congressional Budget Office's projections show that the program can pay all benefits, with no changes whatsoever, through the year 2046... The projected shortfall over the whole 75-year planning period is 0.4 percent of GDP, approximately 30 percent of the current cost of the war in Iraq
Besides playing the shock figure nonsense, Martin Feldstein peddles the free lunch fallacy of privatization so let me focus on this:
Unfortunately, Democratic critics argued that individual accounts would be "gambling" with the retirement savings of working men and women.
I never bought into this increased risk argument, but the flip side of the same coin is that we should not false claim there is some overall increase in expected returns as I tried to explain here by quoting Andrew Abel:
Some economists have argued that investing part of the Social Security Trust Fund in equity is simply a rearrangement of paper assets without any real allocational effects, and they have described such a policy as a “shell game.” The shell game argument is similar to the Ricardian equivalence proposition in public finance and macroeconomics and the Modigliani-Miller theorem in corporate finance. The argumentis that private investors will react to any rearrangement of the social security system’s portfolio in a way that completely neutralizes the effect of the portfolio change. For example, if the social security system sells a dollar of bonds and purchases a dollar of equity, private investors would buy a dollar of bonds and sell a dollar of equity.
Robert Barro and Gary Becker have made similar arguments. So why does Martin Feldstein think that this argument is incorrect?