How Annuitizing Differs from Privatization

Two of the most powerful critiques of the Social Security reform proposals known as Privatization were written in 1998 by Geanakoplos, Mitchell and Zeldes (see citations). The authors showed that individuals picking their own investments would seek to avoid the risk of picking a loser stock that wiped out their principal, so would wind up earning the riskless interest rate of intermediate term government bonds. This in turn required putting the full FICA rate into their account to achieve the expected benefit level, which in turn required new taxes to pay the transition debt. Since this debt would add a new layer on top of what Congress already is not repaying, it would likely carry an interest rate higher than riskless. The combination of new taxes plus market rate of interest on the transition debt completely negates the gain from earning a slightly higher return on investments. Thus, we're no better off with Privatization than under the current system.This paper compares a new reform proposal - called Annuitizing - to the old Privatization proposals, and shows how Annuitizing overcomes the problems exposed in the critiques above. The author, in another paper devoted to that subject, shows how Annuitizing (see citation) can boost benefits to 100% wage replacement, pay off the national debt, cover the uninsured and slow down the growth rate of healthcare costs as well as quickly lead us out of the whole economic crisis.These claims strike some people as sounding too good to be true. This paper opens the door to serious consideration of Annuitizing by showing exactly how it differs from Privatization and therefore why it achieves what the author claims for it.