Publicly funded private accounts  

This has always been the big problem with turning Social Security (or part of it) into a series of private accounts. Beacuse Social Security was conceived as an intergenerational contract under which each generation pays for the retirement of its parents, the only way you can fund personal accounts is to either scrap the system or step outside it. The Bush people seem to be seriously contemplating the latter. Isn't it a little deceptive to take out a huge loan to offset the costs of personal investments, knowing that we as a society will have to pay back that money later with interest?

If you're going to take out such a big loan anyway, wouldn't it be worth looking at ways to preserve the present configuration? It's not such a bad system -- yes, there are problems when you fluctuations in population size, life span, etc, but over larger time scales it should be a wash. The elegant idea is that economic and population growth will provide a bigger tax base with each successive generation, so that there's always more to pay for your retirement than there was for your parents'. So the aggregate payout for a given generation is

(1+e)(1+p)B

where e and p are the rates of economic and population growth respectively, and B is the aggregate benefit of the parents' generation (which also happens to be the amount the retiring generation paid in). The problem we're facing now is that p < 0 (the baby boom has a larger population than succeeding generations), and even worse, e + p < 0. And if you add in increasing lifespans and costs for prescription drugs (the same analysis applies equally to Medicare) then the situation looks grim.

Of course, if you're a believer in the power of capitalism and democracy to drive economic growth, then you know that e + p > 0 in the long run. Once the baby boomers are gone, the system will return to the desired equilibrium where each successive generation is richer (in aggregate) than the last. With a big enough loan, you ought to be able to ride out the storm! Of course it's hard to find a lender for a sum in the trillions, especially when confidence about your economic strength is flagging. But then, it sounds like we're looking for a big loan anyway...

Incidentally, the math for personal accounts looks very similar to that equation above:

(1+e)B

where B is your investment, and e is the return on your investment. It gets rid of the population term, but you still have to worry about the length of your retirement (ie your increasing lifespan), medical costs, etc. Also, e can fluctuate much more if you control your own investment portfolio. Both systems rely on economic growth to power retirement: social Security uses aggregate growth to hedge individual risk but exposes society to democgraphic risks that must be dealt with publicly; private accounts hedge against demographic risks but expose individuals to market risk and lifespan uncerainty that must be dealt with privately (although inevitably there will be some crossover here, since those who run out of retirement money will end up receiving social services, will get sick unnecessarily, etc). Major philosophical differences...