DeLong makes part of my point (see below, including comments) regarding the benefits of Social Security reform, and makes it better that I did (or could). Discussing Martin Feldstein's perceived views on Social Security privatization, DeLong writes:
These days [Feldstein] is more likely to stress not the reduction in personal savings that may be generated by expectations of the continuation of the pay-as-you-go Social Security system, but the gap between stock and bond returns. Marty's argument these days is much more likely to be the claim (with which I have a lot of sympathy) that the stock market does a lousy job of mobilizing society's risk-bearing resources. Stocks appear to be priced as though the marginal investor is a rich 62-year old with some clogged arteries and a fifteen-year life expectancy who is not expecting to leave a fortune to his descendants. But if the stock market were working well, the marginal investor would be a 40-year old in his or her peak earning years looking out to retirement spending 40 years in the future--an investor much less averse to risk than the 62-year old.
Turning Social Security into a forced-equity-savings program would, Marty believes, not only produce huge profits for the system but also materially improve the efficiency of U.S. financial markets.
Kevin Drum wonders if this means that the stock market is underperforming (his phase is a "massive, persistent, and inexplicable market failure"). The short answer is, probably. For whatever reason, folks tend to be more conservative in their investments than they should be. That is, most folks should be holding riskier investments than they currently are because, over time, they are likely to be rewarded by their risk taking. (Or, to bastardize DeLong, forty-year olds are holding the portfolios of sixty-two year olds when they should be holding the portfolios of forty-year olds.)
Thus, one argument in favor of privatizing part of Social Security is that it will force more money into the market and capture the "equity premium" -- the money that is being lost because folks ain't investing the way that they should. I say "one argument" because, as Tyler Cowen has noted, this is not the only or best argument in favor of Social Security. A better argument is that Social Security privatization will increase the national savings rate and make investors and owners out of a whole buncha folks who don't have the opportunity under the present system. To create an ownership society, wherein everyone has a stake in the corporate world.
By the bye, DeLong is absolutely right to call privatized social security accounts "forced equity savings." The goal of privatizing Social Security is to replace the current generational transfer system with a national savings and investment system.
Now DeLong and I part company with respect to who should control the investment portfolio. DeLong "would rather see this forced equity savings done not through private accounts but through allowing the Secretary of the Treasury to invest the Trust Fund in equities." I'd prefer that the investors themselves control their own retirement portfolios, choosing from among a series of (no load) index and other funds. But I hope to take up this debate a bit later.