Social security privatization, continued

Brad DeLong writes:

There is a bigger, unmentioned reason to be against private accounts. Ten years down the road or so, there will be pressure on Congress to allow people to borrow against their private accounts, or to withdraw them to buy a house, or to use them to meet unexpected medical expenses. Congress will bow to that pressure--it's their money, after all. And in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits. As Dick Schmalensee says, "You have to ask yourself not just, 'Is this good policy?' but 'Will this still be good policy after Congress does its worst to it?'" The Medicare drug benefit and the corporate tax boondoggle are powerful evidence that the Bush administration holds no leashes to use to control what this Congress does to policy proposals, while lobbyists can make this Congress roll over and beg.

Brad also takes on whether the government could finance the transition to a more private system by borrowing (also read Bruce Webb's comment, number two in the list). After all, government debt would be higher but government long-term implicit obligations are lower. Would this simply be a wash? (Arnold Kling believes "yes"). I am skeptical. When it comes to government, measured nominal flows tend to be sticky. So say our government increases its borrowing today but lowers its SSA obligations for tomorrow. Even if the transaction can balance without a current increase in interest rates, the increased rate of borrowing (or taxation) will tend to stick in the long run. Plus there is a time consistency problem. If the new debt is placed smoothly, government has an incentive, ex post, to accept some new unfunded liabilities for the future. Knowing this in advance, the bond market will be suspicious about the new debt offering.

What should we do? Here is my previous post on social security privatization.