RECENT NEWS

Recent press reports suggest that President Bush may enunciate only broad principles for Social Security privatization, rather than a detailed plan. One of those principles will presumably be individual choice.

Choice is generally a good thing. But in the context of Social Security, it’s important to keep in mind that more choice implies greater cost.

The current system offers virtually no choice. Everyone is enrolled automatically in the same plan. Largely for this reason, the system is also incredibly cheap to run.

Now think about adding individual choices over investment decisions, over survivor benefits, over whether or not wealth is bequeathable, and so on. Each element of choice adds to the costs of running the system—and therefore lowers investment returns.

For example: A typical American earns about $1,000 a week. If he or she puts 2% of that into a private account, that’s $20 a week. If the $20 is divided among four mutual funds, that’s $5 into each. Just imagine the costs of handling tens of millions of tiny transactions like that.

But the most profound choice is whether participation in the new private accounts will be voluntary or mandatory. Suppose it’s voluntary. Since regular Social Security offers the rich a worse deal than the poor, richer people are likely to opt into private accounts while poorer people stay in the current system. As that happens, the system will unravel.

Not to be too cynical, that may be just what the privatizers want.

I’m Alan Blinder.