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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?'"
This is of course true, but it is just one of many many many pitfalls, current or inevitable, with privatizing Social Security. I'm wonky enough to think about these things when I'm walking down the street, and this particular issue makes my brain hurt as problem after problem come to mind.
The point of Social Security is, after all, to guarantee an absolute minimum income for seniors no matter what bad luck befalls them or bad choices they've made. There's nothing magical about either the current benefit levels, aside from the fact that they aren't all that generous, or the precise levels of the payroll tax/income cap. We can add a mandatory investment account system without changing the existing rates/benefits at all if we want to. It isn't an either/or proposition.
But, the basic issue I keep returning to is -- how do you devise a loot-free system? How do you devise a system which, either in its initial form or after expected later congressional tinkering, can't be looted to a large degree by the fund managers? I can't come up with one. Then, we're back to the issue of what do we do about a bunch of destitute 70 year olds? And, that's why we have Social Security in the first place...