The Folly of Social Security Privatization

[Guest guest]

http://www.motherjones.com/news/dailymojo/2004/08/08_518.html

 

August 12, 2004

The Folly of Social Security Privatization

 

(Note: this is the first in a series of critical looks

at George W. Bush's second-term agenda.)

 

Here we go again: President Bush is making yet another

push for privatizing Social Security, as part of his

pledge to create an " era of ownership " if he is

re-elected for a second term. In a new TV ad, the Bush

campaign is touting the plan as an opportunity for

people to " own a piece of their retirement. "

 

The proposal, like the one put forward in the 2000

campaign, would allow workers to keep a portion of

their payroll taxes and invest them in stocks, via

government-sponsored accounts. Bush has argued before

that workers could get a higher rate of return in the

stock market than they do from Social Security. On

this, he's right -- some workers probably could. But

that doesn't excuse the fact that his plan is as

nonsensical now as it was four years ago.

 

The biggest problem with the plan, as countless

analysts have pointed out, is easy to see. The Social

Security program is currently funded by payroll taxes

from the current generation of workers, who pay into

system so that the government can pay out benefits to

retirees. In essence, every generation owes a debt to

the previous generation: we pay for our parents' and

grandparents' retirement, just as they paid for their

parents and grandparents. And so on. If young workers

were allowed to divert their savings into a private

account, there would be fewer funds to pay for this

generation of retirees, even though those workers have

already paid into the system.

 

So if the government wanted to divert payroll taxes

for all workers under, say, the age of 30, it would

have to come up with additional money to pay those

retirees over the age of 30. Economists estimate that

the transition could cost at least $1 trillion --

money that the government just doesn't have,

especially in the wake of mounting deficits. The

alternative is to either raise existing payroll taxes,

or cut future benefits, neither of which Bush is

proposing. So the president can claim that he can

magically fix the system, but his math just won't work

out.

 

One might also question Bush's assumption that workers

would get consistently higher rates of return in the

stock market. As Robert Kuttner argued back in 2001,

the stock market might not continue to rise at a

steady rate, especially after absorbing a sharp

increase during the 1990s. (The stock market has

already started leveling off over the past few years.)

At the same time, there's always the risk of stocks

going down. A worker could easily see his or her

savings vanish after a financial crisis, or worse,

another corporate scandal. Although there are ways to

minimize this risk, there's no way to eliminate it.

Some portion of workers will inevitably retire at the

wrong time -- right after a stock market crash, say --

and lose their savings. In an economy where workers

already suffer from heavy economic insecurity, do they

really need this additional worry?

 

It's not as if the current system is in crisis,

either, despite what conservatives claim. The most

recent analysis by the Congressional Budget Office

found that, even if no changes are made, the program

will be able to pay full benefits to its retirees

until 2053. If the country can turn its economy

around, and wages start growing faster than inflation,

than the outlook for Social Security will continue to

improve -- since payroll revenue will rise faster than

benefit payouts, which are index to the cost of

living. With 50 years to go, there should be plenty of

time to patch up the program in a fairly painless

manner -- Peter Diamond and Peter Orszag outlined one

such solution in Boston Review earlier this year.

 

The CBO's relatively healthy projections haven't

stopped the programs critics from spinning the

numbers. Most famously, on February 25, Alan Greenspan

argued that the massive budget deficits would

necessitate deep cuts in Social Security (along with

other spending programs.) Of course, as Harry Holzer

noted, it was Greenspan himself who, in 1982,

advocated a payroll tax increase in order to build up

a trust fund to ensure Social Security's solvency.

During the 1990s, the government used this surplus to

shore up its general budget projections and pay down

the deficit. But as a program, Social Security still

owns the surplus it built up -- the surplus is simply

" owed " to the program by the federal government. Those

who claim, as Greenspan does, that Social Security is

now running a " deficit " are simply being disingenuous.

As the CBO report makes clear, if you count the

surplus that Greenspan helped create, Social Security

will be solvent for half a century.

 

Of course, that means the general budget is running a

greater deficit than is usually reported. For that,

blame the tax cuts, not entitlements. As Jonathan

Chait has pointed out in The New Republic, the

deficits for Social Security and Medicare combined

over the next 75 years amount to 2.2 percent of GDP.

At the same time, the Bush tax cuts will cause a

revenue loss also equal to 2.2 percent of GDP over

that period. Social Security could be easily shored

up, if we got our priorities straight. This is not to

say we don't need to reform our entitlement programs

-- we certainly do -- but it's dishonest to say that

the programs are hopelessly bankrupt and drastic

measures are needed.

 

It will come as no surprise if, in the months ahead,

Bush tries to use the same faulty arguments against

Social Security. It is surprising, however, that the

Republicans are ready to revisit the privatization

issue once again. During the 2002 midterm elections,

the party scurried away from the issue altogether.

Norm Coleman, the eventual winner of the Minnesota

Senate race, was heard saying, " I don't support

privatizing Social Security, and I'll fight against

anybody who would do that. " Likewise, the NRCC tried

to deny that any Republican had ever talked about

privatization. At the time, it appeared as if the

Enron scandals had forced conservatives to back away

quickly from any and all talk of privatization.

 

But with corporate scandals faded from public memory,

it seems that Republicans are ready to strike once

more, bringing out all of the usual distortions and

demagoguery. It's too bad: a smart, realistic plan to

privatize social security could help spark an

intelligent debate over pension reform and the shape

of future entitlement programs. But Bush is offering

nothing more than a dishonest proposal and a few sappy

catchphrases. It was a waste of time back in 2000, and

it's a waste of time now.