How Not to Save Social Security

[Guest guest]

http://www.nytimes.com/2004/09/23/opinion/23thu1.html?th

 

September 23, 2004

 

CAMPAIGN 2004: THE BIG ISSUES

 

How Not to Save Social Security

 

Among the clear-cut policy differences between President Bush and

Senator John Kerry is each man's take on Social Security. In his

acceptance speech at the Republican convention, Mr. Bush said, " We

must strengthen Social Security by allowing younger workers to save

some of their taxes in a personal account. " Mr. Kerry, in his

acceptance speech, said, " I will not privatize Social Security. "

 

Mr. Kerry is right, and Mr. Bush is wrong. The president's plan would

do the opposite of what Mr. Bush claims. It would weaken Social

Security, hurt the economy and endanger many workers' retirements by

pushing them into unreasonable risks in the stock market. If Mr. Bush

were a broker peddling stocks to low-income, uninsured, indebted

individuals like many of the Americans who would be included in his

plan, he would be violating rules that require brokers to recommend

only suitable investments.

 

When responsible politicians talk about " fixing " Social Security, what

they generally mean is finding a way to guarantee a basic level of

financial security for the elderly while closing the gap that will

develop over time in the system's finances if nothing is done. Social

Security's trustees plan for solvency over 75 years. Currently, the

program is projected to come up short in 2042, when it will be able to

pay about 70 percent of the promised benefits. That's a lot of money,

but the gap can be bridged over the next 38 years with a package of

modest reforms, which we will discuss in a future editorial.

 

What Mr. Bush proposes - allowing workers to divert some of their

Social Security taxes into personal investment accounts in exchange

for agreeing in advance to receive a much-reduced guaranteed

government benefit when they retire - would neither provide retirement

security, nor take care of the solvency of the Social Security system.

And it would wreak havoc with the overall federal budget.

 

In proposing personal accounts, Mr. Bush has promised to retain the

current benefits for today's retirees and for those who are nearing

retirement. So for some 40 years, workers would be making deposits

into their accounts with tax money that - under the current system -

would have been used to pay the benefits of those who are retired. The

government would have to make up the difference, and Mr. Bush has no

reasonable plan for covering this cost, which is estimated to be at

least $1 trillion.

 

That leaves three general possibilities: immense government borrowing,

draconian cuts in other programs or higher taxes. In a 1997 report by

President Bill Clinton's Advisory Council on Social Security, those

who favored ample mandatory personal accounts proposed a national

sales tax of 1 percent and $1.2 trillion in government borrowing.

 

If offsetting steps were not taken immediately, the reduced cash flow

in the transition period would drive the Social Security trust fund

into the red about 15 years earlier than is currently projected. That,

too, would require wrenching fiscal moves - borrowing, spending cuts,

tax increases - to avoid default on the government's obligation to

retirees.

 

When workers in a partly privatized system reached retirement, they

would find that higher interest rates caused by huge deficits,

reductions in government services or higher taxes had offset some - if

not all - of the sums they had accumulated in personal accounts. And

they would get smaller government benefits than they would if Social

Security had been reformed in a more sensible way.

 

However Social Security is reformed, when younger workers retire,

their benefits are likely to be smaller than the benefits promised to

current retirees. But a partly privatized system would produce a cut

that's likely to be bigger and an income that would be far less

reliable. That's because the government benefit is cut more deeply

under privatization, and how much you can actually accumulate in a

personal account would depend on the stock market. Anyone who lived

through the 1990's knows that investing in stocks can leave you with

less than you started with.

 

Privatization would invite overexposure to the stock market - a risk

that is not justified by the potential return. Most people who already

save for retirement rely heavily on stock investments through 401(k)'s

and other savings plans. Even workers who have traditional pensions

are more exposed to the stock market than ever, as employers

increasingly strive for outsized stock market returns to make up for

inadequate contributions to their plans.

 

And people without pensions or enough income to save money in

retirement plans generally do not belong in the stock market at all.

Stock investing makes sense only after you have accumulated an

emergency cash reserve, are adequately insured and have paid off

consumer debt. Personal accounts within Social Security would

perpetuate the wrongheaded notion that the stock market can bail

everyone out. It can't. Mr. Bush does everyone a disservice by

implying that it will.

 

The personal account idea also does nothing about another big reason

that Social Security needs reforming: people are living longer. Unless

the government mandates that people convert their personal accounts

into private annuities, retirees are in danger of outliving their

money, leaving them to survive on the meager government benefit. And

they would lose the inflation protection built into government

benefits, which is increasingly important the longer you live. Those

most at risk of impoverishment are old women, who live three years

longer than men on average and are far less likely to have private

pensions.

 

There is a broad social argument against privatization, which is that

we all lose if our fellow citizens come up short in their quest for

secure retirements. By taking the financial risk out of growing old,

Social Security has had remarkable results for society at large.

Poverty among the elderly is now 10 percent, down from 30 percent in

1960. Like any sound insurance system, Social Security works by

broadly pooling risks. It protects everyone because it includes

everyone. Personal accounts move Social Security away from a

comprehensive system to one in which it's increasingly every man for

himself.

 

None of these arguments deter Mr. Bush and other advocates of personal

accounts. For them, Social Security is primarily an ideological

struggle. Social Security supports retirees by shifting income from

the young to the old via taxes, and from the rich to the poor via the

formula for calculating benefits. To Mr. Bush and his supporters,

taxation and redistribution are anathema, and Social Security is an

anticapitalist ploy to squelch initiative and growth. Those same

arguments were leveled against Social Security when President Franklin

Roosevelt established it in 1935, and when its constitutionality was

upheld by the Supreme Court in 1937.

 

Campaign 2004/The Big Issues: Editorials in this series remain online

at nytimes.com/issues.

 

Copyright 2004 The New York Times Company