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[Gene GeRue <genegerue AT ruralize.com>]

It appears that changes to the Social Security system are high on the 
agenda of the Bush administration. We are going to be inundated with 
propaganda from all views of the proposed change to private investment 
accounts. Presuming that all you good people let your elected 
representatives know how you feel about important issues, I offer the 
following as part of our information-gathering process. This is a serious 
issue. I suggest that we try to refrain from knee-jerk responses to each 
writer we will be reading from now until the time this is finished.

OP-ED COLUMNIST
Borrow, Speculate and Hope
By PAUL KRUGMAN

Published: December 10, 2004

The National Association of Securities Dealers," The Wall Street Journal 
reports, "is investigating whether some brokerage houses are 
inappropriately pushing individuals to borrow large sums on their houses to 
invest in the stock market." Can we persuade the association to investigate 
would-be privatizers of Social Security?
For it is now apparent that the Bush administration's privatization 
proposal will amount to the same thing: borrow trillions, put the money in 
the stock market and hope.
Privatization would begin by diverting payroll taxes, which pay for current 
Social Security benefits, into personal investment accounts. The 
government, already deep in deficit, would have to borrow to make up the 
shortfall.
This would sharply increase the government's debt. Never mind, 
privatization advocates say: in the long run, they claim, people would make 
so much on personal accounts that the government could save money by 
cutting retirees' benefits. Financial markets won't believe this claim, as 
I'll explain in a minute, but let's temporarily grant the point.
Even so, if personal investment accounts were invested in Treasury bonds, 
this whole process would accomplish precisely nothing. The interest workers 
would receive on their accounts would exactly match the interest the 
government would have to pay on its additional debt. To compensate for the 
initial borrowing, the government would have to cut future benefits so much 
that workers would gain nothing at all.
How, then, can privatizers claim that they could secure the future of 
Social Security without raising taxes or reducing the incomes of future 
retirees? By assuming that workers would invest most of their accounts in 
stocks, that these investments would make a lot of money and that, in 
effect, the government, not the workers, would reap most of those gains, 
because as personal accounts grew, the government could cut benefits.
We can argue at length about whether the high stock returns such schemes 
assume are realistic (they aren't), but let's cut to the chase: in essence, 
such schemes involve having the government borrow heavily and put the money 
in the stock market. That's because the government would, in effect, 
confiscate workers' gains in their personal accounts by cutting those 
workers' benefits.
Once you realize that privatization really means government borrowing to 
speculate on stocks, it doesn't sound too responsible, does it? But the 
details make it considerably worse.
First, financial markets would, correctly, treat the reality of huge 
deficits today as a much more important indicator of the government's 
fiscal health than the mere promise that government could save money by 
cutting benefits in the distant future.
After all, a government bond is a legally binding promise to pay, while a 
benefits formula that supposedly cuts costs 40 years from now is nothing 
more than a suggestion to future Congresses. Social Security rules aren't 
immutable: in the past, Congress has changed things like the retirement age 
and the tax treatment of benefits. If a privatization plan passed in 2005 
called for steep benefit cuts in 2045, what are the odds that those cuts 
would really happen?
Second, a system of personal accounts, even though it would mainly be an 
indirect way for the government to speculate in the stock market, would pay 
huge brokerage fees. Of course, from Wall Street's point of view that's a 
benefit, not a cost.
There is, by the way, a precedent for Bush-style privatization. One major 
reason for Argentina's rapid debt buildup in the 1990's was a pension 
reform involving a switch to individual accounts - a switch that President 
Carlos Menem, like President Bush, decided to finance with borrowing rather 
than taxes. So Mr. Bush intends to emulate a plan that helped set the stage 
for Argentina's economic crisis.
If Mr. Bush were to say in plain English that his plan to solve our fiscal 
problems is to borrow trillions, put the money into stocks and hope for the 
best, everyone would denounce that plan as the height of irresponsibility. 
The fact that this plan has an elaborate disguise, one that would add 
considerably to its costs, makes it worse.
And maybe the fact that serious financial experts, the sort qualified to be 
Treasury secretary, understand all this is the reason why John Snow has 
just been reappointed.
http://www.nytimes.com/2004/12/10/opinion/10krugman.html?oref=login