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[Gene GeRue <genegerue AT ruralize.com>]

EDITORIAL
The Social Security Fear Factor

Published: January 3, 2005

If you've lent even one ear to the administration's recent comments on 
Social Security, you have no doubt heard President Bush and his aides 
asserting that a $10 trillion shortfall threatens the retirement system - 
and the economy itself. That $10 trillion hole is the basis of the 
president's claim last month that "the [Social Security] crisis is now." 
It's also the basis of the administration's claim that the cost of doing 
nothing to reform the system would be far greater than the cost of acting now.
Well, the $10 trillion figure is the closest you can get to pulling a 
number out of the air. Make that the ether. Starting last year, as the 
groundwork was being set for the emerging debate, the Social Security 
trustees took the liberty of projecting the system's solvency over 
infinity, rather than sticking to the traditional 75-year time horizon. 
That world-without-end assumption generates the scary $10 trillion 
estimate, and with it, Mr. Bush's putative rationale for dismantling Social 
Security in favor of a system centered on private savings accounts. The 
American Academy of Actuaries, the profession's premier trade association, 
objected to the change. In a letter to the trustees, the actuaries wrote 
that infinite projections provide "little if any useful information about 
the program's long-range finances and indeed are likely to mislead any 
[nonexpert] into believing that the program is in far worse financial 
condition than is actually indicated."
As it often does with dissenting professional opinion, the administration 
is ignoring the actuaries. But that doesn't alter the facts or common 
sense. If the $10 trillion figure is essentially bogus, so is the claim 
that Social Security is in crisis. The assertion that doing nothing would 
be costlier than enacting a privatization plan also turns out to be wrong, 
by the estimates of Congress's own budget agency.
Over a 75-year time frame, Social Security's shortfall is estimated by the 
Congressional Budget Office at $2 trillion and by the Social Security 
trustees at $3.7 trillion, a manageable sliver of the economy in each case. 
If the shortfall is on the low side, Social Security will be in the black 
until 2052, when it will be able to pay out 80 percent of the promised 
benefits. If it is on the high side, the system will pay full benefits 
until 2042, when it will cover 70 percent.
Contrary to Mr. Bush's frequent assertion that Social Security is 
constantly imperiled by political meddling, it has in fact been preserved 
and improved by political intervention throughout its 70-year history, most 
significantly in 1983. The system could - and should - be strengthened 
again by a modest package of benefit cuts and tax increases phased in over 
decades.
Instead, the administration wants workers to divert some of the payroll 
taxes that currently pay for Social Security into private investment 
accounts, in exchange for a much-reduced government benefit. To replace the 
taxes it would otherwise have collected - money it needs to pay benefits to 
current and near retirees - the government would borrow an estimated $2 
trillion over the next 10 years or so and even more thereafter.
In effect, the administration's plan would get rid of the financial burden 
of Social Security by getting rid of Social Security. The plan shifts the 
financial risk of growing old onto each individual and off of the 
government - where it is dispersed among a very large population, as with 
any sensible insurance policy. In a privatized system, you may do fine, but 
your fellow retirees may not, or vice versa.
In any event, doing well under privatization is relative. Congress's budget 
agency analyzed the privatized plan that is widely regarded as the template 
for future legislation and found that total retirement benefits - including 
payouts from the private account plus the government subsidy - would be 
less than under the present system. The amount available from the 
privatized system was less even after midcentury, when the current system 
is projected to come up short.
It should come as no shock that individual investors might not do as well 
as hoped. The stock market's historical returns - some 7 percent a year - 
are predicated on a hypothetical investor who bought an array of stocks in 
the past, reinvested all dividends, never cashed in and never paid 
commissions or fees. That's not how investing works in the real world. An 
especially grave danger is that investors would withdraw their funds before 
retirement, a pattern that is pronounced in 401(k) plans. It would be 
politically very difficult to refuse people access to accounts that were 
sold to them on the premise that they - not the government - would own them.
The Congressional Budget Office analysis also likely understates the costs 
to individuals of privatizing Social Security. The borrowing that would be 
needed to establish private accounts could lead to higher interest rates, a 
weaker dollar and slower economic growth. It is also likely that future tax 
hikes would be required to cover the interest payments on the additional 
national debt.
The only hands-down winner would be Wall Street, as fees to manage millions 
of accounts poured in. (Those fees, not incidentally, would come out of 
your return.) Current stockholders would also stand to benefit, as 
increased demand pushed up stock prices, giving existing owners a gain at 
the expense of newcomers who would be forced to buy high. The affluent, who 
could afford professional investing advice, would also be advantaged, even 
though everyone would be taking the same risks.
The zeal over privatization is fueled by the belief of Mr. Bush and his 
supporters that free-market fixes are appropriate for virtually every 
problem. That faith is misguided. For a society to be functional and 
humane, it's not enough that some people have a chance to be rich in old 
age. Rather, all old people must have the dignity of financial security, 
and that requires universal coverage.
Social Security is the core tier of old-age support, replacing about a 
third of preretirement income for a typical retiree and providing 
inflation-proof income for life - a feature not available in private 
accounts. Its purpose is not to supplant other retirement investing, but to 
provide a crucial safety net. Anyone who wants to maintain his or her 
standard of living into old age must also amass substantial personal 
savings and investments. To introduce the same risk into the core tier of 
benefits that already exists for the bulk of one's retirement savings would 
be as unfair as it is unwise.
If Mr. Bush were not so serious about privatizing Social Security, his 
urgency would be silly. Compared with other challenges looming for the 
government, it's a non-problem. The shortfall in the Medicare hospital 
insurance fund is two to three times the size of the Social Security 
shortfall, and that fund is projected to be insolvent some two to three 
decades before Social Security. Taken together, the costs of the Medicare 
prescription benefit and of making the tax cuts permanent - Mr. Bush's two 
main domestic initiatives - are 5 to 8.5 times larger. And his hair is on 
fire over Social Security?
One of the most distressing aspects of the debate over Social Security 
privatization is that it distracts from more pressing issues and obscures 
better solutions to the problem of secure retirement. A future editorial 
will discuss new strategies to increase private savings outside of Social 
Security that draw on market theory and behavioral economics and are more 
promising than rehashing the same tired formula of tax-sheltered savings 
accounts. In the meantime, however, Mr. Bush and his supporters will be 
pursuing their idée fixe of privatization. It's bad policy. And it's bad 
politics, too, driven by reflex, ideology and special interests, and 
sustained by conformism that masquerades as party discipline. Lawmakers who 
still value their right and obligation to think for themselves - and to act 
in the best interest of their constituents - must champion solutions that 
will build on Social Security, not undermine it.
A previous editorial, "How to Save Social Security," is available online at 
nytimes.com/opinion.
http://www.nytimes.com/2005/01/03/opinion/03mon1.html?oref=login