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washingtonpost.com
A Test of Faith on Social Security

By William Raspberry

Monday, February 7, 2005; Page A21

The old country preacher was out hunting one day when he wandered too 
near a steep cliff, stumbled over a stone and fell headlong over the edge.

The end seemed certain. Then he glimpsed a tree root growing out of the 
side of the cliff, grabbed it and -- at least temporarily -- saved his life.

He then began to pray furiously for deliverance from his precarious 
position.

"Lord," he said, "Please deliver your servant in his hour of need."

Somewhat to his surprise, the response was both immediate and audible: 
"Do you believe?"

"Lord, thy servant truly believes."

"But do you really believe?"

"Lord, thou knowest all things, and thou knowest thy servant truly 
trusts and believes."

"Then let go of that root."

"Are you out of your cotton-picking mind?"

Which brings me to President Bush's proposal for privatizing Social 
Security. He says he believes the U.S. economy will do well enough that 
it will be financially advantageous for workers to invest a part of 
their erstwhile Social Security contributions in the stock market. And 
since the Social Security system is facing an actuarial crisis. . . .

Bush offered some more details in his State of the Union message last 
week, including several attractive features. But the heart of the 
proposal is his unquestioning faith in the market.

Let me confess: I have faith in it, too. That's why my retirement 
savings aren't sitting around in certificates of deposit or other cash 
instruments. I expect my little nest egg to grow. I count on it growing.

But I also count on my Social Security check to keep coming, no matter 
what. Indeed, the only thing that would make me entertain the 
president's proposal is his assertion that there is a crisis in the system.

I'll let others debate whether there is such a crisis looming.

But as Paul Krugman of the New York Times has noted, the economic 
assumptions that lead to the prediction of a crisis would also portend a 
poor return on the privately invested portion. Conversely, as Krugman 
put it last week, "any growth projection that would permit the stock 
returns the privatizers need to make their schemes work would [through a 
windfall of payroll tax revenue] put Social Security solidly in the black."

If that's too complicated, try this: If the president is so thoroughly 
convinced that the market will outperform the Social Security trust fund 
(invested entirely in U.S. government bonds), why won't he propose that 
the Social Security Administration invest in the market rather than in 
government bonds? Wouldn't the bigger return guarantee the actuarial 
soundness of the system?

Ah, but if it didn't, the government would be stuck with making up the 
difference. It really is hard to let go that root.

Business leaders know it well. That's why corporations are phasing out 
defined-benefit pension plans, in which they guaranteed a certain 
pension based on wages and longevity and paid for it by investing 
company money in the stock market. If managers invested wisely, the 
company made money. If not, the company made up the difference.

Now virtually every company is into defined-contribution plans: They 
contribute a certain amount of money to an employee's 401(k) or similar 
account. The employees decide how to invest that money, along with their 
own contributions, but also assume all the risk if the investments go badly.

Is the president's privatization proposal, like corporate abandonment of 
defined-benefit plans, simply a device for shifting the risk away from 
the "company"? Or does he really think it would be a good thing for the 
workers?

He asked in his State of the Union message for ideas about how to fix 
Social Security. I offer instead this small test of faith: Let the 
president ask the Social Security Administration to sell those bonds now 
in its trust fund and invest the proceeds in the stock market. The 
increased rate of return should pump up the trust fund to the point 
where the system could avert the predicted crisis or, alternatively, 
underwrite the transition to a privatized system. In either case, 
employees would have their pensions guaranteed.

How about it, Mr. President? Will you let go that root?

willrasp AT washpost.com

© 2005 The Washington Post Company