To: "homestead AT lists.ibiblio.org" <homestead AT lists.ibiblio.org>
Subject: [Homestead] Social Security forever
Date: Mon, 03 Jan 2005 08:39:38 -0700
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
[Homestead] Social Security forever,
Gene GeRue, 01/03/2005