Baltimore Sun, May 23, 2000
The latest word in the presidential race is that George W. Bush has a secret plan to save Social Security. Apparently he does not intend to give us much detail, but the main point is that everyone is going to retire rich and happy if we just let him privatize a portion of the Social Security program.
Voters may choose not to take this one on faith. There are times when the details may not matter much, but this is a case in which the devil really is all over the details. As congressional Republicans have found in recent years, it is very difficult to design a privatized system to replace Social Security.
The first problem is the administrative cost. One hundred fifty million individual accounts cost far more to administer than a single centralized system like Social Security.
It costs less than 0.8 percent of annual tax revenue to run the Social Security system. By comparison, the administrative costs of the individual account systems in Chile and Britain, which the privatizes hold up as models, are between 15 percent and 20 percent of annual revenue. If the U.S. system were run the same way, it would mean $60 to $80 billion was being pulled out of workers' retirement accounts each year and put into the pockets of the Wall Street brokerage houses and banks.
The second basic problem with individual accounts is that they can't guarantee workers a secure income.
As anyone who has followed the Nasdaq in recent months knows, markets go up and markets go down. If workers are lucky enough to retire on a market upswing, they might do well with their individual accounts. But workers who retire on a bad day will end up with much less money than they had expected. If the point of Social Security is to provide workers with a core retirement income that is absolutely certain, individual accounts won't do the trick.
The third, and biggest, problem with the Bush plan is that it is making impossible assumptions about the returns that people can expect from stocks.
The main reason Social Security is projected to face problems in the distant future is that projections show that the economy will grow much slower in the future in than in the past.
In fact, the Social Security trustees' projections assume that the economy will grow less than half as fast over the next 75 years as it did over the past 75 years. If the economy kept growing at the same rate as in the past, the program would be fine for at least 75 years into the future.
Remarkably, the Bush plan assumes that the stock market will produce the same high rates of return in a slow-growing economy as it did in the more rapidly growing economy of the past. This assumption defies basic logic, and none of Governor Bush's economic advisers has been able to show how it is possible. In other words, the Bush campaign is just making up numbers here.
In short, Governor Bush is trying to sell a Social Security plan that is based on bad arithmetic and hidden costs and risks. If we can have a serious discussion of the issue, he won't get away with it.
Unfortunately, Governor Bush is not the only candidate playing games with Social Security.
Vice President Al Gore has picked up the baton from President Clinton in the race to "save" Social Security. The big secret is that Social Security doesn't really need to be saved. The economists and policy wonks who study the issue know that the program is fully solvent for more than three decades into the future, even if there are no changes. The changes that might be needed at some point -- if the slow growth projections prove accurate -- are small relative to changes we have seen in previous decades.
In other words, Social Security doesn't need Mr. Gore to save it; the program is doing just fine without his help. But the polls show that Democrats do well when Social Security is an issue. So Mr. Gore, like President Clinton before him, has decided to make it front-and-center in his campaign.
Fanning false fears on Social Security is an outrage for two reasons. First, workers and retirees should not have to worry needlessly about their retirement security. Second, if Mr. Gore is defeated, Governor Bush will be in a position to dismantle Social Security with his secret plan.
The fact is, Social Security is a lot more important than either candidate's residential ambitions.