Knight-Ridder/Tribune Media Services, Feb. 27, 2001
George W. Bush seems to be cruising through the opening months of his presidency with dumb luck, much as he won the office without even winning the popular vote. But there is one arena in which he is playing with fire, and is sure to get burned: he still thinks that he can get away with privatizing our Social Security system.
Mr. Bush managed to get through the election without paying the price for stepping on the famed "third rail" of American politics -- probably because most people didn't know what he was proposing. In fact, a Harvard study of the electorate showed that most voters could not distinguish between Mr. Bush and his Democratic opponent, Al Gore, on any of the issues, with the possible exception of prescription drugs for Medicare.
But Mr. Bush has now reaffirmed his commitment to creating individual private retirement accounts out of the existing Social Security system, a radical idea that even Ronald Reagan would not have dared to put forward. If he continues down this road, it is only a matter of time before the public understands the threat that this poses to their retirement security, and Mr. Bush and his party will pay a political price for it.
Privatization would threaten Social Security in a number of ways. First, it would add some trillions of dollars of costs to a system that is currently financially sound for the foreseeable future. This would build pressure for benefit cuts in the future, and undermine people's confidence in the program.
The additional costs are of two types: first, there is the cost of transition. The 45 million Americans that receive a monthly check from Social Security are being paid from the taxes of currently employed workers. To take away one-sixth of this revenue and put it into private accounts would create a gap that must be filled somehow -- most likely with benefit cuts.
Second, there are the administrative costs associated with managing 144 million individual accounts. These turn out to be enormous -- 15 or 20 times the costs of administering the current program, and enough to eat up as much as 20 percent of the eventual returns from these accounts.
Of course, what looks like waste from the point of view of the public is income from someone else's vantage point: the Wall Street firms who would haul in billions of dollars of easy money from managing the individual accounts.
And that's what this privatization effort is all about, in a word: greed. It is an appeal not only to the greed of Wall Street but to a small, militantly selfish part of the electorate that is willing to rupture the bonds of social solidarity that have made Social Security this country's most successful anti-poverty program. They want to break the commitment that each generation has made to its predecessors for the past 65 years: to provide a basic social safety net in their old age.
The Bush Administration does not put it this way, but the reasons put forth in support of privatization are patently false. First and foremost is the urban legend that Social Security needs to be "fixed" because the baby boomers will bust the trust fund when they retire. But anyone with a computer and a modem can go to www.ssa.gov and see for themselves that Social Security is perfectly solvent without any changes for the next 36 years, even assuming quite dismal economic growth.
For those who worry about the science-fiction future, the same consensus numbers show that the shortfall for the whole 75-year planning period is quite small -- less than three-quarters of one percent of our national income. And now Alan Greenspan has pointed out that even this much-hyped and grossly exaggerated shortfall -- which was never anything to worry about -- might disappear as economists take into account the faster productivity growth of recent years.
Privatization, which would actually worsen Social Security's financial solvency, has been sold as a way of boosting the program by taking advantage of the stock market's high returns. But here, too, there is a false assumption: that stocks can deliver their historic rate of return (on average, 7 percent after inflation) regardless of how overvalued they are at the starting point.
Guess again: the NASDAQ is down more than 50 percent from its peak last March. A lot of people are already making changes in their retirement plans. It seems that privatization is an idea whose time has come -- and gone. George W. Bush would be wise to take notice, and back off.