May 21, 2000
Dean Baker and Mark Weisbrot
San Francisco Chronicle, May 21, 2000
George W. Bush has a secret plan to save to Social Security. He is vague about the details, 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 where 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 Britain and Chile, which the privatizers hold up as models, are between 15-20 percent of annual revenue. If the U.S. system were run the same way, it would mean $60- $80 billion pulled out of workers’ retirement accounts each year, and placed 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 do not always go up. Workers who are lucky enough to retire on a market upswing may 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 provide workers with a core retirement income that is absolutely certain, individual accounts won’t do the trick.
The third 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 seventy-five years as it did over past seventy five years. If the economy kept growing at the same rate as in the past, the program would be fine for at least seventy 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 Mr. Bush’s economic advisors has been able to show how it could be possible.
The stock market also remains grossly overvalued, even with the recent “correction” in the Nasdaq. Price-to-earnings ratios– a measure of how much stocks cost relative to the profits of the companies they represent– are still about twice their historic average. In the short run, the price of stocks can be determined by psychology: people believe that stocks are going up, so they buy them, and the buying drives prices up. But this kind of a speculative run-up cannot last indefinitely. Over the long run– and for Social Security that means the Trustees’ seventy-five year planning period– stock prices must reflect the real earning potential of real companies. This is another reason why no one– including Bush’s economic advisors– can tell a coherent story about how they expect the stock market to deliver the goods that they are promising over the next few decades.
There is another problem with Mr. Bush’s plan: He is proposing to divert some amount– probably two percent– of payroll (about $75 billion dollars this year) from the current Social Security program to individual accounts. But this is money that currently goes to retirees, surviving spouses, and other beneficiaries. So he has to find a way to replace this money, if he is not going to cut benefits.
One way to do this would be to take the money from projected Federal government surpluses. This could conceivably take care of the problem for about the next 15 years, but that would leave no money to augment other programs, such as health care and education. It is therefore doubly dishonest for Mr. Bush to claim, as he does, that he is “saving” Social Security from insolvency. He is in fact creating new financial problems for the program, and even if they turn out to be solvable, it will be at the expense of the Federal treasury and other programs.
The other part of the dishonesty is unfortunately shared by many Democrats– namely the whole myth that Social Security needs to be “saved.” If not for their complicity, we would probably never have reached this sorry state of affairs, where a Presidential candidate can actually try to run on a platform that would undermine America’s most successful and popular anti-poverty program.
As anyone who has looked at the numbers knows, Social Security is financially sound for as far into the future as we would ever want to worry about. Even with the Trustees’ gloomy growth projections, which are the basis for this whole discussion, the program can pay all promised benefits for the next 37 years– without any changes whatsoever.
That really should be the end of the story. We don’t have much of an idea what the world will look like in thirty-seven years, and economists can hardly forecast the Federal budget surplus a few years out without embarrassment. Projections for 2050 or 2075 might as well be read from Tarot cards, for all they good they are going to do.
For those who wish to take such projections seriously, there is still no problem that anyone should be losing sleep over. The Trustees’ projections show a shortfall of well under one percent of our income over the whole 75-year period. So the worst that could happen is that people making 50 or 60 percent more than the average wage-earner of today might have to pay that little bit more in taxes to support their parents and grandparents in their old age. We doubt that they will complain.
But in any case, it will be their decision– not ours– to make. The shortfall that might occur in the far off, hazy future is due to the longer life spans that future generations are expected to enjoy. (Contrary to popular mythology, it is not a problem of retiring the baby boomers, the last of whom will turn 67 in 2031). If people are indeed living longer, they will have to choose how much of their longer lives they want to spend in retirement, and how they want to pay for it.
The generations of the future will have many opportunities to make these retirement decisions for themselves, and to adjust Social Security’s funding and benefits accordingly. It is a bit presumptuous, to put it politely, for us to pretend that we are making the rules for the next 75 years.
Vice President Gore has gone along with the farce and offered his own plan to “save” Social Security. In doing so, he has added more smoke and mirrors to the show. He now pretends that we need to use Social Security’s surplus funds to pay off the national debt. There is no defensible economic argument for doing this, and it certainly won’t affect Social Security one way or another. The Social Security program loans its surplus funds to the Treasury each year, and receives bonds in return. These bonds are as good as any held by other investors. Whether the government uses the money it borrows from Social Security to pay down the national debt, or spends it on other programs, Social Security’s finances remain the same.
By relying on false arguments in this debate, Gore’s defense of Social Security is much weaker than it should be. And by pretending that the program needs to be “fixed,” he undermines confidence in the system and makes it more vulnerable to benefit cuts, or even partial privatization if Bush should win the election.
Social Security keeps half of our elderly above the poverty line, and provides more life insurance than the whole private life insurance industry. It is much more than a retirement program– it is a commitment across generations to guarantee a safety net for those whose contributions to our economy have raised the standard of living for everyone. It is much too important to be put at risk by the presidential ambitions of any candidate.
Dean Baker and Mark Weisbrot are Co-Directors of the Center for Economic and Policy Research.
