MARCH 21, 2005
AT A TOWN-HALL meeting last month in Philadelphia, Rick Santorum, the stalwart conservative senator from Pennsylvania, was pitching President Bush’s plan to privatize Social Security, speaking the reassuringly nonideological language of insolvency dates and rates of return. It fell to a sympathetic college student in the audience, blessedly unversed in the arts of message discipline, to state what conservatives truly think—and have always thought— about Social Security. “I want to know what problem everybody has with taking care of themselves,” she said. At a similar event, College Republicans chanted, “Hey hey, ho ho, Social Security has got to go.”
Out of the mouths of babes came a pair of remarkably succinct statements about what is at stake as the Bush administration sets about privatizing Social Security: Should Social Security remain in something like its present form, as a social guarantee to retirees, widows, and disabled workers? Or should it be dismantled and replaced with a system in which everybody takes care of themselves?
What was clarified at those events has, alas, been obscured in Washington. The consensus among the capital’s chattering classes holds that the Social Security debate primarily concerns the program’s solvency. Therefore, the questions center around political courage, and the greatest threat is that the parties will not agree on a solution. This consensus is wrong in every particular. In truth, the debate is fundamentally ideological. It does not lend itself to compromise. Despite conservatives’ insistence that Social Security faces a “crisis,” in reality, the fiscal threat is distant and manageable, while the political threat is immediate and dire. It follows from all this that those who believe in Social Security should make it their highest priority to drive a stake through privatization.
To the Washington establishment, the suggestion that conservatives essentially want to do away with Social Security is something close to a lunatic conspiracy theory. When a guest on “Meet the Press” suggested as much, Tim Russert replied incredulously, “So you’re suggesting that private personal accounts are a secret plan to get rid of Social Security?” In fact, the plan hasn’t been secret very long. Conservatives always saw the program as an indefensible infringement upon freedom. Alf Landon, the 1936 Republican presidential nominee, called Social Security a “cruel hoax.” More than 40 years ago, Milton Friedman wanted to let workers opt out of it, and Barry Goldwater said, “Perhaps Social Security should be abolished.” That view, however, has never proved popular. And so conservatives hit upon the tactic of phasing out the program by transforming it into a system of private accounts. Privatization activist Peter Ferrara was quite open about this point in a recent interview with Steven Thomma of Knight-Ridder. “A lot of conservatives thought Social Security was an unjustified invasion into the private sector,” he said. “But they weren’t getting anywhere, because that was all negative politics. ... Personal accounts would work because that’s positive politics.”
Still, as long as they remained confined to the political fringe, advocates of privatization nonetheless confessed their abiding hostility to Social Security itself. Ferrara’s 1980 book Social Security: The Inherent Contradiction, which first laid out a privatization plan in detail, asserts that “social security uses simple force and coercion to compel individuals to participate in a program that seizes control of a portion of their incomes.”
In 1983, a paper in the Cato Journal called for privatization advocates to wage “guerrilla warfare against both the current Social Security system and the coalition that supports it.” And a 1998 book by Ferrara and Michael Tanner of the Cato Institute, A New Deal for Social Security, concedes its preference to abolish the program. Ferrara and Tanner write, “[I]n an ideal world, each of us would be free to make our own decisions over how to provide for our retirement— how much and when to save.”
Today the privatizers have gotten closer to their wish than ever before. Bush has raided the libertarian Cato Institute to stock his staff of Social Security advisers. And he has closely followed the “guerrilla warfare” strategy laid out more than two decades ago by unabashed foes of Social Security. Yet, when the president invokes Franklin Roosevelt, as he does every time he talks about Social Security, it is to praise the New Dealer and his works. In his State of the Union address, Bush called Social Security “one of America’s most important institutions, a symbol of the trust between generations” and “a great moral success.” Of course, Bush and his allies have not abandoned their fundamental hostility to Social Security. They’ve merely learned to bury it beneath a pile of disingenuous rhetoric. And that is why Democrats must not be afraid to block the president’s plan.
ONE WINDOW INTO Bush’s ideological disposition is his constant refrain that private accounts would offer “a better rate of return on your money than that which the Social Security system gets.” On a technical level, that’s a deeply misleading claim. One reason is a theoretical concept called “legacy debt.” Social Security started paying out retirement benefits almost immediately after it came into existence, which meant that the early generations of beneficiaries collected benefits while paying little or nothing into the system. This created the legacy debt. Every subsequent generation, whose taxes support previous generations, must bear a higher tax burden to compensate for the first generation’s free ride. That’s the cost of the legacy debt, and it’s why Social Security will always earn a below-market rate of return.
Now, any generation could decide to stop paying into the system and keep their contributions in private accounts for their own retirement. These private accounts would appear to earn a higher rate of return going forward—but only if you ignore the cost of trillions of dollars that must then be borrowed to pay off current Social Security obligations. When these transition costs are factored in, private accounts don’t earn a market rate of return either.
On a deeper level, though, Bush’s line of reasoning is illuminative. Privatizers portray Social Security as a kind of low-performing 401(k) plan. But the program was never intended as a personal retirement plan. It’s a form of social insurance, designed to spread risks throughout the population. One such risk is that you get sick or hurt and can’t work anymore; 11.5 percent of Social Security benefits go to disabled workers (which is another reason why retirees get a lower rate of return).
Another risk is that your income will decline, perhaps because economic changes make your skills less valuable. (Today, for example, steelworkers could be made redundant by productivity increases. Perhaps in 30 years it will be accountants or software engineers whose work was outsourced overseas.) That’s why Social Security gives low-earning retirees a greater return on their taxes than high-income retirees. Still another risk is that you’ll live a very long time and exhaust your savings, which is why old-age benefits are indexed to inflation and last for a lifetime.
A system of individual accounts would concentrate all these risks on the shoulders of the individual. The inherent risks of investing have captured the most attention. Obviously, if you invest poorly—or even retire at the end of a market slump—you may get a nasty surprise at retirement. (Gary Burtless of the Brookings Institution studied what would have happened historically if workers had invested two percentage points of their Social Security taxes in stocks. Those retiring at the end of a slump would have less than half the income of their more fortunate counterparts who cashed in a few years earlier.) But the risks of replacing social insurance pose an even harsher dilemma. If you suffer a career-ending disability before you’ve put aside enough in your account, if you find yourself at the low end of the income scale, or if you live longer than you had made contingencies for, you would be out of luck. Social Security doesn’t make anybody a millionaire, but it offers everyone the assurance against suffering too much from outrageous fortune. A privatized system would invert that premise.
Privatization advocates insist that the changing economy has rendered social insurance obsolete. “The economy is changing, the world is changing,” asserted Bush during last year’s campaign. “In our parents’ generation, moms usually stayed home while fathers worked for one company until retirement. The company provided health care and training and a pension.”
Bush is right about the changes. As Yale political scientist Jacob S. Hacker has noted, this generation of workers faces much greater income variability than the previous generation. Rather than slow, steady pay increases and lifetime employment, workers change jobs and see their incomes fluctuate dramatically. One of the most potent changes has come in company pensions. Forty years ago, most pensions gave workers a fixed benefit. Today, most pension benefits are tied, at least in part, to stock-market performance.
But Bush has the implications of this change exactly backward. Because workers face higher risk in the economy today, social insurance that eliminates risk makes more sense, not less. Privatized Social Security might have made some sense 40 years ago for workers who stayed at one company their whole career and retired to a guaranteed pension. Why not let them take some risks with their public pension? But it utterly fails to meet the needs of the present day. The last thing you want is for your 401(k) and your Social Security to drop simultaneously during a market decline shortly before you retire. If workers are going to take on greater risk in a more dynamic economy, a risk-free bedrock of social insurance offers the perfect complement.
TO THIS, BUSH’S allies would no doubt reply that they only intend to privatize the system in part. They would leave a minimum guaranteed benefit in place, along with survivors’ benefits. What they rarely acknowledge is that partial privatization is designed to lead to full privatization.
Bush, in a rare moment of wandering off-message, actually admitted this once. Shortly after announcing his support for private accounts in 2000, he was asked about transitioning to a fully private system at a question-and-answer session, and he replied, “It’s going to take a while to transition to a system where personal savings accounts are the predominant part of the investment vehicle. ... This is a step toward a completely different world, and an important step.”
How will this work? Conservatives believe, not without reason, that private accounts will offer an invidious comparison to traditional Social Security. Workers will note that the taxes they send off to the traditional program disappear, while the money in their own accounts grows before their eyes. The private accounts will, in most cases, also appear to provide a higher rate of return. As noted above, the comparison is deceptive—traditional Social Security will be bearing the weight of the legacy debt, disability benefits, and, for affluent workers, redistribution to those earning less. But the comparison will create a constituency clamoring for expansion. Conservatives once proclaimed this unabashedly. The 1983 Cato Journal paper, which advocated what it called a “Leninist Strategy” for undermining Social Security, argued, “This mechanism for demonstrating the individual gains and losses that occur under Social Security is a key step in weakening public support for our present system.”
Today’s privatizers offer assurances that private accounts will be strictly limited and regulated. But those promises can’t easily be reconciled with one of their key selling points—namely that workers would own them. “Under a privatized Social Security system, workers would have full property rights in their retirement accounts,” writes Cato’s Tanner. “They would own the money in them, the same way people own their IRA’s or 401(k) plans.” The comparison with IRAs and 401(k) accounts is instructive. These, like the proposed Social Security accounts, were created for the very narrow purpose of retirement savings. But their owners saw them as their own property and demanded the right to use them for children’s educations, buying homes, and other purposes. Congress has steadily acceded to those demands, and the Bush administration has already proposed expanding IRAs into all-purpose tax shelters with even fewer restrictions.
As conservatives well understand, once a group of voters has been given a property right by Washington, they will never allow it to be taken away. The individual rights will be a ratchet, one that can be expanded but never contracted. The pressure for expansion would be especially strong during extended bull market runs, such as during the late ’90s, when the public (and even some economists) tends to delude itself into thinking that stocks will rise forever. This is why conservatives are so insistent upon establishing individual accounts. They have uncharacteristically volunteered compromises— even offering to violate their theological opposition to tax hikes—in order to insert their opening wedge. Privatizers understand full well that any concessions they make can be legislated away in the future, while private accounts cannot.
IN LIGHT OF all this, it should be clear how critical it is to block private accounts. And it’s curious, if not outright bizarre, that so many of those who do not share the privatizers’ basic hostility to Social Security nonetheless urge the Democrats to compromise with them. Suppose a group of peaceniks, concluding that their long quest to slash defense spending has failed, decided to overhaul the Pentagon. They have the explicit goal of transforming the military into a shriveled force incapable of projecting power overseas, but they sell their plan as a solution to wasteful defense procurement. Of course, they wouldn’t receive a serious hearing, just as Social Security privatization didn’t two decades ago. But imagine that they patiently advocated their case, and, in due time, very liberal Democrats came to control the White House and Congress and put their brand of military “reform” on the national agenda. Would moderate conservatives feel the need to strike a deal? Would their failure to do so reflect a shameful lack of response to the (very real) problem of Pentagon waste? Probably—hopefully—not.
Why, then, is privatizing Social Security widely seen not as a contest of diametrical philosophies but as fertile ground for compromise? (As Joe Lieberman said on CNN last Sunday, “So, at some point, we’ve got to stop criticizing each other and sit at the table and work out this problem.”) One reason is that the culture of Washington celebrates consensus. Refusing to compromise is considered unseemly. Republicans have played to this sentiment by accusing Democrats of opposing Bush merely for the sake of denying him a victory. The press has proved receptive to this line of attack. “So the Democratic position,” PBS anchorman Jim Lehrer asked Senate Minority Leader Harry Reid last month, “is that there is no crisis and nothing needs to be done at all to the Social Security program right now?”
Republicans like to point out that none other than Bill Clinton called Social Security’s financing a “crisis” in the late ’90s. Indeed, it seemed that way at the time. But it has become less and less clear that Social Security actually will become insolvent. In 1997, the Social Security actuaries projected that the Trust Fund would run out in 2027. But every year since, even after the economic slowdown of 2001, faster growth has pushed that date back. Today, the actuaries project the Trust Fund will run out in 2042. It’s now within the realm of possibility that the date of insolvency will be pushed back indefinitely. Quite possibly, in other words, little or nothing will need to be done to save Social Security. More likely, the benefit cuts or tax hikes required to keep it in the black will be less severe than currently projected.
CUTTING THE GUARANTEED benefit is the politically dicey part of reforming Social Security, and privatizers argue that establishing individual accounts will make such cuts easier. As an administration Social Security strategist put it, “You’ve got the bitter medicine of changing the indexing [which will reduce benefits], but, to go along with that, you’ve got the sweetener of the accounts.” But, in reality, individual accounts make benefit reductions more painful by forcing deeper cuts than would otherwise be necessary. And, of course, the deeper the cut, the harder it is to enact.
Given that his own supposed solution will make it harder to shore up Social Security, Bush’s claims to be motivated by a desire to save the program are patently disingenuous. Bush has argued that the true Social Security crisis will occur not when the Trust Fund runs out in 2042, but in 2018, when Social Security benefits outstrip tax revenues, forcing the program to cash in its Treasury bonds. What emergency will happen in 2018? The federal government will have to run deficits. But, of course, the government is already running large deficits right now, and Bush hardly regards that as a “crisis.” If Bush wanted to control entitlement spending, he’d look to save Medicare, whose long-term deficit is seven times that of Social Security.
The only way to make sense of Bush’s behavior is to understand that his professed concern for Social Security’s solvency is a pretext. He wants to use this moment of maximal Republican power to put his ideological imprint on any change to the system. From a fiscal standpoint, repairing Social Security now as opposed to five or ten years from now makes almost no difference. The true basis for Bush’s urgency is that Republicans may not control Washington in five or ten years. For ideological conservatives, this is a pressing reason to act now. For the rest of us, it isn’t.
Bush has tried to pressure Democrats by accusing them of putting their heads in the sand by not putting forth a detailed plan to save Social Security. Amazingly, mainstream pundits have endlessly repeated this vacuous talking point, seemingly oblivious to the fact that Bush has no detailed plan, either. Bush has put forth some general principles. Democrats have also put forth general principles. (In a press conference, Democratic leaders indicated their preference for a bipartisan solution, mixing benefit cuts and tax hikes, similar to what a commission chaired by Alan Greenspan produced two decades ago. ) Sure, Bush has focused more on the need for change and Democrats on the dangers of the wrong kind of change. But that’s because Bush can be sure any plan that passes soon will meet his approval. Democrats, obviously, have no such confidence.
Bush and his allies have accused Democrats of opposing his agenda out of pure partisan interest. They have also warned that the public will blame Democrats if they block reform. Both these arguments happen to be wrong. Not only are there sound, substantive reasons for defeating privatization, polls show around 70 percent of the public opposes replacing part of a guaranteed benefit with an individual account. The minority party will not be blamed for failing to implement wildly unpopular changes.
The fear peddled by the administration that fiscal calamity will ensue if we do nothing is also groundless. What’s so bad about waiting until the last minute? In 1983, Congress waited until the very eve of insolvency to act, and a very responsible bipartisan solution emerged. If we do nothing until 2042, and insolvency actually does loom then, the same thing would no doubt happen again.
There are other principled reasons for postponing a Social Security fix. Waiting too long may not be ideal, but acting too soon carries its own risks. Long-term projections are highly unreliable. The further in advance of the problem we act, the less reliable our guess. Also, acting now to “save“ Social Security would consume scarce resources that may be needed to solve larger problems. Some moderates have suggested cutting a Social Security deal that includes a tax hike. But balancing the general operating budget and saving Medicare and Medicaid will probably require tax hikes, too. These twin problems- -the deficit and health care—dwarf Social Security’s future insolvency. Pouring resources into saving Social Security now is like driving a fire truck past the blazing inferno to fireproof the house across town.
Some liberals are naturally attracted to the prospect of offering subsidized savings accounts to help workers who have never had the chance to save money and build wealth. It’s an attractive goal. (Though whether it’s a compelling use of public funds given our desperate fiscal straits is open to dispute.) The key obstacle is that Bush supports those accounts only as a bludgeon against Social Security. If a given bill doesn’t sow the seeds of the program’s demise, Bush almost certainly won’t sign it.
Likewise, he will have little incentive to sign a bill that merely eliminated the program’s future deficit, because doing so would deprive him of his strongest pretext for privatization. The key point Democrats should understand is that, while it may be tactically useful to favor an alternative to privatization, no decent alternative is going to be signed into law under this president. There will be plenty of time in the future for shoring up Social Security or adding spiffy new savings vehicles. In the meantime, the crown jewel of the New Deal faces an existential threat. Defeating that threat is the task to which we must presently address ourselves.
This article appeared in the March 21, 2005 issue of the magazine.