At the heart of the president's plan is a proposal to allow taxpayers to divert a portion of their social security taxes to private accounts they can invest in stocks. The administration rests its case for private accounts on Four Big Lies.
Lie No. 1: Social Security faces a crisis that demands immediate, dramatic measures.
Social Security is "in crisis" in much the way that Saddam Hussein had weapons of mass destruction. That is, as useful fiction. The facts of the matter are these. As the baby boom generation retires, there will come a point when there aren't enough workers still paying Social Security taxes to cover the boomers' Social Security benefits. This will happen around 2018.
At that point a Social Security trust fund, which has been collecting surplus taxes to meet this shortfall, will have to be tapped. By using the trust fund to supplement revenues, the government can pay all Social Security benefits for four decades or so. At the point when the trust fund is exhausted, Social Security revenues would cover only about 75 percent of the benefits currently promised by the system.
As any honest analyst will agree, fixing this problem doesn't require heroic efforts. Over time you could make small changes in one or more of the following ways: a) increase the age at which Social Security benefits commence; b) raise the cap for income that's subject to Social Security tax; c) reduce benefits; d) increase the Social Security tax rate. In 1981, the last time the system needed tweaking, President Reagan chose "a" and "d." President Bush could do the same.
Of course there's a simpler solution still. Congress could repeal the tax cuts for the richest 1 percent of Americans that President Bush pushed through in his first term and redirect those revenues to Social Security. That would do the trick. But the president doesn't favor this solution.
Lie No. 2: Private accounts will save Social Security.
In the debate over Social Security, this canard is doing the work that "Saddam attacked the World Trade Center" did in the prelude to war in Iraq. More insinuated than asserted, the notion has a simplicity and emotional appeal that sell the administration's proposals despite being patently false. David Walker, comptroller general of the non-partisan U.S. Government Accountability Office, put it most plainly: "The creation of private accounts for Social Security will not deal with the solvency and sustainability of the Social Security Fund." In fact, it will make things worse.
Think about it. By allowing taxpayers to divert up to a third of their Social Security taxes into private accounts, the government will reduce revenues to a Social Security fund already "in crisis." And yet President Bush has vowed not to cut benefits for folks near retirement (55) at the time the plan takes effect. So on the Bush plan, the government faces the same benefit demands for a long time--20 years anyway--while having even less tax revenues to meet them. The revenue shortfall caused by private accounts over the next 20 years would come to something in the $2 trillion range, which amount would have to be borrowed by the government.
The real sucker punch is that even after putting future generations in hock for $2 trillion, President Bush's plan doesn't "save" Social Security. Benefits will still have to be cut, a reality private accounts will only hasten.
Lie No. 3: Allowing individuals to divert Social Security taxes into stock investments will make up for reduced future Social Security benefits.
The kernel of truth in President Bush's plan is that stocks historically have earned much higher returns than bonds. This being the case, it makes sense that the Social Security trust fund assets could grow faster over time if they were invested in stocks and bonds instead of in bonds only, as has been the case. Faster growth of trust fund assets could offset a future decline in Social Security tax revenues and so support a higher level of benefit. This is a plausible argument. Only it happens not to be one for private accounts.
The Social Security Administration could itself invest a portion of trust fund assets in stocks just as it now does in bonds. While the government might thus reap the benefits of superior stock returns, the odds of individuals doing so are much lower, for two main reasons. The first is cost.
The president's own Commission to Strengthen Social Security concluded the administrative costs of individual accounts would be 10 to 30 times more than the costs of administering the current system. Which makes sense. You'll pay much lower fees on one vast account than you will on 150 million small ones. High administrative costs (plus outright gouging) have plagued private accounts in Chile and England, cutting deeply into the superior returns advertised for stocks.
Equally important is the disadvantage individuals face as decision-makers over their investments. As someone with 20 years of professional investment experience, I can tell you that most people--even highly educated, financially sophisticated people--are lousy decision-makers when it comes to investing. Most notably, they panic in market declines and sell their stock holdings, thinking they'll buy back in when the market is acting better.
Empirical studies have shown time and again that such tactics--if panic can be called a tactic--dramatically reduce the returns from stocks and thus their advantage versus bonds. The federal government could avoid such emotionalism by adopting a mandate that a fixed percentage of Social Security assets be invested in stocks at all times. So why doesn't President Bush simply let the Social Security Administration invest a portion of the trust fund in stocks, as President Clinton contemplated? Well, because...
Lie No. 4: It's your money.
By referring to the Social Security taxes Americans pay as "your money," the president shrewdly casts Social Security as a kind of savings plan. You pay a certain amount in; you get a certain amount back at retirement. If this were the whole story, one might well ask rhetorically, as the president does, why the government should be handling "your money" that you've saved for retirement.
But Social Security wasn't devised as a savings plan. It was designed as an insurance plan to protect the elderly in our society from poverty. The Social Security taxes you pay are thus better thought of as insurance premiums than savings deposits.
And there's a big difference. Indeed, it's the absolute crux of the matter.
Insurance plans reduce the cost of any one person dealing with a potential misfortune--whether car wrecks or cancer--by sharing the risk and cost of that misfortune with others. To work, an insurance plan has to have members who'll turn out not to need it. Their premiums go to pay the claims made by others who do. This is how Social Security works. A poor person who lives long can draw more in benefits than he ever paid in Social Security taxes while a rich person who dies young doesn't get any benefits for the taxes he paid.
This is what Republicans don't like about Social Security: It's an insurance policy that they, as the party of wealth, believe they'll never need. They'd much prefer to shoulder the cost of their old age through their own personal savings. And they want everyone else to do the same.
This is what they're selling under the guise of private accounts, and it amounts to a radical shift in policy from a plan where risks and costs are shared to one where they are not.
So the next time you hear President Bush talking about his vision of an "ownership society," remember that what he really has in mind is a society where you're on your own.