SOCIAL SECURITY

Social Security Reform Advocated By Bush

President Bush has made Social Security reform a top priority in his second administration, as he did in his first. It has not proven to be a very popular cause, either among the American people (polls and focus groups both indicate that Americans are against reforming the system) or members of his own party. The debate is often confusing, with each side accusing the other of creative mathematics and deliberate obfuscation. What, exactly, is the debate really about, and what might it mean if reforms are implemented?

Privatizing Social Security would involve, essentially, diverting a portion of current payroll taxes into private accounts. The funds then would be available for the worker to invest in stocks or other investment vehicles through government-sponsored accounts. Simple in theory, the plan has come under extremely heavy criticism from members of both parties, and its supporters have defended it just as vigorously.

The first major disagreement centers on whether or not there really is a "Social Security crisis" at all. It is true, mainly because of the coming retirement of the baby boomers, that the system faces a future shortage of funds. Because there soon will be more retirees than active workers, they will be drawing more money than will be going into the system. However, the severity of the problem and its effects are up for debate.

As proponents of privatization point out, the system, as it stands, will begin running a deficit within the next fifteen years as entitlements paid out begin to eclipse revenue taken in. Privatizing the system now will involve an investment to cover the transition costs, but it will save the system for the long run. Critics counter that while the system will indeed face a future

deficit, the current system will be able to pay full benefits for approximately fifty more years, and that the system can be kept as it now if only minor changes are made. A modest increase in payroll taxes (1% of GDP by one estimate) will fill the hole and keep the system solvent for the indefinite future.

Proponents argue that the current system is bankrupt and that, without reform, cuts in benefits will have to be made. Critics dispute this, noting that the system generates a yearly surplus of $180 billion, which the government then borrows to finance other programs. Critics of Bush's economic policies are quick to point out that the deficits in both Social Security and Medicare equal 2.2% of GDP, which happens to be the same deficit incurred by Bush's tax cuts for the wealthy. The critics further point out that while the money has been spent, it still belongs to Social Security, and it must be paid back. All that is needed, they argue, is some fiscal responsibility to pay back what was taken out.

The second major disagreement is over transition costs. Both sides agree that there will be transition costs, but they disagree markedly on what the effects of those costs will be. Transition costs arise because of the nature of the system. In theory, Social Security works like a bank, with workers paying money into the system, and they will later get it back. In practice, however, the money that the current crop of workers is paying into the system is funding the current benefits of those receiving Social Security benefits. Critics point out that if a portion of payroll taxes is diverted into private accounts, that money is not going into the system, while the system is still paying out benefits to current retirees. The simplest way to fix this problem is also the most draconian: simply cut the benefits currently being paid out. That plan, however, will not fare well with workers who have paid full shares into the system only to have their benefits slashed. The only other solution is to have the government make up the difference, which carries an absolutely staggering price tag; the most conservative estimates start at $1 trillion and run up to about $5 trillion. Bush has said that this bill would not be paid by either cutting benefits or raising taxes, so the only way to do it would be by taking on more debt. As the government is currently running a large deficit, critics argue, the additional debt simply cannot be floated without devastating effects on the economy. Proponents of privatization argue that the cost of doing nothing is much greater in the long run, and that the extra wealth generated by private accounts will pump the economy up to the point where the deficit, no matter how large, will become insignificant. Critics counter that because the stock market's performance is dependent on investment, and thus on the economy as a whole, adding trillions in debt would drag the economy down. Moreover, they point out that any deficit eventually would have to be paid back, and that debts are paid back through higher taxes, which would negate any additional monies gained by investing in stocks. This amounts to double taxation, the critics say—taxing workers now in the form of payroll taxes, and taxing them later in an effort to pare down the deficit caused by the transition.

The third major disagreement centers on the wisdom of putting retirement funds into the stock market. Proponents argue that it would be an opportunity for workers to exert more control over their money—to "own a piece of their retirement," as a recent television message worded it. President Bush has made this the major selling point for his privatization plan, part of what he calls the shift to the "era of ownership." The idea is that if workers have control over their own money, they will take better care of it and invest it carefully. To solve the baby-boomer problem, critics contend, benefits eventually would have to be cut, or taxes raised, neither of which would be desirable. The current crop of workers, therefore, will receive less in returns than they paid into the system. Based on stock market returns, proponents argue, money invested in private accounts would bring more yields than money placed in the Social Security system, and investing in the stock market would bring greater economic growth to the nation and benefit everyone, thus turning the negative rate of return into a positive one. Finally, proponents assert a moral right of people to be able to control their own economic fate: As it is the workers' money, should they not have the right to have some say as to the way it is invested?

Critics point out that the high returns and economic security promised by proponents of privatization depend entirely on the performance of the stock market in years to come. Currently, say critics, the stock market is fairly strong, but to argue that it will continue to grow at its present rate into the indefinite future would be irresponsible and unrealistic. Proponents argue that the government will oversee the funds, and that the only stocks available for consideration will be well-analyzed and "safe." However, critics counter that while risks can be reduced in this fashion, they cannot be banished entirely. While some might be very successful, others inevitably will reach their retirement age at "the wrong time" (e.g., just after a stock market crash or in the middle of a major recession), or they might find themselves holding stock in another Enron-type corporate collapse.

Bush's plan has not generated much enthusiasm with the American people, and it has only lukewarm support in his own party. This has led to several news sources declaring the debate dead, and the issue a political defeat for the president. Bush has not given up, however, and he is currently traversing the country, speaking at town-hall-style meetings to well-screened groups of supporters, seeking support for his position. As Bush put it, "I'm going to spend time talking about Social Security every week until something gets done, because that's my job."