By Sebastian Mallaby, Washington Post
Monday, December 13, 2004; Page A21
The debate about Social Security has started off on the wrong foot. To
privatize or not to privatize should not be the main question. The problem with
this administration is not that it wants private accounts, which have pluses as
well as minuses. The problem is that it wants private accounts as an end in
themselves, and so may lose sight of the Social Security issues that actually
matter. Why shouldn't private accounts be the central issue? Because none of their
advantages is big enough to be decisive. Consider the philosophical attraction of individual ownership. Owning your
own retirement plan, like owning your own house, bolsters virtues such as
responsibility and values such as freedom. But it's a mistake to weight this
advantage too much, because private accounts will be intensely regulated. The
contributions will be mandatory; the investment options will be restricted; and
retiring account holders may be required to spend their savings on annuities.
Individuals will "own" their accounts, but they won't exactly control them. A second advantage in privatization is that it converts part of the current
payroll tax into personal savings. Although the savings will be compulsory, many
workers will feel as though they've had their taxes cut; work incentives will
strengthen and the economy will grow. But this advantage should not be
overemphasized either. The "tax cut" would be small, and would not affect the
marginal rates of people earning more than the payroll tax cutoff of $87,900 a
year, so the economic boost would be limited. A third advantage is the possibility of higher national savings. Workers who
get private retirement accounts may acquire a taste for thrift, and they may
start putting aside more than they are forced to by the government. A higher
savings rate means more capital, lower interest rates and so more investment and
growth -- which in turn generates extra tax revenue to pay for the baby boomers'
retirement. But this advantage isn't decisive either, because nobody knows
whether a new savings culture would really take hold. Conceivably, some who
currently save might stop if they acquired their own Social Security accounts.
So savings might even diminish. Finally, private accounts offer a way for the Social Security system to
capture the returns from equities. Contrary to much anti-Bush chatter, holding
equities is sensible for retirement plans -- that's why nearly all private ones
invest in them. The long-term nature of retirement saving mitigates equities'
risk, and the danger that stocks may crash the day before you retire can be
managed by shifting gradually out of the market in the years before you quit
working. But this risk management will happen consistently only if regulators
control investment decisions. In other words, this fourth advantage can be
realized only by giving up the philosophical satisfaction in permitting real
"ownership." Taken together, the four arguments for privatization amount to a weak case.
There are some benefits to be gained, but there's also a risk that, if you blow
up the current system, Congress will replace it with something irresponsible.
What might "irresponsible" entail? Here's where Bush should listen to Democrats
such as Gene Sperling, who set out sensible tests for any fix to Social
Security. The first test is that the funding gap in the current system should be
plugged. This may sound obvious, but the leading proposal put forward by the
president's Social Security commission used over $1 trillion in general tax
revenue to pay for the nation's retirement (not counting the so-called
"transition costs"). This sort of "solution" is a fraud. The premise of Social
Security reform is that we need to avoid plundering the rest of the budget to
pay for the boomers' retirement. Second, the funding gap should be fixed equitably. It shouldn't be plugged
entirely by cuts in benefits that hit the less well-off, especially since
President Bush's first-term policies have been skewed in favor of the wealthy.
So there needs to be some increase in revenue to balance the inevitable cuts in
benefits. The payroll tax should be reformed so that income over $87,900 is not
completely exempt. Third, the opportunity to boost national savings should be seized
aggressively. The United States is running a huge current account deficit and
courting the possibility of a dollar crash because of its chronic lack of
savings. One way to boost saving is to raise the cap on payroll taxes. But it
can also be done by creating private Social Security accounts that are funded at
least partly by mandating saving on top of payroll tax diversions. There's nothing to stop Bush from endorsing these objectives: a real fix to
the funding problem that isn't socially unfair and a serious effort to boost
savings. Both objectives are consistent with Bush's policy of privatization;
indeed, private accounts could help achieve them. But the signs so far are
discouraging. Bush has said he rules out payroll tax hikes, and he's been silent
on the savings question. He seems to want privatization as an end in itself --
which means he's likely to endorse a privatization that's not worth having.