SOCIAL TOPICS (Archive): Investment & Economic Analysis

Published, Spring 2005

Second term presidents usually focus on foreign policy because that is the sphere in which their constitutional powers are greatest and where election-minded legislators are least likely to meddle. So far this has not been the case with President Bush.

After an election campaign that was built on the argument that he was the candidate best equipped to defend America against terrorism, and an inaugural address devoted to the idea that America’s mission was to spread liberty around the world, the president abruptly turned his attention to the reform of Social Security, promising to make it his number-one domestic priority. If Bush follows through, it will be a remarkable testament to his belief in the urgency of the issue and his willingness to confront the political minefield it will surely unearth. It is not as though there were no major issues still at stake around the world to demand his attention—one need only mention the troubles still brewing in the Middle East and the spectacular failure, thus far, of his efforts to stop the North Korean’s program to acquire and expand its nuclear arsenal.

Why, then, this headlong march to grasp the “third rail of American politics”? I think we can readily dismiss the argument that social security is bound for a fiscal crisis so huge and immediate that future beneficiaries should worry that the funds to pay their benefits will simply be unavailable. Indeed, as of this writing, even some of the administration’s spokespeople seem to be easing away from the “imminent crisis” rhetoric. Pensioners bear no more risk that they will not be paid than any other holders of a government guarantee. All those IOUs held in the Social Security trust fund that sometimes are referred to as “just so much paper" are in fact the best financial guarantee in the world: the full faith and credit of the U.S. government. True, the system for paying benefits, according to the current guess, will begin to fall short in 2042, when payroll taxes might cover just about 75 percent of the projected average pension. But that hardly constitutes a crisis. To put this number in perspective, the entire shortfall could be eliminated by some modest tinkering with the key revenue and benefit formulas: a higher cap on wages subject to payroll taxes; a rise in the age when benefits begin, reflecting increases in life expectancy; or an overall reduction in benefits. Indeed, the system’s health could be secured for the next 75 years simply by cutting the average retiree’s benefit by about $1,850 per year in today’s dollars, or just 13 percent. 

So why is President Bush so intent on revamping the system? My belief is that the proposals being floated represent nothing less than a major step toward recasting the government’s role in providing a safety net for our elderly, and a rejection of the whole idea of mandatory insurance against want for retirees. There is simply no credible case for claiming that the proposed reforms are only about a better way to provide a generous retirement benefit or to shore up a failing system. This is the administration’s “ownership society” in its first and most important incarnation: Greatly reduced government guarantees of retirement security, private accounts in which Americans plan for their own futures, and exposure for all to the opportunities and risks of the financial markets. 

Here is the impact of the anticipated proposal on a worker born in 1990, who earns the relatively high average annual lifetime wage of $58,000 (in 2004 dollars): a cut in the guaranteed annual benefit from $28,863 to $18,406, or 35 percent, if the retiree opted not to participate in the private account program; or, alternatively, a reduction in the guaranteed benefit to just $2,191 if the same retiree chose to participate fully in the private account option. In the latter case, a portion of payroll taxes would be diverted into one or more of the investment choices offered by the plan. ^[1] A retiree would need to have earned a return of about 3 percent above inflation on his or her private account just to be left with the same benefit as the person opting out of the private system. Recall that even this sum is 35 percent less than the benefit under current law. If the private account produces the 4.6 percent return that proponents have forecast (and that seems a very aggressive estimate to us), the total benefit earned would still fall more than 10 percent short of the provision mandated by current law. No additional safety net is contemplated for those whose investments fare worse than these forecasts. Obviously, big projected returns on these accounts are simply the other side of big risks.

This is very different from the “freedom from want” that Franklin Roosevelt sought in launching Social Security. Roosevelt conceived an insurance system that he hoped would protect Americans from the disasters that could befall them in retirement, through the loss of a parent, or from disability, because, as he articulated in his famous dictum, “The only thing we have to fear is fear itself.” The emphasis in Roosevelt’s program would thus be on its provision of insurance. Some would surely put in more money than they would ever receive. But the insurance system would be a large step toward protecting each of us from the potentially immobilizing fear of financial catastrophe. A more financially secure citizenry would also foster a steadier economy and a sturdier social fabric. We should now be asking if this is a model we want to keep or one we want to replace.

—B. Apfel