The Fake Crisis

So if there's no crisis in Social Security, why is President Bush pushing so hard to privatize it?
It's politics. Since the days of Barry Goldwater, the Republican right has really wanted to dismantle Social Security. And now they have a degree of political dominance that lets them push it to the top of the agenda — even though no rational analysis of the actual problems facing the U.S. government would say that it belongs there.

Why do they want to dismantle it?
It's hard to understand why anyone would want to return us to the days before the New Deal, when millions of elderly people lived in poverty. But if you really dislike the notion that the government provides a safety net for the poor, then Social Security is the prime target. The U.S. government is a big insurance company, with a side business in national security. Social Security is the biggest social-insurance program that we have. It's been highly successful, and it's extremely popular. It's one of the things that makes people feel somewhat good about government — and so, therefore, it must go.

And some people stand to profit from abolishing it. Wall Street poured a lot of money into both of Bush's campaigns, hoping he will divert Social Security into the stock market.
That's a factor, but I don't think it's the reason behind it. Attacking Social Security is a lot like attacking Iraq — just because a lot of people stood to get lucrative contracts from it, that doesn't mean that's why they did it. If you privatize Social Security, there's going to be a tremendous amount of income for the mutual-fund industry. That's one reason there is a constituency for this on Wall Street. And that's one of the important reasons why this is really gonna work very badly.

What do you mean? Those who are pushing privatization say that our financial markets are one of our greatest strengths — that private investment will work better in the long run than government-managed accounts with lower rates of return.
There are two problems with that. First, the fees charged on private accounts will be a significant drain on returns. In a typical portfolio, we're probably looking at a return of four percent. But fees are likely to take at least one percent, like they do in Britain. So now we're down to a return of three percent or less on private accounts. And since Bush wants to borrow $2 trillion to pay for the transition, we're talking about borrowing at interest rates of three percent to establish private accounts that will yield three percent — with a lot of additional risk. So it's a lose-lose proposition, except for the mutual-fund industry.

The second problem with the market is that some people — probably many people — will end up getting much less than they would have under the current system, depending on which funds they pick and how the market does. A lot of people will hit age sixty-five with very little in their private account — and that means a big return of poverty among the elderly, which is exactly what's happening in Britain right now. As a result, the government will have to step back in and rescue people. We'll have more suffering and bigger bills. People will ask: Where did all that money go? The answer will be: It basically went into mutual-fund fees.

But what if stocks do well? Isn't it possible that privatization would work?
The only possible way that stock returns can be high enough to make privatization work is if the U.S. economy grows at three to four percent a year for the next fifty years. But Social Security's own trustees expect the economy's growth rate to slow to 1.8 percent. If that happens — if their own assumptions are correct — then privatization would be a disaster. And if that doesn't happen — if the economy continues to grow at a steady rate — then the trust fund is good for the rest of the century, and we don't need privatization.