Privatizing Social Security: Whose security, freedom?

An electrician friend recently lamented: “I can never retire. By the time I reach retirement age, Social Security will be bankrupt.” Such fears are widespread, especially in communities where many are self-employed and benefit-rich jobs are dying. Baby boomers should worry about their future, but not because of Social Security. Exaggerated fears about Social Security – and the steps taken to “fix” the system – are a reason for concern. These fears are a testimony to the domination of our political agenda by the right.

Social Security has always angered market devotees. Viewed as a paternalistic intervention in a free market, the program achieved such popularity that even Republicans eventually dared not oppose it. Unlike welfare, Social Security serves poor, working-class and middle-class professionals alike. Even my local dentist recently bragged that he now collects Social Security.

The program is also extraordinarily simple and efficient. Less than one out of every hundred dollars paid into the system goes for administrative overhead. Our much-celebrated private sector HMOs or insurance companies cannot come close to such efficiency. Finally, Social Security is a public policy success. Levels of poverty among elderly Americans have declined substantially due in large measure to Social Security.

Social Security has reached a crucial turning point not because of any change in underlying numbers but because conservatives seek its radical transformation. Nonetheless, even in an era of conservative dominance a program as successful as Social Security cannot be attacked frontally. Most conservatives no longer complain that it is paternalistic, though this long-standing criticism has merit. Just like truancy laws or taxation for public schools, Social Security mandates that all citizens take steps to insure vulnerable segments of the population. This paternalism is a small – and necessary – price for civilized society.

The new claim is that this program is dangerously underfunded because thirty-seven years from now reserves will be exhausted and ongoing benefit obligations will exceed revenues. Even this futuristic horror scenario is based on projections of economic growth slower than at any point in our recent history.

The war in Iraq or the Medicare prescription drug program entail far vaster, open-ended spending, yet the Bush administration hardly mentions their long-term fiscal implications. Even if no changes were made, Social Security could pay about three-quarters of promised benefits for another generation beyond its so-called bankruptcy. Would that Enron had gone bankrupt in this fashion. And for far smaller increases in taxation than either Iraq or the prescription drug program will likely require, Social Security could be placed on a sound foundation as far as the eye can see.

Imagine a family earning $60,000 a year. They and their employers now pay about $7,5000 a year in payroll taxes. Merely by increasing that amount about another thousand dollars, their Social Security -and their children’s – will be completely secure. And even this tax increase will be taken out of real incomes that even by cautious estimates will grow more than $600 a year. (In addition, if the Social Security trustee’s demographic assumptions are correct, our hypothetical family will be paying less for day care and public schools.) The fundamental question is: In a worst-case scenario will I surrender a modest increase in payroll taxes from a steadily growing income to sustain a safe and efficient form of social insurance?

An even better solution to any possible shortfall is to reverse some of the income and capital gains tax cuts the Bush administration seeks to make permanent. Protection in old age and public education should properly be seen as broad social obligations. They should be funded at least in part from progressive revenue streams, as is the case in most European nations.

If the U.S. economy is so tenuous as to require increases in Social Security taxation, rescuing that system through privatization is fatally flawed. Over the long haul, the stock market cannot do well in a stagnant economy. Nor do privatized retirement accounts represent real personal freedom. The Rugged Individualist is still forced to place a certain percentage of yearly income in approved investment vehicles. Government will define these and bureaucrats will have to monitor compliance.

Unless President Bush’s brave new world is like Lake Wobegon, where everyone’s children are better than average, there will be big losers and winners. I make few predictions in this column, but I have two here: 1) With vast sums invested by citizens of varying degrees of expertise and interest, there will be major abuses. 2) A new regulatory structure will be created. Regulation will not be the product of demands by left intellectuals but of outrage from ordinary citizens.

A paradox of Social Security privatization will be a more complex and intrusive system than anything we have yet experienced.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net