Dreamers Rise
An Open Notebook
 Illustration by Henry L. Stephens from The Goblin Snob (ca. 1855) The following assortment of notes, musings, proposals for future consideration, lists, and quotations is by design doubly open: exposed to the reader, but also subject to revision, expansion, excision in a way that a traditional written journal (or even a blog) is not. Social Security I make no pretense of being a public policy expert, but I am following the Social Security privatization debate closely. To state my bias upfront, I believe that the Bush administration is following exactly the same strategy they used to justify the invasion of Iraq: invent or exaggerate a “crisis,” lie about the evidence and about the likely positive or negative consequences of their plan of action, get people afraid, push through the plan, and then leave the mess for someone else to clean up. (Repeat as needed.) And the sorry part is that, as happened with Iraq, millions of people will be taken in. But as I say, I'm no expert. The encouraging thing is that, at the moment, there seems to be a fair amount of reluctance on the part of Congress to fall for privatization. The details of the Bush proposal have not yet been announced, though the gist seems clear: in order to stave off an eventual projected shortfall in the Social Security trust funds (which would reduce its ability to pay out benefits), permit or compel the diversion of a substantial portion of the revenue that is now derived from the FICA tax into private accounts, which (in theory) would earn more money because they would, presumably, be invested in equities rather than in government securities. However, since the money put into these personal accounts would no longer be funnelled into the Social Security trust funds, the government would have to borrow trillions of dollars in the short haul to pay off the benefit obligations that will be incurred in the next few decades. (In theory, this expenditure would be offset, eventually, by the reduction in the benefits owed to future retirees, who would be entitled to smaller benefits because they had invested a portion of their money on their own.) Some preliminary points: 1. The shortfall that is projected to occur, which would be a result of changing demographic trends and an aging population (fewer workers, more retirees), is not imminent; in fact there is some evidence that the Social Security trust funds are in better shape than they were a few years ago. We're talking decades, not years; so, despite the warnings of impending crisis, the government could in fact do nothing in the next few years. The problem, if it really exists, would not go away, but it will not spiral out of control in the near future. 2. The only real argument for privatized accounts, rather than just appropriate adjustments in benefits and FICA taxes, as a solution to whatever shortfall may be coming, is that in theory equities historically pay more than treasury securities, so that retirees could benefit by having less of their money tied up in relatively low-earning trust funds. But, as any prospectus will tell you, past performance is no guarantee of future results. It is perfectly possible to envision a scenario in which oil shocks, huge budget deficits, and other factors would cause a recession or depression, with a consequent steep drop in the value of equities. Moreover, although many wage-earners might invest their money prudently, many others would lack the luck or the knowledge to do so. So we would be trading security — which is supposed to be the point — for (possibly) higher returns at higher risk. The other arguments for privatization, which are largely ideological and relate to the supposed iniquity of taking someone's hard-earned money and giving it to “someone else,” and to the supposed consequent loss of “freedom” to invest as one chooses, I reject out of hand: those arguments were posed, and, by general consensus, rejected, when the Social Security system was first created. If you don't want to live in a society, don't; if you stay you have to accept your connections — legal, economic — with other people. 3. The Social Security system currently expends less than 1% of its income for administration. Private investment firms are profit-making institutions and are going to want a much larger piece of the pie than that. While some Wall Street firms might stand to be big winners under the Bush plan, there may be considerable resistance in the investment business to taking on the the adminstration of numerous small accounts. There is already serious concern in the business community about the idea of massive borrowing to jump-start privatization, particularly in view of the costs of the war in Iraq and the huge loss of revenue due to recently enacted tax cuts. And no one can predict the effect of suddenly pouring huge amounts of money into equities. 4. An article by Paul Krugman (“The British Invasion,” The New York Times, 1/14/2005) points out that Britain under Margaret Thatcher conducted a similar privatization program, with a less than satisfactory outcome. In Chile, which did likewise under that paragon of a free society Augusto Pinochet, administration costs soared and the expected higher payouts never materialized, requiring massive new subsidies from the government to provide a modicum of security to retirees. My bottom line is that Social Security has served its purpose splendidly, as the result of arguably the most successful social legislation in American history. It pays for itself and provides a large measure of income security to retirees as well as surviving spouses and dependents, at very little administrative cost. There is no reason to monkey with it other than to the extent of whatever tinkering is required to keep benefits and contributions in balance. In the end, you get what you pay for. Joshua Micah Marshall, on his website Talking Points Memo, has been doing an excellent job of following this issue and tracking the positions of our representatives in Congress (he tabulates the “Fainthearted Faction” of Democrats who seem open to the Bush plan, as well as the “Conscience Caucus” of Republicans who are unpersuaded). Paul Krugman's Op-Ed pieces on Social Security, which are numerous and definitive, appear in The New York Times, which may require a fee for archived pieces. But try The Unofficial Paul Krugman Archive. The AARP, the AFL-CIO, the editorial page of The New York Times, and, I'm proud to say, the two US senators from my state (NY) have come out firmly and persuasively against privatization. More to come, as time permits. A couple of addenda: A fair-minded feature article in The New York Times Magazine, 1/16/2005: “A Question of Numbers,” concludes: Prudence dictates taking steps now to minimize the possible shortfall. This could include raising the cap, some modest cuts and tax increases and a gradual redeployment of the trust fund into assets that may not be tapped, willy-nilly, for whatever legislative purpose. But only a real crisis would dictate undoing an institution that has provided a safety net for retirees, that has helped to preserve in the social fabric some minimum of shared responsibility and that has been supported by workers in good faith. And, in looking at Social Security today, the crisis is yet to be found. And on the same day, the Times reports on plans to use the Social Security administration for political purposes, to whip up fears of a crisis and build support for privatization. More information: The Social Security Network Working Families Party (Social Security) The AARP has now added a blog on the topic as well. Talking Points Memo thereisnocrisis.com 1/14/2005 Postscript (2/5/05): A letter to Nicolas Kristof The Times Op-Ed columnist, though not in favor of the Bush administration's Social Security proposal, took liberals to task for “making a historic mistake” by refusing to acknowledge the “huge problem” facing Social Security. Your column in today's Times “Social Security Poker”( 2/5/2005) bases part of its argument on the likelihood of dramatic extension of life spans in the 21st century. One point you make is that life spans grew by 30 years in the 20th century, yet the SSA [Social Security Administration] is only anticipating an increase of six more years by 2075. But the SSA is on more solid ground: the dramatic increase in life expectancy at birth in the 20th century was largely due to declines in infant mortality and deaths from childhood diseases, factors that do not in general affect how long people live after they retire. The increases in life expectancy at ages 65 and 75 -- the figures that matter in determining the impact of improved longevity on the solvency of the Social Security program -- have been subtantially lower (only about 5 years since 1940, and barely a year since 1980), and there is some evidence that improvement in life expectancy at those ages is slowing (this point was discussed in Roger Lowenstein's excellent article in the NYT Magazine a few weeks back). Of course, if you are correct that medical science is about to achieve a revolution in longevity (I doubt it, but that's another argument), then it's possible that life expectancy will in fact increase dramatically, but it is a misunderstanding to extrapolate the inprovement in life expectancy at birth in the 20th century as evidence. The most recent report of the OSDI trustees indicates that the entire expected shortfall in Social Security in the next 75 years could be eliminated by enacting an immediate, permanent increase in the payroll tax of 1.89%. (The system could also be balanced by cutting benefits, an approach I don't favor.) If the Republicans were not allergic to the idea of ever raising a tax, they would realize that this would be a much better investment than running up trillions of dollars in debt to float the president's plan. Or, they might find an alternative way of directing revenue to Social Security to compensate for the shortfall. The fairest approach, though, it seems to me, is to expect the system to pay for itself, as it always has. A modest raise in the payroll tax (less than 1% each for employer and employee) sounds like a sustainable burden, given the Bush administration's deep cuts in the income tax. The Social Security “crisis” is not a demographic one (it is a challenge, but not a crisis) but a political one, and Democrats are absolutely right to resist the Bush administration's fear-mongering. Post-postscript (2/8/2005): A letter to the editor The Journal-News, a suburban New York paper owned by the Gannett chain, published an editorial forcefully opposing the Bush plan. I applaud The Journal News for its strongly worded editorial ("State of the Union," Feb. 3) criticizing the Bush administration's Social Security privatization plan. Journal News readers should take note that the votes of New York's congressional delegation may be pivotal to the success or failure of the proposal in Congress. The Bush administration plan, based on exaggerated claims of an imminent Social Security "crisis" (successive annual projections by the Social Security trustees indicate that the system is actually in better long-term condition than it was several years ago), is both unnecessary and irresponsible. It would subject the retirement security of millions of Americans to the whims of the stock and bond markets, and almost certainly be accompanied by deep cuts in benefits. As The Journal News notes, the Bush proposal comes at a time of mounting budget deficits. These deficits will only be made worse with the full effect of massive tax cuts and our large military expenditures in Iraq and elsewhere; the required outlay of trillions of dollars to jump-start the Bush plan is, if nothing else, fiscally reckless. Social Security has served as an essential part of retirement security for generations of Americans, as well as providing benefits to surviving spouses and dependents, and has done so at very low administrative cost. With modest reforms, it will remain so for generations to come. To undermine it, in the name of an unsound speculative privatization scheme, would amount to nothing less than an act of vandalism. (Published in the Journal News 2/8/2005) As the original editorial does not seem to have been posted to the paper's website, the text (scanned from the print version) follows: The Journal News Thursday, February 3, 2005 OUR VIEWS State of the Union The second-term Bush defers honest talk on Social Security One of these days, America is going to have a heart-to-heart about Social Security that speaks candidly about the financial challenges of that program and the implications of other taxing and spending choices. President Bush showed in his State of the Union address last night that he is content to leave that honest discussion for another day. The president, searching for a legacy beyond his campaign against terrorism, big tax cuts, big budget deficits, and wars in Afghanistan and Iraq, used the address to marshal public support for his view of Social Security in free fall and to advance his prescription for remaking the program, the most enduring feature of the nation's social safety net. Amid Pavlovian partisan applause, he called once again for the partial privatization of workers' Social Security accounts -- a suspect cure chasing a nonexistent crisis. On the foreign front, the president used the speech to highlight recent signs of hope in Iraq, still our nation's most pressing concern. He spoke movingly of Sunday's landmark vote and the "personal courage" displayed by the Iraqi people, who defied threats of violence and predictions of a woeful turnout. The president spoke with candor of the many challenges ahead -- for the Iraqis, but also the Afghans, the Israelis, the Palestinians and the Ukrainians. But with Social Security, the White House's No. 1 domestic-agenda item, the president stopped sort [sic for "short"] of the same candor. He certainly did not connect all of the budgetary dots. Once again, the president refused to draw a contextual picture for the American people that reveals the true scope of the nation's fiscal mess -- annual budget deficits exceeding $400 billion, a national debt approaching $8 trillion, and a broken health-care system that confounds budgets public and personal. A president partial to candor might have used this national stage to acknowledge that the United States has a budget problem, not a problem with Social Security -- a government program that actually works. Given our rapt attention, he might have talked about our collective lack of fiscal discipline over time and the annual raids on Social Security's surpluses to fund other government spending. He might have talked about the record deficits run up on his own watch, the financial sacrifices dictated by war, and explained how his tax-cutting initiatives might have helped propel the economy in the short run, but bound our hands in the long run. The president could even have used pointer and chalkboard to show how the 75-year cost of his tax cute equals three times the size of the projected Social Security shortfall over the same period. Perhaps even more helpfully, a candid president might have used the address to amplify the call of some leaders, including some in his own party, who are pressing for a broad review of aging in America -- an assessment that would necessarily take in the cost of medical care, Social Security, Medicaid, health insurance, prescription drugs, all of the things that factor into our extended lives. But the president settled for more of the same: mostly hyperbole, scare tactics, and fright for young and middle-years workers. Make no mistake about it. Social Security requires fixing; so, too, a litany of government-funded programs and misplaced priorities. But the case has not been made -- certainly not by President Bush -- for the kind of wholesale changes he advocates, changes that would necessitate borrowing trillions of dollars. In concert with other budget reforms, more modest adjustments in how program contributions are made or how benefits are paid out will help shore up Social Security. The thing is, the president with such a far-reaching domestic agenda -- from banning gay marriage to drilling for oil in Alaska -- won't achieve even minor fixes if he persists in a dubious cure that is more distraction than solution. The sooner we start an honest talk about real fixes, the better.
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