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Bottom Line: It's a Bad Idea

April 27, 2005

President Bush's Social Security privatization idea is a mistake. Not a policy mistake, a simple mathematical one. It cannot work -- if by "work" one means leaving future retirees better off than under the current system. On Tuesday, the Senate Finance Committee began congressional consideration of the plan. Amid the rhetoric, keep the following in mind.

* Much of the money put into Social Security isn't an "investment" -- it is paid directly to current retirees. So it's disingenuous for privatization advocates to compare your long-term "return" in the program with what your return could be in some private account.

* Bush says Social Security is in crisis because the trust fund may run out of money in a few decades. Minor changes in assumptions can shift that moment of truth a lot sooner or a lot later. Minor reforms in Social Security could also postpone the crisis into a future too distant to plan for.

* Bush has conceded that privatization won't solve the looming shortfall. In fact, his plan does not even address the crisis that is supposed to be the reason for it. Instead, the plan assumes that IOUs to current and near-future retirees will be paid off as part of the "transition" to privatization. If the trillions needed to do this were available, there would be no crisis and no need for privatization.

* Privatization will not change the mix of stocks, government bonds and other investments in the economy. The Social Security trust fund is invested in government bonds. But the government's total borrowing needs are determined by spending and tax revenues. If money from the trust fund is diverted into private stocks and bonds, the same amount will have to be diverted from private stocks and bonds back into government borrowing.

* Nothing about Social Security privatization would increase the total savings in the U.S. economy. If the mix of investments doesn't change, and the total amount available for investment doesn't change, the total return on investment in the U.S. economy will not change. Therefore, any additional money that goes to retirees will have to come out of the pockets of other investors.

* Although it is theoretically possible for future retirees to invest so cleverly that they extract money from the rest of the economy, or from foreigners, there is not even a theory of why this should be likely.

Some people believe the point of privatization is more spiritual than financial. They believe widespread stock ownership gives people a healthy stake in the economy (and/or perhaps turns them into Republicans). If that's more important to you than your retirement prospects, fine. But for those who'd rather demonstrate good business sense than worship it, the Bush plan is a bad idea.

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