Leave Our Pensions Alone

Older working people thinking about retirement can be thankful that President Bush’s plan to substitute private savings accounts for part of Social Security isn’t already in effect. The stock market’s gyrations would create enormous problems for anyone trying to retire and convert a private investment account into an annuity.

This summer, Brookings Institution economist Gary Burtless studied how workers retiring would have fared if a Bush-type plan had been in existence. He found that a savings account built up over 40 years and invested 100% in stocks could have been converted into an annuity equal to somewhat more than recent average earnings--if it had been applied for at age 62 on Jan. 1, 2000. But the annuity would be less than half as much if applied for at age 62 on Jan. 1, 2003, assuming the same stock market averages on that date as the actual averages on July 19, 2002.

Facing this situation, anyone contemplating retirement would have to make an agonizing decision: Retire now, hoping to protect against further loss, or hold off in hopes of a higher stock market later. Guessing wrong would have serious consequences.

The suddenly conspicuous vulnerability of Bush’s plan to market downturns helps explain why so many previously supportive Republican candidates are backpedaling, and why the president is working so hard to persuade retirees and older workers that their benefits are safe regardless of how younger workers might fare.

Whether he succeeds may determine whether Democrats or Republicans control the next Congress.

Older Americans vote in greater numbers than any other age group, and concerns about Social Security can easily determine how they’ll vote. (The poorest two-fifths of those over 65 get 82% of their income from Social Security; the middle fifth, 64%; and the next highest fifth, 46%. Even the top fifth will be significantly dependent on Social Security when large numbers of them retire.)

But can older voters count on keeping the full benefits provided by current law if the president’s plan is enacted? The honest answer is no.

To begin with, the commission charged with implementing the president’s goals was given conflicting instructions: Protect the benefits of the retired and the soon-to-retire and bring Social Security into long-range balance while diverting billions of dollars in program funding into private accounts.

The president made the task harder by ruling out two obvious options: raising Social Security taxes and directly investing program funds in stocks (to secure, over the long run, better returns than are attainable from investing in government bonds).

The panel produced three proposals, one of which doesn’t even claim to bring Social Security into long-range balance and so can be ignored. The others bring Social Security into balance by cutting benefits.

One plan cuts benefits more than enough for balance; the other achieves balance by combining benefit cuts with funding from general revenues. Both establish individual savings accounts using major additional infusions of general revenue.

Even with such infusions, however, under either plan many workers now younger than 55 would end up with less in total retirement income--Social Security plus income from their savings accounts--than under the current Social Security program alone. The situation would be worse for those whose investments do less well than average.

Meanwhile, the dependence of both plans on huge infusions of general revenues has been undermined by the Bush tax cuts, which, if allowed to go fully into effect, will mean there won’t be any surpluses. In that case, any general revenues spent on Social Security would add to the overall deficit.

Would Congress support what appears to be a dubious deal? No one can predict. But remember, many supporters of privatization have proposed cutting benefits of the elderly and near-elderly by such strategies as reducing the annual cost-of-living adjustment and raising the retirement age. Such proposals could be brought forth again.

It appears that the only entities assured of doing well under partial privatization are financial services firms.

The moral is clear: Older workers and retirees should be deeply skeptical about promises that their benefits are protected. Such pledges are sure to become negotiable in the real world of lawmaking.

The only safe course for voters is to insist on preserving Social Security for the benefit of all workers--past, present and future.