Conservatives Want Risks of Old Age Assumed by People, Not Government

Look around the corner--past the obsessive fascination with the Clinton campaign fund-raising controversy, past even the sputtering drive for a balanced budget--and it’s possible to glimpse the outline of a debate that could transform the two federal programs with the broadest impact on American life.

At a moment in Washington when the closest thing to a new idea is a new list of subpoena targets, thinkers in both parties are choosing sides for a fundamental argument over the structure of Social Security and Medicare. It’s worth lending an ear to the quiet debate today, because it will become a lot louder tomorrow.

Social Security and Medicare operate on the common assumption that Americans need to insure themselves collectively for the risks of old age. Each program provides universal benefits to all seniors, no matter how great the annual cost to government. In effect, both programs shift the burden of guaranteeing a secure retirement from individuals to society--which, through government, accepts the financial risk of rising costs to provide the certainty of income support and medical care.

But that distribution of risk is coming under rising intellectual assault from the right. With increasing confidence, conservative thinkers are challenging the bedrock principle that collective insurance offers the most secure retirement to Americans. Instead, a brigade of conservative privatizers is arguing that both Medicare and Social Security should be restructured to shift control--and risk--from government to individuals.

“What you are going to see,” predicts Steve Forbes, a contender for the GOP presidential nomination in 1996, “is not only with Social Security but most programs that [control is] going to go back to the individual.”

Congress is likely to muddle through this session without fully addressing these issues. But as pressure to reform entitlement programs grows with the graying of the baby boom, confronting them will become unavoidable. As Julie Kosterlitz wrote in the National Journal, “Over the next decade, Congress and the president will be asked to make a basic choice: whether to try to shore up the traditional . . . collective arrangements . . . or to embrace self-reliance.”

The conservatives who side with self-reliance argue that the existing collective arrangements amount to a pyramid scheme of empty promises. Today, Social Security, Medicare and Medicaid consume just over 10% of the economy; if the programs aren’t reformed, the Clinton administration estimates that will jump to nearly 19% by 2030. Since it’s implausible to actually let the costs rise that high, the conservative critics predict that government will inevitably slash services for retirees in the next century. “The real risk is staying with the centralized system you have today, which cannot deliver to young people its promises,” Forbes insists.

Forbes--like the Heritage Foundation and the Cato Institute--says the answer is to give individuals more control over the resources for their retirement. They want to privatize Social Security by shifting from the current system--where today’s workers’ taxes pay for the benefits of today’s retirees--into a mandatory savings plan, where workers would personally invest their payroll taxes in individual retirement accounts. On Medicare, the privatizers want to move from today’s open-ended guarantee of government-financed care toward a system where Washington would provide retirees with vouchers to purchase insurance in the private market.

These ideas follow the trend in the business world. Medicare and Social Security now operate as programs in which recipients are guaranteed a “defined benefit”--a fixed pension or a specific level of health care. The privatizers would transform them into programs where government guarantees only a “defined contribution” to the elderly’s support, like the health care voucher. Private employers are already rushing in that direction: In 1975, defined benefit pension plans covered 87% of private-sector workers; by 1993, the number was down to 56%.

Employers like defined contribution programs because they provide predictable costs. That’s their main attraction for government as well. But that security for providers comes with its own price: increased unpredictability for the individuals who depend on the programs.

Consider Social Security. Privatization advocates say workers would accumulate far more for retirement by investing in the stock market than Social Security now provides. But critics like Dean Baker of the Economic Policy Institute say those calculations are based on unrealistic assumptions about the market’s likely performance. No one, of course, can say who’s right. But in a way that’s the point: Under the privatization plans, the risk of market uncertainty falls on individuals, not government.

Likewise, converting Medicare into a voucher would fundamentally shift risk from government to individuals, says Theodore R. Marmor, a professor of Public Policy at the Yale School of Management. Affluent retirees, he argues, could supplement the government voucher with their own funds to purchase gold-plated insurance plans. But “people who don’t have extra income will choose low-cost plans and then discover it doesn’t do a lot of what they think it should do,” he predicts.

Critics like Forbes say that Social Security and Medicare--large centralized programs that herd everyone into universal arrangements--are anachronistic in an Information Age built on decentralization and flexibility. But, as Marmor argues, it may be that a guaranteed baseline of benefits is even more essential in an era when so many other sources of stability--particularly the promise of sustained employment at a single job--are eroding. In the years ahead, Washington inevitably will have to restrain the cost of Social Security and (in particular) Medicare. But that doesn’t mean we’re not still better off bearing the risks of retirement together than alone.

Ronald Brownstein’s column appears in this space every Monday.