The GOP Revives Social Security Privatization Ploy

The newly elected Republican Congress has not yet been seated, but one key GOP objective that most Republican candidates ducked during the campaign is already back in play: Social Security. The White House has let it be known that privatization could be on the agenda as early as next year.

Historically, tampering with the popular universal retirement system has been seen as a political “third rail.” So unpopular is the idea that some Democrats, in a move against the GOP, this year tried to force a vote on privatization. Republicans blocked it because the timing was wrong.

Many GOP candidates succeeded in obscuring differences and cast themselves as stewards of the current system. So you would have to conclude that in the 2002 election, Republicans got elected not to privatize Social Security but because they succeeded in persuading voters that they would do no such thing.

But that was then. The effort for privatization is back; the only question is when.

Though details have not been formalized, Bush strategists lean toward a plan that would divert a portion of the 12.4% payroll tax into optional private accounts. The theory is that younger investors could put some of that money into the stock market.

Leaving aside the politics, the idea has three big problems. First, Social Security is in play because it faces a potential financial shortfall about 40 years from now. Privatization supposedly is a remedy. The need to fix Social Security’s finances is real. But diverting payroll taxes to pay for private accounts is the opposite of a solution because it would worsen that shortfall by trillions.

Second, as a consequence of problem No. 1, privatization would leave less money for Social Security checks, unless the national debt rose by several trillion dollars. (With the looming deficits resulting from the Bush tax cuts, there no longer is a big surplus to apply to Social Security.)

To cover the shortfall caused by the diversion of payroll tax receipts, privatization plans reduce the conventional Social Security checks. The private accounts supposedly would make up for the loss.

Some versions would add a “means test,” which would require pensioners to demonstrate poverty before they could draw Social Security checks. As with welfare, retirees would have to deplete assets to make themselves poor enough to qualify.

(The genius of the current system is that Social Security is earned, and rich, middle class and poor alike are entitled to checks based on their lifetime income and taxes paid.)

The third problem is that Social Security and private accounts are simply not comparable. By design, Social Security is social insurance. No matter how long you live, you cannot outlive it, and the checks are guaranteed. With private accounts, once the money is used up, it’s gone. And bad investment luck or bad timing relative to stock market performance can leave a retiree with much reduced income. (Ask an Enron retiree.)

President Bush, in carefully chosen language, has promised that no retiree would lose any benefits because of changes in the Social Security system. But many younger Americans, far from retirement, would find themselves shortchanged by privatization.

The retirement system, such as it is, combines several elements: personal savings, private pension or 401(k) plans, assets from the sale of a house and Social Security. Social Security remains the one part that is reliable. Without it, half of the nation’s seniors would be living in poverty.

In the 2002 election, Republicans largely succeeded in blurring differences on Social Security. But the matter will eventually come before Congress. And then the blurring ends.

Bush will try hard to get some Democrats to defect. Polling data suggest that some younger voters want those payroll tax receipts, to play the market.

The challenge for Democrats is to not abandon Social Security but to instead strengthen the system’s finances and extend social insurance, including health insurance, to younger families.

Despite a lot of nonsense about outmoded Depression-era programs, looming financial disaster and charges of demagoguery, social insurance is the Democrats’ winning card.

Shame on Bush for deceptively monkeying with Social Security. And if the Democrats serve as his enabler, shame on them.

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Robert Kuttner is co-editor of the American Prospect.