Sniping over Social Security

Embattled Democrats have accused the GOP of plotting to “privatize” Social Security, warning that “Social Security as we know it would be gone, and senior citizens would see their life savings recklessly gambled away on Wall Street,” as the Democratic Senatorial Campaign Committee put it. That’s ridiculous hyperbole, even by campaign standards. Still, Republicans who’ve advocated a shift toward private accounts can’t escape the fact that they’re trying to change the program, not simply save it.

Few GOP candidates have called for Social Security to be turned into a privately run system. What some two dozen Republicans in the last year have supported are proposals to divert some payroll tax payments into personal accounts. The most popular of these is the deficit-cutting “roadmap” offered by Rep. Paul D. Ryan (R-Wis.). It includes a proposal to allow workers less than 55 years old to shift up to about 40% of their payroll tax contributions into personal accounts, which they would own and could pass on to their descendants. Ryan also called for two changes that would address Social Security’s long-term funding problems: raising the retirement age gradually to 70 and reducing the inflation-adjusted benefits for wealthier beneficiaries. And he would beef up the minimum benefit to keep retirees above the poverty line.

The hope is that private accounts would generate better returns on Wall Street than Social Security earns on its investments in special Treasury bonds. But the idea has at least two significant drawbacks. First, diverting payroll taxes into private accounts reduces the amount available for current retirees, whose benefits are funded by current workers’ contributions. The changes set in motion by Ryan’s plan would eventually generate a surplus for Social Security and lower its long-run cost, but in the meantime the government would have to borrow heavily to fill the gap caused by the individual accounts, exacerbating the federal deficit.

Second, letting workers reduce their regular Social Security benefits in exchange for a shot at higher returns through private investing undermines the basic purpose of the program, which is to relieve workers of some of their future financial risks. Ryan would have the government insure the private accounts to guard against losses, but that creates a moral hazard: Individuals would take all the gains, and taxpayers would be stuck with any losses.

In short, individual accounts aren’t the right way to avert the shortfalls that loom in the not-too-distant future. But it’s still over the top to suggest that Ryan’s plan would throw seniors to the financial industry wolves. Rather than trying to scare voters, Democrats should come up with a better plan to shore up Social Security for the long term.