Date: January 27, 2005
Sent to but not published by Boston Globe

George W. Bush is an expert in playing the game of accusing his opponents of the sins that he himself is guilty of. He is quoted as saying in yesterday’s press conference (Boston Globe, January 27, 2005: A 3) that “those who want to derail a Social Security agenda ... by scaring people.” It is Bush and his minions who are going around scaring people with the big lie that the Social Security system is in deep trouble. Most assessments of the System agree that “minor modifications” of the system are required -- a modest change in the income level on which Social Security taxes are levied will do the trick. The draconian changes proposed by the President are completely unnecessary.

Instead of engaging in a sensible reform program, which we agree is necessary, he is determined to destroy the system while claiming to be saving it. Private accounts have three major flaws -- flaws that have been amply demonstrated by the disastrous privatization undertaken by the UK’s Thatcher government in the 1970's (and it was a disaster for both pensioners and for the insurance companies providing the pension benefits). These three flaws are the problem of volatility; the problem of individual plan costs; and the problem of transition costs. The first two accrue to the individual, the last to the country.

Any one who has lived through the past five years knows that share prices can go down as well as up; as can bond prices. Individuals with their private plans can win or lose in these two markets. As a result the capital they amass may or may not be sufficient to compensate for the reduction in Social Security benefits. The nice thing about Social Security benefits are that they do not run out – individual privatized accounts do not have similar longevity.

The Social Security trust fund has microscopic administrative costs (about 0.3% of its assets and many of these costs are not incurred for the administration of the trust fund but for assessing eligibility and making payments to the 40 million beneficiaries -- retirees and disabled employees). Privatized plans operating through brokerage houses, mutual fund companies, and insurance companies have much higher expense ratios – only TIAA-CREF and Vanguard have expense ratios in this ballpark for their Asset Allocation funds; funds in this class have average expense ratios 1.28% (according to Lipper). These administrative costs will reduce the capital that accrues in the individual’s account. Social Security enjoys enormous economies of scale that the individual cannot duplicate.

If funds that are currently paid into the Social Security trust fund are diverted to private accounts, the country will have to make up the difference. This means that we will start dipping into the trust fund next year rather than 20 years from now and it means that the trust fund will be exhausted in about seven or eight years rather than in 40 or 50 years from now. It is estimated that an additional $2 trillion debt will be incurred by the US; debt that international capital markets will be very chary about funding.

These are real costs that Bush and his yea-sayers do not mention. The price of freedom is eternal vigilance, so watch what Bush and his spokes-people are saying as the volume of their scary talk increases over the next stage of the Social Security debate. And ask the tough questions that they ignore.

The past election was supposed to be about morality, what Bush is saying about Social Security is not moral; what Bush intends to do about Social Security is not moral.