WASHINGTON — The supporters of Social Security reform who want
a system of personal accounts are getting lucky. Opponents have
tipped their hand and they are not showing any new cards. What
follows is a primer on the arguments they’ve been making since
2000.
1. Personal Accounts Will Be A Free-For-All. In
a recent article financial analyst James J. Cramer
complains that personal accounts will amount to “self-directed
investing.” Cramer caricatures the attitude of the reformers: “The
secret to solving the inevitable bankruptcy of Social Security? Let
people manage the money themselves: They have to do better than the
.86 percent annual return the Feds get for them.”
Well, sorry to disappoint all you gung-ho investors hoping to do
some day trading, but the reform almost surely will be set up to
encourage wage-earners to invest in reputable diversified funds.
There will be no Enron-style 401(k)s beckoning beginners to invest
all their money in one risky stock. The lesson of the stock market
is diversify, diversify, diversify. Any serious reform plan will
take that lesson to heart.
Indeed, underlying Cramer’s free-for-all complaint is the idea
that…
2. The Average Joe Is Just Too Dumb To Manage His Own
Account. Cramer exhorts reformers to “Spend an hour
listening to my radio show when I fix a 401(k). Every week,
hundreds of Americans send me their wrecked 401(k)s…that
they, their brokers, and their human-resource ‘experts’ have”
wrecked. And,
As someone who listens to or reads e-mails from
literally thousands of investors a week, I’m dumbstruck by how
little most people know about even the basics of investing. Almost
no one can read a balance sheet. Most don’t know the difference
between a stock and a bond. The majority think that diversification
means owning Dell, Microsoft, Intel, and Cisco or Bristol-Myers,
Pfizer, Merck, and Johnson & Johnson. Few think there’s
anything dangerous about putting all of their retirement assets in
their own company’s stock, even after the Enron, WorldCom, and
Global Crossing fiascoes.
Has it occurred to Cramer that the folks sending him emails and
calling in don’t represent most 401(k) account-holders? If there
were widespread discontent and mismanagement among the 42 million
Americans with 401(k)s, we would have heard from them by now. And
the competitive forces of the market would be offering services
tailored to their discontent.
What drives Cramer is typical liberal elitism: We need
benevolent government bureaucrats to make sure that the benighted
masses don’t hurt themselves. As Cramer puts it, “The idea that
somehow these people are now going to get to handle their own
Social Security and health-care accounts should scare politicians
to death.” Actually, what should scare us to death is the idea that
politicians will have total control over Social Security and health
care. After all, it was their “wise, prudent management” that’s
left the taxpayers holding the bill for a $24 trillion entitlement
liability.
3. The Trust Fund Makes Social Security
Solvent. Is there a bigger sham foisted on the American
public than the idea of a Social Security “trust fund”? Noam
Scheiber in the New Republic was trying to get us to
believe in it the other day when he criticized
congressman-turned-talk show host John Kasich: “Kasich ignores the
fact that the money the rest of the government owes Social Security
technically keeps the program solvent for another 24 years after
that.” For those of you who are beginners in the lore of Social
Security, here’s what Scheiber is referring to: Currently, the
Social Security program runs a surplus because it collects more in
revenue than it pays out in benefits. Each year the rest of the
government “borrows” that surplus to help pay for very important
things like defense, roads, and building rainforests in Iowa. The
government then puts treasury bonds—i.e., IOUs—equal to the
amount of the surplus into the Social Security trust fund. In
theory, once the Social Security system is paying out more in
benefits than it collects in taxes, it pulls those IOUs out of the
trust fund and redeems them to help pay for benefits.
Now you ask, “Where do we get the money to pay back the IOUs?”
That’s the $5 trillion question! Most likely future taxpayers will
be on the hook. As I’ve written before:
Relying on the trust fund to keep Social Security
solvent is willfully to ignore the long-term effect that paying off
the trust fund will have on the budget and our economy. It’s like a
captain who, seeing that a storm has wrecked part of the deck of
his ship, orders his crew to take all of the wood from the hull to
fix it.
Scheiber senses he is on thin ice here by including the word
“technically” in that clause and then following it up with, “there
is some debate among liberals and conservatives over what kind of
obligation [the Trust Fund] actually is.” The only reason there is
any debate is that liberals insist on making it one. Most
conservatives agree with no less an authority than the
Congressional Budget Office, which states, “Social Security’s finances are often discussed
in terms of the trust funds that are used in the federal budget to
track outlays and revenues over the life of the programs. Those
trust funds are mainly accounting mechanisms and contain no
economic resources.”
4. Reform Requires Big Benefit Cuts. Scheiber
craftily presents this argument. In a full-length article for the
New Republic (sorry, not online), he argues that “the more
honest the accounting [in a reform plan] the more draconian the
cuts to the current system.” So, there’s no genuine reform plan
that doesn’t cut Social Security benefits big time.
Yet Scheiber is vague about what he means by “draconian cuts.”
And this is significant because in his criticisms of Kasich’s view,
he says he agrees with Kasich “that we could solve most of the
problem simply by indexing the growth in Social Security benefits
to consumer prices rather than wages.” Nowhere in that small blurb
does Scheiber refer to this change as a “draconian cut.”
In fact, switching the way Social Security calculates future
benefits increases by basing changes on the Consumer Price Index
instead of wages will not cut benefits. It will only reduce their
rate of growth. Yes, yes, I know, in the Left’s lexicon any
reduction in the rate of growth is the same thing as a cut. How
reform proponents should deal with that is a subject for a later
column. But if switching to a CPI-based system would fix the
problem, then it shouldn’t be that difficult (nor that much more
costly) to switch to a CPI-based system with personal accounts.
With personal accounts, wage-earners will get a better return on
their money in exchange for a reduction in the rate of growth of
their benefits, and the system will eventually return to
solvency.
Make no mistake — opponents of Social Security reform will pull
out all the stops in this fight. They will do whatever it takes to
prevent workers from becoming investors. That kind of society won’t
support the big-government policies they favor. But in the upcoming
fight it’s nice to know they have no new tricks up their
sleeves.
