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.
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