In a recent column looking at the arguments advanced by opponents of Social Security reform, I stated that “it’s nice to know [reform opponents] have no new tricks up their sleeves.” Since then, however, reform opponents have proven to be a bit more ingenious — if not also disingenuous. Although some of the arguments they’ve recently made were pulled out of the ol’ closet labeled “Scare Tactics,” they have managed to invent some new ones. Here’s a rundown:
Transition Costs Will Hurt Economic Growth. Reform opponents complain about the cost of transitioning from the current system to a system of personal accounts. A recent article in CNNMoney echoes critics’ complaints:
It could cost as much as $1 trillion to $2 trillion to convert to a partially privatized system since some workers will divert part of their Social Security taxes to individual accounts. If the government borrows to finance that shortfall, that could drive interest rates higher, hurting investment and job creation.
Borrowing that much over ten years is not unprecedented, nor is it economically detrimental. In fact, if you look at budget data from the six ten-year periods between 1983 and 1997, you’ll notice the amount we borrowed ranges from a low of $1.8 trillion (1988-1997) to a high of $2.1 trillion (1985-1994). With the exception of a brief period from 1990-1991, these sixteen years were a time of strong economic growth. Interest rates on treasury bonds declined during this period, real private investment more than doubled, and over 35 million jobs were created. The economic argument against borrowing for personal accounts is similar to the one made against Bush’s tax cuts. It also holds about as much water.
Administrative Costs Are Lower Under The Current System. This one is recycled from the last time reform was debated back in 2001. Typical is the argument the Center for Economic and Policy Research advances: “On average, less than 0.6 cents of every dollar paid out in Social Security benefits goes to pay administrative costs. President Bush’s Social Security commission estimated that under their system of individual accounts 5 cents of every dollar would go to pay administrative costs.”
However, the question the Center avoids is what are we getting for that low administrative cost? Based on what the current system would be able to pay out in benefits years from now, the answer is a negative return on our money. Apparently, reform opponents have not realized that there is little point in low administrative costs when one is getting nothing for it. Chances are most people would trade that in for a system with higher administrative costs and higher returns. And since personal accounts will be voluntary, no one will be forced to incur those administrative costs.
Public Opinion Is Against Personal Accounts. The AARP recently tried to disseminate this notion via disinformation. A “survey” conducted for AARP by Roper Public Affairs revealed that 43% of respondents favored personal accounts, while 47% opposed them. This was a case of the devil being in the details. The survey polled only people age 30 and older, leaving out the 18-to-29-year-old population that tends to favor personal accounts. Furthermore, the question on personal accounts informed the respondent that the amount the “average worker” could invest would be “about $750 per year.” Thus, there is no way to know if the respondent dislikes the idea of accounts or thinks the accounts would be too small. In short, the AARP’s survey is the polling equivalent of garbage.
The fact is, opinion on Social Security reform varies considerably with the type of question being asked. More technical questions tend to dampen support for reform. Back in December Fox News/Opinion Dynamics asked the relatively simple question: “Do you think people should have the choice to invest privately up to 5% of their Social Security contributions, or not?” Sixty percent of respondents said people should have choice.
Individuals Won’t Really Have Much Control Over Their Personal Accounts. Paul Krugman tried this argument recently:
American privatizers extol the virtues of personal choice, and often accuse skeptics of being elitists who believe that the government makes better choices than individuals. Yet when one brings up Britain’s experience, their story suddenly changes: they promise to hold costs down by tightly restricting the investments individuals can make, and by carefully regulating the money managers. So much for trusting the people.
Who does Krugman think he’s kidding? If reformers were proposing a free-for-all, he’d be criticizing them for exposing people to huge amounts of risk. Further, reformers have never “changed their story.” They have been up front about the limits on what can be done with personal accounts.
Even some conservatives buy into this line of thinking. Writing in the Weekly Standard, Irwin M. Stelzer states:
No one is proposing to allow participants in the current system to invest even a part of their contribution in any way they might choose?the proposal now on the table would have the government limit investment options to stock-index mutual funds, bond funds, and cash–the resulting pool to be converted into annuities upon retirement?So much for freeing citizens from the heavy hand of the state.
Yet just because individuals won’t be completely free from government interference doesn’t mean that they will not be freer than they are now. (The same goes for Krugman’s argument about “trusting the people”: reformers trust the people more than do the backers of the current system.) As I noted last week:
Even if reform limits me to only putting $1,000 of my payroll taxes annually in a personal account and I have to wait until it accrues to $10,000 before I can invest it in mutual funds outside the three-to-five conservative funds, that’s still a lot more than I can do with my payroll taxes at present.
In an ideal world we would be free from government meddling. But rejecting a reform that makes us freer because it does not make us totally free is to make the perfect the enemy of the good. Surely Stelzer is not in favor of that, is he?
Even When The Trust Fund Runs Dry, Benefits Will Still Be More Than They Are Today. Reform opponents often claim that when the Social Security trust fund runs out in 2042, Social Security will still have enough revenue to pay 73% of benefits, and that amount will still be more than what beneficiaries receive at present. Some pundits, like Kevin Drum, almost sound enthusiastic about this:
Still, you might be wondering what happens if the gloomy predictions of the Social Security trustees turn out to be right. Here’s another thing you probably don’t know. Even in the worst case, even if we do absolutely nothing for the next 38 years, Social Security won’t go bankrupt.
On the contrary, benefits will continue to be paid forever. They won’t be as generous as we’d like, but they’ll still be higher than they are today.
While Social Security will continue to pay benefits when the trust fund runs out in 2042, it is important to understand exactly what this means to beneficiaries. Although it will still be more than what we receive today, there is no way around the fact that for beneficiaries in 2043 it will be 27% less than what they were receiving in 2042.
What’s so odd about this argument is that it is made by many of the same people (although not Drum) who engage in fear-mongering about benefit cuts under reform. If we are not to worry about benefit cuts under the current system, why are they so bad under a system that at least gives individuals a chance to make up the difference with personal accounts? Don’t hold your breath for reform opponents to answer that question.
Fix Medicare First! Opponents of reform are trying to divert attention away from Social Security and toward Medicare, since Medicare is in worse shape. The New York Times recently tried this approach:
Mr. Bush’s reason for ignoring the far more pressing problem of Medicare while he pursues Social Security privatization is especially tortured. Over the next 75 years, the mismatch between revenues and Medicare benefits for doctors’ care and prescription drugs is 3.5 to 6 times as much as the shortfall in Social Security, according to the Center on Budget and Policy Priorities.
Actually, President Bush’s reason is good political sense. Seniors don’t trust the GOP on Medicare thanks to the “MediScare” campaign Democrats unleashed when Republicans tried to fix Medicare in 1995. It enabled Bill Clinton to demagogue the issue to reelection in 1996, and almost cost the GOP the House of Representatives. Given that the residue of MediScare still lingers in seniors’ minds, a Republican President like Bush probably does not have enough trust among the senior population to tackle Medicare. But he can build such trust by reforming Social Security first.
Consider that one of the scare-tactics reform opponents employ is that current retirees will see their Social Security benefits cut. Should Bush succeed at reform, seniors will eventually realize the tactic is nonsense once they see that their monthly Social Security checks are not reduced. Once that happens, Bush will have enough political capital with the senior population to push Medicare reform.
Indeed, Bush’s decision to tackle Social Security first is a smart one. As usual, the New York Times has misunderestimated him.
Although reform opponents have advanced some new arguments, they are just as ineffective as the old ones. In the long run, they won’t do much to derail reform as long as the advocates off reform work to refute them.
Finally, readers may have noticed that I didn’t address one of the biggest of the new arguments: the “there is no crisis” con. That is the subject of Part II on Monday.