Social Insecurity

WASHINGTON —  Now that the stock market bubble has burst, the notion of privatizing Social Security might seem like a bad dream. A recent study by the bipartisan Center for Economic and Policy Research found that if 5% of Social Security payroll taxes had been carved out in each of the last four years for individuals to invest in private stock accounts, as was advocated by some privatization supporters, the accounts would probably have lost about $72.65 billion--and that was before the stock market slide of the last few weeks.

Yet in a triumph of hope over experience, the Bush administration is still arguing that allowing workers to invest Social Security funds in personal accounts is a good idea. Spokesman Ari Fleischer declared Wednesday that stocks were a “sound long-term” way to obtain higher rates of return.

Far from giving up, champions of privatization are gearing up for another attack on Social Security. Their efforts are a textbook case in how a fringe cause can become a central tenet of a Republican administration, whether or not it flies in the face of reality.

Beginning in the 1990s, a chorus of free-market intellectuals started making the case that to avoid Social Security going bankrupt, it must be privatized. The belief that workers would be hostage to the vicissitudes of the market was dismissed as absurd. Writing in July 2000, James K. Glassman, co-author of the book “Dow 36,000,” proclaimed the emergence of a new investor class of middle-class Americans who demanded market-friendly policies from Washington. According to Glassman, “a Social Security reform that gives people the option to create their own investment accounts would turbocharge the movement toward middle-class capitalism.” Cyberpundit Andrew Sullivan remarked that “Social Security was a system designed in the 1930s, and the way it siphons vast amounts of productive capital into low-paying government investments is explicable only in the context of a country terrified of another Great Depression.”

If Sullivan offered a kind of patriotic argument for diverting funds, Stephen Moore, president of the Club for Growth, offered a more personal reason: “If you’re younger than 40, you’re a fool to stay put. You can do much better opting out and privatizing your Social Security.” Social Security, he concluded, was nothing more than “inter-generational theft.”

Given the gyrations the market has been experiencing, are Moore and company a bit more cautious these days about advocating the overthrow of a system that has helped ensure seniors for some seven decades?

Not at all. Moore breathes optimism: “What we’re experiencing now will show up just as a blip, the stock market will march back on its merry way to normal rates of return. The swings we’re seeing now are just noise.” Andrew G. Biggs, who was a staff member on the Bush Commission to Strengthen Social Security and is an analyst at the libertarian Cato Institute, agrees: “It’s a tempest in a teapot.... The stock market doesn’t affect underlying values at all.... With privatization, your average return would be 6% after inflation. If we had just started, you would have had a dip today but had a long time to get rid of it.”

Even after Enron, columnist George F. Will called privatization “the most direct path to participation in the economy’s wealth creation.” Indeed, proponents argue that, precisely because the market has collapsed, there is no better time to sink Social Security funds into stocks.

But if those arguments were flawed before the recent crash, they are wholly fallacious in its aftermath. Social Security is supposed to serve as a nest egg for seniors, not the source of speculative profits that can go up or down. All the predictions of long-term gain are well and good, but what if someone retires during a severe slump? In a bear market, Social Security gives retirees a margin of comfort, serving as a safety net that allows them to take risks with their other assets if they choose to. The truth is that there will always be winners and losers in the stock market.

It’s also the case that massive, government-sanctioned investment in the stock market can have distorting effects. Take Japan. Investment analyst James J. Cramer noted that government support created an environment in Japan in which individuals and corporations “became heavily enmeshed in a stock market that was totally divorced from the ‘fundamentals,’ as we say on Wall Street.” The Japanese economy remains in the doldrums and companies are starved for capital because the public has been burned and would rather keep its funds under mattresses than in the market. Had the U.S. government already been invested in stocks, the market could well have risen far higher--and the current crash would be even more severe.

Finally, it is not clear that Social Security is really going under. Although its surplus has subsized debt reduction and tax cuts, the fund still has one.

Even as the Bush administration moves to derail Social Security, the system is working exactly as intended. But if the collapse in stocks can’t dent the optimism of privatization champions, nothing will.