System Needs Tweak, Not Disaster Relief

One mark of a truly terrible idea is that it outlasts the delusions that first gave it life. In today’s world, there’s no better example than the push for Social Security “privatization,� a threadbare artifact of the last stock market boom.

The diversion of a portion of Social Security taxes into some form of individual investment account has been promoted for years as a solution to the system’s impending collapse. President Bush has draped the old notion in “ownership society� rhetoric, part of his anti-tax credo that individuals are wiser at spending their money than the government and thus should keep more of it.

As appealing as this may sound, when applied to Social Security it’s not a device to rescue the system from ruin. Instead, it’s a weapon aimed at the system’s heart.

The privatization idea was born back when the stock market seemed to be making everybody rich. Economist Martin Feldstein, the patriarch of privatization, salted his manifestos with calculations of yields and rates of return for private investments versus those imputed in Social Security taxes and benefits. The latter always came up dismally short.

One flaw in this methodology should be obvious: The good times didn’t last. Although the stock market more than tripled in value from 1995 through 1999 (as measured by the Standard & Poor’s 500 index), it fell 50% from then to the end of 2003. Investors who stood pat from 1995 through 2003 would have seen two-thirds of their initial gains go up in smoke.

That’s the risk facing individuals who invest their accounts prudently in broad stock funds. What of those who opt to take a flier on stocks like Krispy Kreme (down 80% since its peak) and fray their safety net beyond repair?

In any case, judging Social Security like an investment fund defines it as something it was never meant to be. Social Security is a social insurance program whose benefits were never expected to have a direct relationship to contributions. After all, the very first Social Security recipient, Ida May Fuller, paid a mere $24.75 into the program, but collected $22,888.92 between 1940 and her death in 1975.

Reflecting its underlying purpose, Social Security has features that private investment accounts can’t match: Its payments are inflation-indexed, they can’t run out during the recipient’s lifetime, they’re shielded from market fluctuations and they’re payable to survivors for their lifetimes. The system is progressive, meaning it covers a larger share of the needs of low-income members than of the wealthy. Private investment accounts would almost certainly do the opposite, laying the most risk onto the two-thirds of all elderly retirees for whom Social Security is the sole or principal source of income.

But what about the system’s health? Fear-mongering about the condition of Social Security is the handmaiden of the privatization lobby. The words “insolvency,� “bankruptcy� and “disaster� are casually tossed around in the hope that a numbed public will become convinced that, barring a draconian solution, no one’s Social Security benefits will be safe.

In fact, this description isn’t remotely accurate. Social Security taxes, interest earned from the system trust fund’s holdings of Treasury securities (currently $1.7 trillion and scheduled to grow to nearly $4 trillion by 2022) and revenue from the redemption of those securities are projected to be enough to fund 100% of all scheduled benefits through 2042. At that point the trust fund will be exhausted, and tax revenue will be sufficient to fund only about 73% of currently scheduled benefits.

These figures suggest that the system needs tweaking, not disaster relief. They certainly don’t warrant performing radical surgery in an atmosphere of apocalyptic panic four decades in advance of the crisis point.

Serious economists proposing to strengthen the system say its projected deficit can be eliminated through any number of modest changes. These include raising the maximum annual income on which Social Security tax is levied (currently $87,900), bringing new state and local government employees into the system to broaden its base, and maintaining the federal estate tax and allocating the proceeds to benefits.

So where does the impetus for privatization come from? The campaigners include anti-tax ideologues and groups affiliated with the brokerage and insurance industries, which hope to cash in on the creation of millions of individual rainy-day accounts. Mutual fund executives have recently warned that they can’t accommodate a surge of small accounts without charging hefty fees, which doesn’t mean they don’t want the business, just that they don’t want limits on their fees. In other words, the retirement-bound individual is being set up for a shearing.

President Bush’s “ownership society� ideology, which glorifies personal responsibility and demonizes government programs, sounds great -- until you remember that Americans once lived in such a free-market paradise. It was the 1920s, and it ended in an economic catastrophe that led to the very Social Security system that Bush is now plotting to destroy.

In the months to come the privatization gang will muster reams of scary-sounding facts and figures, produced through obscure recipes like “generational accounting,� to convince people that Social Security is on the verge of imploding.

Their solution would erode the most effective social welfare program the U.S. has ever enacted and cede a significant portion of the national retirement nest egg to Wall Street, all in the name of an unnecessary “reform.� The really pressing issue for Social Security is not how to shore up the system’s finances, but how to protect it from reformers like these.

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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at [email protected] and read his previous columns at latimes.com/hiltzik.