Privatization of Social Security: Winners and losers
Carlton M. Caves
2005 March 15

In a column entitled "Bush Must Fight Back," published in the March 9 San Diego Union Tribune, Ruben Navarrette, Jr. urges the Bush administration to marshal the support of younger workers for Social Security reform. He wants the administration to make the case that under the present Social Security system, we baby boomers are going to be the winners at the expense of his generation of younger workers.

Since Navarrette's recommendation is already an easily identifiable part of the Bush administration's strategy for selling privatization of Social Security, it might be hard to see exactly what Navarrette brings to the debate. There is, however, something distinctively unattractive about his contribution. Although Navarrette generally writes about Hispanic issues from a conservative perspective, a second persistent theme in his columns is an intense hostility toward baby boomers, defined loosely as people born between 1945 and 1960, who are now between 45 and 60 years old. He portrays the boomers, especially liberal ones, as smug, self-indulgent louts who are out to get his generation (Navarette is 37), which we might define as those born between 1960 and 1975, people now between 30 and 45. It's best not to speculate on what parental or other influence fuels this almost pathological animus, but it is important to recognize it, because it informs much of Navarrette's commentary. More important, however, is to analyze Navarette's---and Bush's---contention that the present Social Security system is unfair to young workers and that privatization will right this unfairness.

Bush and his neoconservative flacks want younger workers to believe that the demographic bulge of baby boomers will bankrupt the Social Security system, leaving it in ruins when workers now under, say, 40 retire. They send the message that younger workers, after paying for the boomers' retirement, will be left holding the bag, with nothing left for their own retirement. This is a deliberately deceptive message, which conflates two different demographic problems faced by Social Security.

The first problem is indeed the population bulge of boomers, who on retirement will increase the ratio of pensioners to workers. This population bulge is a temporary condition, which will last for the 30 or so years during which the boomers are drawing pensions from Social Security. It would put the system under severe strain had not measures been taken to prepare for it. Beginning in the early 80s, as the the boomers' entered their prime working years, the Social Security system began accumulating a nest egg through increased payroll taxes. The nest egg is there now in the $1.5 trillion Social Security trust fund, which will continue to grow for a little over a decade, after which it will be drawn down to pay for the boomers' retirement. Since the trust fund is entirely invested in government bonds, all of us as taxpayers are obligated to pay off the bonds, just like any other government debt. The need to pay down this debt over the next 35 years or so does argue for fiscal prudence, something that we experienced in the 90s, but that has gone missing during the Bush administration.

The second demographic problem faced by Social Security---and this is the real problem---is the continued increase in life expectancy. This is a systemic problem, which increases the ratio of pensioners to workers. Indeed, if we ignore population bulges, the ratio of pensioners to workers is identical to the ratio of retirement years to working years. This problem has nothing to do with the boomer bulge---so much for Navarrette's generational warfare---and it will ultimately lead to a situation, sometime in mid-century, in which the present Social Security system is unable to pay current benefits. No retirement plan, private or public, can work if the ratio of the retirement years to working years gets much above a third. Increases in life expectancy will have to be dealt with by some combination of decreased benefits, increased revenue, and increases in the retirement age. These changes should be considered carefully now and be put into effect before the boomers begin to retire. Privatization does nothing to change the fundamental arithmetic of increasing life expectancy. The only difference under privatization is that increases in revenue involve putting more money into private accounts instead of more taxation.

Under the present Social Security system, there are no generational winners or losers; there is no reason to pit Navarrette's generation and even younger workers against the boomers. Instead there is an ongoing social contract that needs to be renewed and adjusted to take into account the increased life expectancy that we hope the boomers and subsequent generations are able to enjoy.

The surprise comes when one takes a closer look at the winners and losers under a Bush-style transition to private accounts. Under Bush's scheme, benefits for current retirees and the boomers will be financed by government borrowing that replaces the payroll tax revenue that is lost to private accounts. Such a transition will require the federal government to borrow several trillion dollars over the next 35 or so years, and this makes it easy to identify winners and losers. The winners will be current retirees and the boomers, whose retirement will be funded wholly or partially out of borrowed funds. The losers will be the future taxpayers who have to pay off the resulting government debt. Those future taxpayers will lose because they will have to pay for their own retirement, through contributions to private accounts, and for the retirement of current retirees and the boomers, through paying off the multi-trillion dollar debt.

Bush and his neocon allies are promoting privatization for purely ideological reasons. They have made transformation of Social Security a priority not because it is the most important problem facing the nation---it is important, but it pales in comparison to the systemic federal deficits that Bush's tax cuts have led to---but rather because they see the next two years as their prime opportunity to begin dismantling the most successful program in the liberal social contract. Their ideology abhors social contracts, holding instead that each person should be responsible for his own destiny. They're not really concerned about the potential failure of Social Security, for if they were, they would propose solutions that address the system's real problems. What attracts their attention to Social Security is not its potential failure, but rather its extraordinary success, which is an intolerable affront to their core ideology.

The great discovery of the Bush neocons is that the best---really the only---way to sell their ideology is through misrepresentation and deception. In this regard, the appeal of promoting a transition to private accounts financed by borrowing is obvious: the ultimate losers can't be identified---they might be 50 or 100 years out---so the transition can be sold as a winner for the entire present voting population. This is a tactic of breathtaking irresponsibility---let's party, and leave the mess for the future to clean up. Is there anybody out there who still believes the GOP is the party of fiscal responsibility?

Younger workers especially need to beware, because the bill is not going to be put off for 50 years or even 30 years. Global economic forces will force the US to restore fiscal discipline on a time scale much shorter than 30 years. When that happens, younger worker, you and your fellow taxpayers will be faced with paying off the transition debt, and you will be the big losers. We all need to demand answers from Bush and the Congressional Republicans about their plans to privatize Social Security, but it is younger workers who should be asking the hardest questions.

The unavoidable fact is that in any transition from the current pay-as-you-go system to private accounts, some generation of workers will be losers, since that generation will have to pay both for its own retirement and for current retirees and the boomers. A responsible neocon would promote a pay-as-you-go transition to privatization in which the losers were clearly identified. Current workers would contribute to private accounts to finance their own retirement, but would continue to pay the payroll tax to support the retirement of those who worked under the old Social Security system. The payroll tax would gradually be reduced as the number of retirees covered by the old system decreased.

An honest advocate of such a program would say something like the following: ``A transition to private accounts is good for America because it will make each American responsible for his own retirement through investments in our great free-market economy. I'm promoting a responsible privatization in which the government does not borrow vast sums to finance current benefits. Such borrowing would transfer the cost of privatization to some future, unspecified generation, and that is unacceptable. It is true that under my plan, younger workers will bear a large burden, because they will fund not only their own retirement, but also that of their parents and grandparents. It is also true that the new system of private accounts will eliminate the progressive aspects of traditional Social Security, thereby leaving many retirees in poverty. But these costs are worth it to move to a system in which each person is responsible for his own destiny." If neocons would make this honest case, we could all decide on the merits, but don't hold your breath waiting to hear it.

What about Navarrette? Once you get past his unfortunate incitement of generational warfare, you find that he's not wedded to private accounts and that he just might support a set of sensible proposals for adapting Social Security to the 21st Century. Here's my message to him: "Ruben, you and I might find common ground if you would just set aside your hostility toward my generation, but even if you did, you would still have a problem. You're addressing your ideas to Bush under the illusion that he and his allies are interested in solutions and will listen to and adopt reasonable ideas. You're barking up the wrong tree with that one. For Bush and the neocons, privatization is a purely ideological objective, which they will pursue without reference to the system's actual problems. You would do better to aim your sensible proposals at people who are willing to listen."

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