Bush's Numbers Racket
Why Social Security privatization
is a phony solution to a phony problem
by Dean Baker
The American Prospect magazine,
The word from President Bush and his minions
is that Social Security is on its last legs, facing imminent danger
of bankruptcy. Fortunately, Bush is prepared to rescue this antiquated
program by offering workers the opportunity to invest a portion
of their Social Security taxes in private accounts. He would like
us to believe that this plan will both get the government out
from under a crushing debt burden, in the form of future Social
Security obligations, and provide younger workers with a more
Almost every part of this story is untrue.
First, Social Security does not face any crisis in the normal
meaning of the term. Second, private accounts would not give workers
a more secure retirement; they reduce security. And third, the
basic logic of the story is faulty; it is impossible to both reduce
government spending on Social Security and increase benefits,
unless the plan somehow increases growth. And no economist seriously
contends that putting Social Security money in the stock market
will increase growth.
THE BASIC NUMBERS
Starting with the crisis story, the first
place to look is the Social Security trustees' projections, the
standard basis for analysis of the program. The most recent projections
show that the program, with no changes whatsoever, can pay all
benefits through the year 2042. Even after 2042, Social Security
would always be able to pay a higher benefit (adjusted for inflation)
than what current retirees receive, although the payment would
only be about 73 percent of scheduled benefits.
The Social Security trustees' projections
are based on extremely pessimistic assumptions about the future.
(Four of the six trustees are political appointees of President
Bush: the treasury, labor, and health and human services secretaries,
plus the Social Security commissioner.) For example, the trustees
assume that economic growth over the 75-year planning period will
be less than half as fast as over the last 75 years. 'While most
of this difference is due to the assumption of slower labor-force
growth following the retirement of the baby-boomer generation,
the trustees also assume that productivity growth will revert
back to the rate of productivity growth during the slowdown years
of 1973-95. Even so, the trustees themselves have begun using
slightly more realistic assumptions. In 1997, they placed the
year that Social Security would begin facing a shortfall at 2029.
By 2003, they had revised that projection to 2042. Any system
that gains 13 years of health in six years is hardly bankrupt.
The nonpartisan Congressional Budget Office
(COB) did its own analysis of the program last summer. Using only
slightly more optimistic assumptions, the CBO found that the program,
with no changes at all, could pay all benefits through the year
2052 and more than 80 percent of scheduled benefits in subsequent
On the face of it, the fact that Social
Security may face a shortfall in just under 40 years (according
to the trustees' report) or 50 years (according to the CBO) hardly
sounds like a crisis. After all, the program faced projected shortfalls
in the 1950s, '60s, '70s, and '80s. Each of these shortfalls was
dealt with-usually with modest tax increases, and in the case
of the '80s shortfall, a phased increase in the retirement age
beginning in 2003. In the past, no one seemed to feel the need
to begin whining about a looming crisis 40 or 50 years ahead of
But the proponents of the crisis story
have been largely successful in spreading fear. Part of this success
is due to the use of deceptive language in framing the issue.
The promoters of the crisis routinely speak of an $11 trillion
"unfunded liability" for Social Security. But most of
the people who hear the $11 trillion figure or use it (including
reporters) probably have no idea what it means.
The $11 trillion is obtained by projecting
Social Security taxes and spending for the infinite future. The
gap between projected spending and taxes for all time is then
summed up (using a 3-percent real-discount rate) to get a projection
of $11 trillion of debt.
However, more than two-thirds of this
projected debt is due to spending beyond the 75-year planning
period for Social Security. This means that the debt is not something
that we are imposing on our children or grandchildren. Rather,
it is a debt that we are projecting that our great-grandchildren
would impose on their grandchildren-assuming pessimistic economic
The basic story is that life expectancies
are projected to increase through time. This raises the cost of
the program through time. If taxes are never raised and benefits
are never reduced, the shortfall would eventually be very large.
But serious people don't worry about designing
Social Security for the 22nd century. (The secret here is that
we don't actually get to design Social Security for the 22nd century
anyhow-the people who are alive in 50, 60, and 70 years will design
the program in a way that makes sense to them. They will not care
at all about what we thought was a good system in 2005.)
If we just confine ourselves to the already
lengthy 75-year planning period, the projected shortfall comes
to $3 trillion. This may still sound very large. However, the
Social Security trustees calculate that this shortfall is 0.7
percent of national income over the planning period. The CBO projects
an even smaller number, just 0.4 percent of income over the next
By comparison, the increase in annual
defense spending since 2001 has been more than 1 percent of the
gross domestic product, twice the size of the Social Security
shortfall projected by the CBO. And Bush's tax increases equal
about 2 percent of the GDP. In fact, rolling back Bush's tax cuts
on the very wealthiest would raise sufficient revenue to cover
the shortfall for 75 years.
THE TRUST-FUND SCARE STORIES
The promoters of privatization have one
other standard trick to promote fear about Social Security's future:
They point out that, beginning in 2018, Social Security will be
forced to rely on income from the trust fund to pay benefits.
But this was deliberate. The 1983 Social Security Commission,
chaired by Alan Greenspan, deliberately designed a system that
would build up a surplus-taxing more than was necessary to pay
benefits-so that the income from this surplus could be used help
pay the costs of the baby boomers' retirement. Drawing on the
trust fund is no more of a problem for Social Security than it
is for any pension fund to use some of its accumulated assets
to pay benefits to retirees. Indeed, that is exactly what is supposed
Some conservatives have even derided the
Social Security trust fund as an "accounting fiction?' Like
most claims to wealth in a modern economy, it exists primarily
as an accounting entry (how much gold does Bill Gates have in
his basement?), but it is hardly fiction. Under the law, the federal
government is obligated to repay the government bonds held by
the Social Security trust fund, just as it is obligated to repay
other government bonds. While tax revenue will be needed to repay
these bonds, it is slated to come from personal and corporate
income taxes, both very progressive forms of taxation. By contrast,
the Social Security tax is a highly regressive wage tax. The meaning
of the trust fund is that workers effectively prepaid their Social
Security taxes. Now, the government is obligated to tax the Bill
Gates and Pete Petersons of the world to repay this debt.
FUNNY NUMBERS ON PRIVATE ACCOUNTS
After telling people that Social Security
poses the risk of economic disaster, the privatizers promise that
individual accounts would provide everyone with a secure retirement.
The basic argument is that high returns in the stock market would
allow workers to get more money from their Social Security taxes
than what they can get through the current system.
There is a simple and obvious problem
with this logic. When they project rates of return in the stock
market, the privatizers routinely assume that the returns in the
future will be equal to the returns in the past, 6.5 percent to
7 percent above the rate of inflation. But the whole basis for
projecting a Social Security shortfall is the assumption that
the future will have far slower growth than in the past.
It is not just the retirement security
of individual workers that would be threatened by privatization.
President Bush's plan would also lead to transition costs that
could be as high as $200 billion a year for more than 30 years.
Given the much slower projected rate of
profit growth, and the fact that price-to-earnings ratios in the
stock market continue to be far higher than the historic average,
it will be impossible for stock returns to be as high in the future
as they were in the past. Projections of stock returns that are
consistent with projections of profit growth and current price-to-earnings
ratios are approximately 5 percent above the rate of inflation.
Because most projections assume a 50-50 mix of stocks and bonds,
the implied return on private accounts, after deducting administrative
costs, would be about 3.5 percent. This is not much different
than the 3-percent return projected for the government bonds held
by the trust fund.
In short, there is no untapped bonanza
to be claimed by putting Social Security money in the stock market.
This step would add little, if anything, to average returns. It
would simply add risk. Individual workers may do worse than the
average because they make bad investment choices or they happen
to retire during a downturn in the stock market. Going in this
direction makes sense if the purpose is to increase fees for the
financial industry, but it is not a step toward increasing workers'
retirement security. Moreover, with individual accounts, retirees
would have to worry about living too long, whereas Social Security
is guaranteed for life.
Even with individual accounts, most workers
would still see large benefit cuts under the second plan produced
by President Bush's Social Security Commission, the one that Bush
indicated would be the model for his proposal. An average wage
earner who is age 20 at the time the plan is implemented could
expect his or her basic Social Security benefit to be cut by $200,000,
or more than 30 percent, over the course of his or her retirement.
He or she could expect to make back less than $70,000, or about
one-third of this cut, through his or her private account.
But it is not just the retirement security
of individual workers that would be threatened by privatization.
President Bush's plan would also lead to transition costs that
could be as high as $200 billion a year (almost 2 percent of the
GDP) for more than 30 years. The transition problem stems from
the fact that workers would begin placing their money in private
accounts immediately, leading to large losses of revenue to the
government. However, the commission's plan proposes phasing in
cuts to new retirees, beginning five years after the plan takes
effect. These cuts would not get large enough to offset the lost
revenue (and resulting interest burden) for more than three decades,
which would lead to a substantial deficit increase in the intervening
In order to avoid the appearance that
his plan would lead to record-breaking deficits (measured as a
share of the GDP), President Bush wants to take this transition
by not counting this borrowing as part of the budget. The argument
is that we would pay this money back (with benefit cuts) 40 or
50 years in the future, so the current borrowing should not be
viewed as adding to the deficit.
The question of whether the transition
borrowing could be taken off the books is a political one, but
politics won't determine the impact of this borrowing on the nation's
economy. There is little evidence that financial markets look
40 and 50 years into the future (and it's not clear what they
would see if they did). But every other country that has privatized
its Social Security system has felt the need to offset the immediate
loss of tax revenue with some spending cuts and/or tax increases.
And none of them started with deficits that are as large as those
the United States is currently running.
There were already grounds for believing
that the Bush deficits were too large and would lead to a substantial
increase in interest rates if not reduced quickly.
Adding $200 billion a year to these deficits
makes it far more likely that the country would face considerably
higher interest rates in the near future.
There is also a good example of what can
happen when a country tries the Bush approach to Social Security
privatization (even if it didn't go quite as far). In 1994,
Argentina partially privatized its social-security
system. While there were some cuts included in this package, it
cost the government an amount of tax revenue equal to approximately
0.9 percent of the GDP, equivalent to $100 billion a year in the
United States. In 2001, Argentina went into bankruptcy and defaulted
on its debt. If the social-security revenue had still been coming
to the government over the period between 1994 and the default,
Argentina would have been running a balanced budget in 2001.
The United States is obviously very different
from Argentina, but this example is not encouraging for proponents
of privatization. The financial markets were not impressed with
the fact that Argentina's social-security payments would be lower
20 years in the future. The markets focused on the deficits the
country was running in the present. It is likely that they would
also focus on the $600 billion (plus deficits) that would result
from President Bush's Social Security plan.
In short, Bush's plan would undermine
a system that has provided security for tens of millions of workers,
and their families, for seven decades, and which can continue
to do so long into the future if it is just left alone. His private
accounts would provide far less security, while hugely raising
costs in the form of fees to the financial industry. Finally,
the cost of transitioning to this new system could throw the country
into an economic crisis. It's small wonder that Bush is facing
increasing skepticism. TAP
Dean Baker is co-director of the Center
for Economic and Policy Research.
The Bush page
Index of Website