Private Accounts: A No-Brainer

Last week, The New York Times quoted a Harvard law student who favors the privatization of Social Security as saying the accounts-formerly-known-as-private are "a no-brainer."

Funny, I'd say that pretty well describes this future legal eagle.

Here's my take: If you aren't smart enough to figure out what's wrong with President Bush's plan to privatize Social Security, then you won't be able to run one of the accounts-formerly-known-as-private, either. (The White House doesn't want anyone to call them private accounts anymore, even though they have always been known as private accounts – it's the new political correctness.) It's not as though this were all just-too-complex for the average citizen.

Without any math at all, you can understand the most important problems with the Bush plan:

A) It doesn't fix Social Security. This is not a partisan contention – the Bush people admit it, though they use bizarrely fuzzy language. Before the president's State of the Union Address, a "senior administration adviser" (means head honcho in charge) told the Los Angeles Times that "the individual accounts would do nothing to solve the system's long-term financial problems." It does nothing to shore up Social Security, no fix, no nada.

B) They're using two starkly different economic projections to make their case. In the first, under a gloom-and-doom scenario no one thinks is realistic, Social Security will NOT be broke, bust, flat or bankrupt in 2042. Even under the grimmest forecast, the system will still be able to pay retirees more in constant dollars than it does today – the shortfall would be a fraction of 1 percent of the national income. Despite Bush's funereal announcement, "The crisis is now," it is not now and it is not a crisis.

To fix that is easy – raise the cap on Social Security taxes (the point at which they no longer apply and you don't have to pay any more) from $90,000 a year to $200,000 a year. According to The New York Times, that step alone would just about cover the entire invented, fabricated meaningless scare figure – "$11 trillion Social Security deficit" – constantly reiterated by the Republicans marching in lockstep. That particular bit of horse poop comes from predicting Social Security into infinity, a meaningless exercise.

C) If you use the same unlikely doom-and-gloom scenario Bush uses to predict the "bankruptcy" of Social Security to predict the future of his formerly-private-accounts plan, the accounts will be an abysmal failure because the economy will be so bad, they won't make any money. But lo, as Bush presents it, the economic future is not going to be grim at all, but au contraire, so rosy everyone will have more money and there is such a thing as a free lunch.

Of course, if the economy actually is that rosy, then Social Security would never run into trouble in the first place, all will be magically solved by glorious economic growth, and we don't have to do a thing.

D) The plan will cost around $2 trillion in "transition costs" just to shift from the current system. You notice Bush didn't mention that in the State of the Union. That's $2 trillion we don't have, can't afford and will have to borrow, with horrid economic consequences, all quite apart from the fact that the plan won't work.

E) Similar plans have so far been tried in Chile, Argentina, Bolivia, Britain, Singapore and Sweden. According to The Wall Street Journal, there are problems with it everywhere. Only in Chile, the Journal says, "the program is considered a solid success, though hardly the 'miracle' it is sometimes portrayed in seminars and studies by proponents overseas."

In addition to large fees charged by fund managers – the Journal says 20 percent, others say one-third of the total deposited – there is widespread evasion of the system. According to the World Bank, half the contributions of the average Chilean worker went to management fees. The Journal also cites several reasons why the United States, with more mature markets, is unlikely to ever see the dizzying heights of the plan's early years in Chile.

F) Of course, Bush's plan cuts Social Security benefits, both now and in the future. Here's how: He wants to change the benefits from being indexed to wages to being indexed to inflation. The result will be to cut future benefits by 40 percent or more.

G) If our future legal eagle is alert, he will have the administration explain "clawback" to him. In his big speech last week, Bush said of private accounts, "And best of all, the money in the account is yours, and the government can never take it away."

Bull. Here's how the future cuts work: You invest your money in an account that over time nets you a nice little profit. The government then "repays" itself the money it "loaned" you at 3 percent interest by cutting your Social Security benefits by that amount. If you managed to make 4 percent on your account in which you contributed $1,000 a year from the start of your career, you would have $99,800 by the time you retire, but the government would keep $78,700 of it, about 80 percent. If you only made 3.3 percent, you're left with nothing but the guaranteed benefit, now diminished by inflation indexing.

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