News & Politics

Choice Shtick

Destroying Social Security does nothing to advance individual freedom.
This article is reprinted from The American Prospect.

Once upon a time, there were weapons of mass destruction in Iraq, and we were invading in order to destroy them. Then they turned out not to exist. Fortunately enough, it turned out that George W. Bush was only pretending to think the weapons of mass destruction were the reason to invade. Really it was all about the freedom from the beginning. You just didn't notice. Similarly, as the president's case that Social Security is in crisis continues to crumble, conservatives are busy ginning up new reasons to phase the program out and replace it with a system of mandatory investments in private stock funds.

As George Will put it on Jan. 20 in The Washington Post, the really important reasons for destroying the most successful program in American history are "philosophic." It's all about choice. All about freedom. Similar arguments have issued forth recently from the pens of Andrew Sullivan, Jonathan Rauch and David Brooks. My friend Will Wilkinson, recently a graduate student in philosophy and now a policy analyst at the Cato Institute, ground zero for privatization, recently recommended Daniel Shapiro's old Cato paper "The Moral Case for Social Security Privatization," which argues that privitizing social security is all about "maximizing individual choice and liberty." As Will put it in a recent Newsweek column, think of today's kids who own "iPods, in which they can store as many as 10,000 songs of their choosing, which they can hear whenever they choose. Then try to explain to them why they should not be allowed to put a portion of their Social Security taxes in tax-personal [sic] retirement accounts."

Well, I've only got an iPod Mini, which only stores about 1,000 songs, according to Apple's estimates. In fact, though, I've got a considerable number of very short songs by bands like NOFX and the Ramones, which take up less disc space, letting me put more than 1,000 on. And this, of course, is part of the beauty of choice. Me, I love "Judy is a Punk," so there it is on my iPod. My dad, not so much. He likes a lot of Rolling Stones songs I consider overwrought. And thanks to the magic of choice, he gets to put the songs he likes on his iPod, while I listen to the songs I like. Choice, you see, is a good thing.

The important thing to keep in mind, however, is that Social Security privatization isn't like that at all. Cato's privatization maestro, Michael Tanner, has his problems, but he isn't given to rhetorical flights of fancy. His plan, as described on the Cato web site, would eliminate half of Social Security's revenue stream, requiring massive cuts in guaranteed benefits. In exchange, you would be forced to save 6.2 percent of your wages for your retirement in an individual account. "Allowable investment options for the individual accounts," Tanner writes, "will be based on a 3-tier system: a centralized, pooled collection and holding point; a limited series of investment options with a lifecycle fund as a default mechanism; and a wider range of investment options for individuals who accumulate a minimum level in their accounts."

Not really as much fun as an iPod. Meanwhile, "At retirement, individuals will be given an option of purchasing a family annuity or taking a programmed withdrawal."

Under the current system, 6.2 percent of my paycheck vanishes each pay cycle and goes to the government; when I retire, I'll get a fixed sum of money every month from the government. Under Tanner's plan, 6.2 percent of my paycheck vanishes each pay cycle and will go to a private investment manager; when I retire, I'll get a fixed sum of money every month, either from the investment manager or from the insurance company I buy my annuity from. The difference – Will's grand triumph for the cause of human freedom – is that I get to pick which private investment managers handles the money during the interim.

As cause for a moral crusade, this is silly – on a par with mandating that, at great expense, the Internal Revenue Service allow people to get their tax forms on seven different colors of paper and then insisting that people complaining about the price hate freedom. It's a choice that's not worth anything to the choosers. When it comes to music, the beauty of choice is that tastes differ, so when we each get to do our own thing, we all wind up happier. But the outputs of all the different private accounts and, indeed, traditional Social Security are the same: monthly checks. The only thing at issue is the size of the checks.

Lots of people might choose songs that I wouldn't choose. Letting us all pick has real value. But all of us want the same thing out of our checks: high numbers. The choice, as such, has no value. The only thing that's really at issue is whether privatization would make people's checks bigger. The answer, on average, once all the costs are considered, is no.

While privatizing Social Security would only trivially increase individual freedom, it would massively increase individual risk. The median return to a private account would be about the same as the median Social Security benefit, but actual returns would vary significantly around that median according to a variety of factors including, most prominently, market conditions over which you have no control in the year in which you happen to retire. Some people would do much better than they do under the current system, but many would do much worse. In practice, this would restrict, rather than expand, the choices available to individuals. Under the current system, Social Security's guaranteed benefits allow middle-income people to invest additional money fairly aggressively – exchanging a small risk of catastrophe for a high average payoff.

Under privatization, no such thing would be possible, and middle-class people would need to invest their money very conservatively. Rather than chasing the elusive freedom of private accounts, we should be looking for ways to expand further down the economic ladder the freedom to invest that many Americans already enjoy. Something along the lines of Gene Sperling's plan for a "universal 401(k)," where generous federal matching grants to poor investors would allow low-income workers to build up savings, sounds like a good idea to me. If conservatives are really interested in expanding choice, opportunity and ownership, they'll get behind the idea as well.
Matthew Yglesias is a Prospect staff writer. This article is available on The American Prospect web site. Copyright © 2005 by The American Prospect, Inc. Preferred Citation: Matthew Yglesias, "Choice Shtick", The American Prospect Online, Jan 25, 2005. This article may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the author. Direct questions about permissions to [email protected].
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