The Lock Box has been Opened: Candidates Consider Social Security for the New World

On October 17, 2004, Democratic presidential nominee John Kerry turned his bright campaign spotlight onto Social Security, the entitlement benefit for seniors aged 65 and older.

Through a new television commercial and retooled campaign speeches, Kerry is charging that Bush, if reelected, would surprise the nation by privatizing Social Security -- a move that Kerry and most Democrats say could ruin the program and put America’s seniors at risk.

But the administration’s broad effort to privatize government entitlement programs like Social Security and Medicare is hardly a secret - it’s just that the Bush campaign hasn’t highlighted its plans for Social Security in recent debates and prominent speeches.

But for about four years now, Bush has been saying that he would like to allow younger workers to use a portion of their payroll taxes for retirement investments in the stock market, a plan that amounts to partial, not complete, privatization. That money would, therefore, not go into the tax pool to pay for government services. If services are not cut, then the government has to borrow more money from other countries by selling bonds that promise that we will repay the loans in the future with interest.

Is partial privatization a good idea?

Democrats say that Bush’s plan doesn’t make sense because younger workers’ taxes pay for today’s retiree benefits. To execute his plan of diverting young people’s tax dollars into their own retirement investments, Bush would need to borrow money, cut benefits, or both, but the President hasn’t announced which route his policy would take.

For evidence, Democrats point to a commission appointed by Bush that studied the privatization of Social Security. It concluded that even partial privatization would rack up trillions of dollars in government debt and drastically reduce future benefits.

Republicans argue that workers are better off managing their own retirement monies. The Republican philosophy is that people should take responsibility for their own retirement and health care - primarily through savings. The assumption is that individuals can and should know enough to make the profitable choices and manage their own money. They can and should make their own decisions without the aid or protection of the federal government. Bush believes that private competition among corporations to get us to buy their stock with our money and buy their health insurance will provide seniors with high-quality, low-cost benefits. With this policy, buying health care and retirement is like buying a car or a pair of shoes. With competition the quality goes up and the price comes down. Kerry’s philosophy is that all Americans are entitled to at least a secure base of retirement benefits and health care. He believes that the federal government can and should ensure benefits to everyone using tax dollars that we all contribute is safer than expecting the stock market to always match the real value of corporations.

What about the market?

When Bush first proposed privatizing Social Security, it was the year 2000 and the world was entirely different. The economy and stock market were soaring, terrorism was "out there" but not "over here," and Social Security had a surplus. In that world, that context, most Republicans thought it made sense to consider privatizing Social Security. The surplus could cover current retirees’ benefits as young people diverted their tax dollars to investments that would surely skyrocket in the robust market.

Now, some Republicans and most Democrats say privatization is a bad idea. Not only is the Social Security surplus gone, but the treasury is in a deep deficit that affects all sorts of government spending, not just Social Security. In addition, the past four years have revealed the stock market to be more volatile than many thought. The price of a stock may not measure the real value of a corporation, but rather what investors are betting that other people will buy the stock for in the future.

Economic theory

Even economic theorists who praise the market as highly efficient have started to recognize its unpredictability. Famous economist Eugene Fama recently shifted his market theories to include the idea that people’s illogical investments can disrupt the market.

Another famous economist, Richard Thaler, has argued for many years that human behavior can create an unstable environment. Thaler studied Sweden’s attempts to privatize its retirement system and found that workers invested in risky stocks because they had too many choices. The study demonstrated that privatization can result in workers losing their benefits because of poor investment decisions.

If the Bush administration decides to privatize the U.S. Social Security system, Thaler suggests that workers be given a limited number of investments from which to choose. That way, workers would be less likely to make poor decisions that cause them to lose their retirement money, and the market would be protected from a swell of new investors.

But Thaler’s idea flies in the face of the Republican philosophy: that workers should be free to choose how to invest in their retirement.

Critics on both sides feel that privatization should be considered in light of contemporary market theories, but ultimately, the parties will return to their basic philosophies on benefits.

It’s likely that the next President will greatly affect our retirement and healthcare benefit systems, so choose a candidate with a party philosophy that closely matches your own. Do you think Americans know enough to choose the right investments? If they are given a select list of investments, who would choose the list and what happens to the investments that don’t make the list?

What do you think?

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Article Posted on: 10/23/2004