259. "Should We End Social Security? A Community Approach," Challenge, Vol 41, No. 5, (September/October 1998), pp. 5-15

The Privatization Coalition

Developments in the political economy make it rather likely that the greatest social legacy of the Clinton Administration will be the unraveling of Social Security. The forces needed to push legislation for partial privatization of Social Security through Congress are rapidly coalescing, constituting a lobbyist's dream ticket.

One major force driving the privatization proposals are various economists, who, for intellectual and ideological reasons, have constructed mathematical models, studied Social Security in other countries (especially Chile), and otherwise found privatization to be desirable. These economists provide the rationalization, the mantle (if not science) of objectivity, which other parties draw upon to legitimate their self-interested motives. For example, Michael Tanner, from the libertarian Cato Institute, argues in Challenge that private pension systems (Social Security included) account for Chile's high private savings rate which is 26% of GDP and high annual economic growth rate of 7%, disregarding the numerous other cultural, social, and economic factors that affect both these rates and the many countries that have high savings and growth rates, many of the so called emerging economies, but do not have privatized Social Security.

Another force behind privatization are the conservative ideologues who oppose most government programs in principle, especially welfare ones, and seek to use Social Security to solve other problems they believe trouble America, such as the low savings rate. By far, the most persistent of these is Peter Peterson--who is not merely the leading alarmist about the dire effects of the Social Security shortfall but also the one who sees cutting entitlements as the source for balancing the budget and growing the economy, as Jeffrey Madrick pointed out recently in New York Review of Books. The ideological nature of Peterson's case stands out in that cutting the military budget and corporate welfare is not even on his list of revenues that could be drawn on to partially cover the shortfall. (It should also be noted that he arrives at his alarmist figures only by combining the Medicare shortfall with that of Social Security). Steve Forbes is a more recent but highly enthusiastic champion of privatization. Among the younger writers, David Frum carries the banner of privatization, repeating such incendiary lines as that Social Security and Medicare would consume as much as 55% of the average paycheck by the time the last baby boomer retires. (New York Times, November 6, 1996). Especially vociferous is John Graham for the National Center of Policy Analysis.

Wall Street lobbies can hardly contain their glee at the prospect of turning many millions of Americans, not currently in the stock and bond markets into clients, and adding a trillion dollars to the funds they manage. Wall Street firms have set up an elaborate lobbying operation without fanfare, under the umbrella of something called the Investment Company Institute. The New York Times reports, "Instead of kicking sand in anyone's face. . .it has been quietly working behind the scenes to shape legislation and doling out big sums to key members of Congress" (September 8, 1996). Congress rarely resists lobbies with deep pockets even if its members have grave doubts about the causes at issue. But when lobbies push for legislation that fits the members' own ideology and is "legitimated" by economic studies and models, there is little that can stop such a combination.

Leading Republican and Democratic members of Congress have already expressed support for privatization. They find it difficult to resist offers to fix of a major problem that seems cost-free, in an era of tight budgets. If one could truly increase the yield of the Social Security portfolio significantly via privatization, and thus requiring no new public outlays to overcome the Social Security "crisis," why should an elected official oppose such a solution? And, Congressional members also realize that despite legislation that separates Social Security from the federal budget, most calculations of the deficit still include Social Security. The 100 billion dollar annual surplus provided by Social Security, which is expected to grow over the next years, makes the deficit look significantly smaller than it actually is, and allowed elected officials to give the impression of a balanced budget without making necessary cuts in expenditures or increasing taxes.

Most baby boomers believe that unless Social Security is profoundly reformed, they will have to pay very high payroll taxes to keep it going, or Social Security will not be there when their turn to collect comes. As has been often noted, there are few under the age of 35 who trust that Social Security will be there when they are entitled to collect. No wonder they favor any act that they are told will increase the yield of Social Security and ensure that they are able to collect without an increase in payroll taxes.

Until 1998 the main force that stop the coalescing forces of privatization was the fear it would be grossly enrage the public, especially older Americans who are much more likely than young ones to vote and make campaign contributions. This used to be referred as the "holy grail" or the "third rail" of American politics; to touch it was believed to inflict instant political death. Indeed, it was probably the best issue Democrats had going for them. (A study asked Americans what issue would make them shift sides if they agree with a candidate for public office on all matters but one. Most issues garnered no more than three percent; Social Security scored 25%. It was also the only issue which made conservatives support a progressive candidate).

This dam was broken when President Clinton used an epoch turning statement by Senator Moynihan to put Social Security privatization on the table. On March 15, 1998, Moynihan announced his plan to reform Social Security by cutting payroll taxes and allowing workers to divert a percentage of their Social Security taxes into private investments. Soon thereafter, President Clinton conceded that he might accept a modest amount of privatization. True, the President did not explicitly state that he favors privatization, but the very fact that he shifted it from a tabooed option to an legitimate one, radically changed the political situations. With strongly focused and well-heeled forces already in place, backed up by elaborate ideologies, all these forces needed was to get the opening the President gave them. They have been further embedded when soon thereafter a Congressional commission issued a report calling for the introduction of personal investment accounts.

Small it will not remain. If partial privatization is allowed, it will be very difficult to prevent the lobbies from widening the opening. For instance, if Americans are allowed initially to only invest 15% of their Social Security deposits in private funds, there will be no particular reason in future years to oppose 20%, and so on. The same holds for the kinds of financial investments to be allowed. Even if Americans are initially allowed to invest in only stocks and bonds, it will be difficult to resist the real estate lobbies calling for the right to invest in REITS, and for the last of the gold bugs to argue that their coins are the best hedge against inflation, and so on.

Why oppose such a gathering force?

Privatization and the Erosion of Community

Privatization would corrode the spirit of community, the idea that we are all in this together, the very essence of Social Security. Americans, paying similar Social Security payroll taxes, would retire with very different nest eggs, some sure to fall into welfare and become public wards if their investments sour. As Robert Ball put it, "privatization would entail a betrayal of the 'community solidarity' embodied in Social Security" and replace it with an "extra ordinary high degree of go it alone individualism" (New York Times, December 8, 1996).

The communitarian movement was born in 1990 out of the recognition that too many of our fellow citizens were all too keen to have their rights respected but unwilling to shoulder the personal and social responsibilities that are corollaries of these rights. Most Americans still favor less government and lower taxes but also demand more of every government service to be had. Generally, the language of rights abounds and is indeed beyond reproach, the cornerstone of our free society, but responsibilities are considered onerous, if not oppressive. The communitarian movement argues that rights cannot be sustained without responsibilities because each right lays a claim on someone, and if that person does not honor the claim (that person's responsibilities), there will be no regimes of rights.

One should not overlook the other side of the same equation: it follows from the same basic communitarian moral thesis that if people have lived up to their personal and social responsibilities--if they have kept their part of the social covenant--then they are entitled to collect whatever the society explicitly and implicitly promised them; that is now their right. Thus, if people worked all their lives, raised their children the best they could, paid taxes, saved, voted regularly, and did volunteer service, the society owes them the assurance that they will not be destitute in old age, abandoned when they are infirm, unprotected from those who prey on the frail and failing. Social Security is but one element of what is due them.

There is room for debate about the precise levels and nature of the obligations that society has incurred, the other side of the intergenerational communitarian covenant, but not about their basic nature. Violating this covenant endangers and offends not merely our elders. When a society violates its promises to its senior citizens, no member of society will be able to expect that he or she could at some future date retire with dignity and basic economic and social security. In fact, they would have no reason to believe that the society will honor its commitments to anyone else. Such retreats from the promise thus endanger not merely the old, but the whole social fabric.

If it Ain't Broke, Don't Use Sledge Hammers to Fix it

Social Security is one of the very few domestic programs that has been a resounding success. It has provided a safety net for three generations of Americans. In 1990, the poverty rate for persons age 65 or older was 14.7 %; without Social Security it would have been 52.8% according to a study by Eric Kingson and Edward D. Berkowitz. Henry Aaron, a leading expert on Social Security, suggests that without Social Security there would be 15 million more poor elderly. Unlike most other public programs and private pension funds, the administrative costs of Social Security are very low.

Furthermore, the public strongly supports Social Security. (A 1996 poll showed that Americans ranked protecting Social Security higher than most issues of concern to them, higher than "creating jobs and economic growth," higher than reducing taxes, than protecting the environment, and many other concerns (Special Supplement to the Wall Street Journal, December 13, 1996). Given that we have numerous programs that are troubled, from the war against drugs to Medicare, we should focus our reforming zeal on some other targets than a highly successful, low cost, widely popular program.

The problems of Social Security are much smaller than has been suggested by the alarmists. Henry Aaron pointed out during a debate on Social Security on a public TV program that in recent American history we have covered large shortfalls, over shorter periods of time than that currently available for fixing Social Security, without undue difficulties.

Indeed, alarmist predictions are based largely on a pile of questionable assumptions. For instance, the trustees of Social Security assume that wages will grow at 1% a year over the next 75 years, a lower rate than they have grown in the past decades. If one assumes a higher rate, such as 1.7%, which is much closer to the historical record of the last generation, the Social Security fund will continue in the black for generations to come. One can argue about this particular assumption; I use it merely to illustrate the chaos principle: Given the long term and cumulative projections involved, any small changes in the many assumptions made about the future significantly alters the prognostication.

Henry Aaron, Robert Ball, former commissioner of Social Security, and Robert Myers, former deputy commissioner of Social Security (writing in Challenge) have each demonstrated that relatively small and gradual changes in the retirement age and the contribution rate would ensure the health of Social Security way past the crisis it is supposed to face thirty years or so from now, as the last of the baby boomers retire. I would add that all Social Security benefits should be considered taxable income, and that the tax they generate would be credit to the system. This step would allow Social Security to remain universal and inclusive which is essential for its longer run public support and political health, but those who are relatively well off would in effect return part of their benefits. While ideologues and the media keep repeating the obsolete fact that Social Security beneficiaries collect much more than they give, even allowing for inflation and interest, it is very rarely mentioned that this feature was changed and that current contributors collect a bit less than they would be due by the same calculations; i.e. far from draining Social Security, each year a growing number of Americans get no more than their fair share and still make a small contribution to reducing the projected Social Security shortfall.

If Social Security needs shoring up, there are many small adjustments, already listed, that could fully restore it. Privatization advocates scoff at these small steps as if they were "piecemeal" and "fixes" and call for a radical change, an odd notion when it comes from arch conservative circles.

The Dangers of Privatization

Most advocates of privatization do not as much as mention, let alone address, the following beehive of problems it stirs up:

If billions of dollars of Social Security funds are invested in stocks and private sector bonds, the US Treasury will need to find a proportional number of takers for its bonds, which are now purchased by Social Security. The net result of this reshuffling--of who holds what financial assets--may be nil, if all that is going to happen is that some who now buy Treasuries would buy stocks and vice versa (hence no benefits for economic growth, etc.), somewhat negative if the Treasury finds fewer takers than it has now (leading to higher interest rates needed to attract buyers as the Treasury must place its paper, and as a result less growth and higher deficit). Some positive effects might be imagined but there is no compelling evidence that they will occur.

Enabling the baby boomers to cash in the Social Security entitlements without a significant raise of general or payroll taxes requires a larger GDP. Simply reshuffling who holds US Treasuries and who holds bonds and stocks is unlikely to significantly enhance growth. The argument that greater investment in stock and private bonds will lead to higher investment rates resulting in higher economic growth disregards that some of those who now buy stocks and private bonds will have to buy the Treasuries or the US will not be able to finance its debt. Alan Greenspan, hardly an opponent of private markets, expressed doubt that privatization will lead to an "appreciable" increase in the Social Security trust fund's assets, and ". . .to whatever extent it does, would likely be mirrored by a comparable decline in the income of private pensions and retirement funds" (Wall Street Journal, December 9, 1996).

Most importantly, if one is really intent on increasing the US savings rate, the best way is to reduce the public deficit, thus leaving more resources for investors to employ in the private economy; better yet, run a surplus that would allow the government to reduce its debt (not to be confused with the annual deficit) or itself contribute to investment. Such changes in the public accounts do not entail attempts to modify the behavior of many millions of Americans, which is at best a slow, cumbersome, expensive, and often unsuccessful endeavor.

If all Americans enrolled in Social Security have to invest in stocks and bonds, they will be subject to the kind of churning advice and publicity barrages Americans experienced when IRAs were created, only this time advertising will focus on those Americans least prepared to make investment decisions, those not currently in the market, the new "fish" as some on Wall Street call their new clients. The difficulties Americans (and citizens of other nations) have in dealing rationally with such self-serving advice from Wall Street is evident in that about half of all Americans pay brokers and mutual funds to beat the market while study after study shows that this cannot be done consistently.

One example will stand for many: Given that in order to be assured that one's stocks will beat other sources of investment, one needs to keep funds in stocks for an average of twenty years (if experience over the last 150 years is to serve as a guide). It makes no sense for people whose remaining life expectancy is less than twenty years and who need to spend down their funds in their lifetime to keep funds in stocks. It is hardly a fact that they hear from their mutual funds or brokers, those they will need to contend with if Social Security is privatized. About half of the American people have no such experience--indeed studies show they cannot even tell a stock from a bond--and many of those are among the less educated and hence most subject to undue influences from brokers whose interests are not naturally compatible with those of investors. For instance, brokers have an interest an "churning" and in assets that provide a high transaction fee to brokers--the opposite of the investors' needs. A good part of their assets in small accounts will be eaten up by brokerage fees.

All said and done, the case for privatization of Social Security is suspect at best, and poorly documented at least. The main question is a political one: Given the forming coalition, where will the social force come from that will stop the privatization bulldozer in its tracks? Reminding one another of the obligations we owe to each other as members of one community may provide an important source of arguments for those concerned with maintaining the integrity of Social Security.

Amitai Etzioni is author of The New Golden Rule (a 1998 Perseus BasicBooks paperback) and The Spirit of Community, and is director of the Institute for Communitarian Policy Studies at The George Washington University.


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