Breaking the Contract

SYNOPSIS: Krugman exposes Bush's lack of understanding of the Social Security system -- brings me back to the good old days of debunking

If converting Social Security to a system of private retirement accounts is such a good idea, why can't advocates of that conversion try, just once, to make their case without insisting that 1+1=4?

Last week George W. Bush did it again, contrasting Social Security benefits with what retiring workers would have if they had invested all their Social Security taxes in the stock market instead. As an article in The Times pointed out, this was a misleading scenario even on its own terms; financial planners strongly advise against investing solely in stocks, and a diversified retirement account wouldn't have risen nearly as much in the 1990's bull market.

But there's something much more serious wrong with Mr. Bush's story. Indeed, the latest remarks perfectly illustrate how he uses bogus comparisons to make private accounts sound like a much better idea than they really are. For by emphasizing what today's 65-year-olds could have done if they hadn't paid Social Security taxes, Mr. Bush has forgotten something rather important. Without those taxes, who would have paid for their parents' benefits?

The point is that when touting its plan to privatize Social Security, the Bush administration conveniently fails to mention the system's existing obligations, the debt it owes to older Americans. As with so many other administration proposals, private accounts are being sold with deceptive advertising.

The truth which Mr. Bush's economists understand perfectly well is that Social Security has never been run like a simple pension fund. It's really a social contract: each generation pays taxes that support the previous generation's retirement, and expects to receive the same treatment from the next generation.

You may believe that Franklin Roosevelt should never have created this system in the first place. I disagree, but in any case Social Security exists, and older Americans have upheld their end of the bargain. In particular, baby boomers have spent their working years paying quite high payroll taxes, which were used mainly to support their elders, and only secondarily to help Social Security build up a financial reserve. And they expect to be supported in their turn.

Mr. Bush proposes to allow younger workers to place their payroll taxes in private accounts in effect, to break this ongoing contract. But then what happens to older workers, who have already paid their dues?

There are only two possibilities. One is default: make room for the trillions diverted into private accounts by slashing the baby boomers' benefits. The other is to buy the baby boomers out that is, to use money from other sources to replace the diverted funds.

Those really are the only alternatives. Last year the special commission on reform of Social Security, which was charged with producing a plan for private accounts, came to an ignominious end it issued a deliberately confusing report, then slunk quietly out of town. But wade through its menu of options, and you'll find that in the end the commission grudgingly rediscovered the obvious: Private accounts won't "save" Social Security. On the contrary, they will create a financing crisis, requiring sharp benefit cuts, large infusions of money from unspecified outside sources, or both.

But nervous Republican members of Congress want to send all Social Security recipients a letter (at government expense, of course) assuring them that their benefits will never be cut. And now that the magic budget surplus has turned back into a pumpkin, the government is in no position to infuse new money into Social Security on the contrary, the government at large is now borrowing from Social Security at a furious pace.

So why is the Bush administration reviving its push for private accounts right now? Did it really learn nothing from the implosion of the reform commission? I doubt it; the administration's economists aren't fools, though loyalty often requires that they pretend otherwise.

A more likely interpretation is that this is entirely cynical. War frenzy is subsiding, the Bush domestic agenda is stalled, and early indications for the November election aren't as good as Karl Rove expected. So it's fantasy time: tantalize the public with visions of sugarplums, then blame Democrats for snatching the goodies away. And it doesn't matter that the numbers don't add up, because the plan will never be tested by reality.

Originally published in The New York Times, 3.5.02