A 'cure' worse than the cold
Experience with 401(k) retirement plans shows that many people fail to invest and to diversify sufficiently to maximize their returns. Many make mistakes at each step of the way, not because they are stupid but because they live busy, complicated lives, focusing on work and family, and lack the time to become financial experts. Many people are shrewd enough to understand this, which is why they invest in mutual funds. Those 50 percent or more who are not in the stock market presumably have even less knowledge and experience.
Furthermore, historical stock-market returns are not a guide for future performance. A lot depends on when you buy or sell, especially when America faces not only dramatic fiscal problems but a threat to profit margins in growing global competition, particularly from India and China. If someone retires after the market dives, he or she could lose a good chunk of retirement savings. The market, after all, fell by 45 percent in real terms between 1968 and 1978--never mind the bust between 2000 and 2002. Individuals would be glad to pocket gains, but if millions of retirees suffered dramatic losses, there would be enormous political pressure to come to their rescue. We would very likely end up privatizing gains and socializing the losses.
Upside down. The macroeconomic consequences of privatization of Social Security are equally significant. Privatization fails to address the long-term gap in the program's financial resources. It would make things worse because the government would have to borrow the money that otherwise would be paid into the system. This amounts to roughly $2 trillion in the first decade, over $3 trillion in the second decade, and approximately $5 trillion in each of the third and fourth decades--a run-up of about $15 trillion in the national debt, based on a Congressional Budget Office estimate widely believed to be close to the Bush plan. Privatization does not begin to save money until 2050--hardly a solution to a crisis the administration has described as imminent. Even worse, it might create a fiscal crisis, inflating future budget deficits to unprecedented levels and sending the economy into a tailspin.
Of course, the idea of an "ownership society" is to change the relationship of Americans to their government so they look less to Washington than to themselves (and, just maybe, vote more Republican). No doubt some Americans could build savings and more wealth and have a nest egg for retirement. No doubt there is value in savings and self-reliance, in making private investment decisions, planning ahead, and increasing distance from the government. But there are other values in the very title of the program--Social Security. "Social" surely implies a contract to help manage poverty among the old and to know that our society provides a minimum income for all of our fellow citizens in their retirement years. And "security" means buffering the harshness and cruelty of the markets so that the well-being of the elderly is not dependent on shrewd stock picks and hot mutual funds that enrich some but fail the very people who need Social Security benefits the most.
Privatization thus gets things upside down. Social Security was not meant to re-create the free market; it was intended to insure against the vagaries and cruelties of the market and to permit Americans to count on the promise that the next generation will take care of them in their old age.
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