Volokh Conspirator Todd Ziwicki asks a sensible-sounding question that reveals the depth to which BushCo has hornswoggled the supporters of its plan to replace Social Security with private retirement accounts.
His question is simple: Why should people be calling the new accounts “risky” when one of the investment options will surely be a money-market fund? (Or, he might add, Treasury bonds.) People who don’t want to take the risk don’t have to take the risk, and the returns on safe investments are no lower than the return on the current trust fund. So, he asks, what’s the problem? “Am I missing something here?”
The answer is as siumple as the question. Social Security is a defined-benefit plan; the new accounts would be defined-contribution. By spending spent the Social Security surplus on tax cuts for his rich friends and the war in Iraq, Bush has put the government in a position where — unless fiscal sanity is restored — the general fund may be unable to meet its future obligations to the Social Security Trust Fund.
But restoring fiscal sanity is against contemporary Republican principles, so instead Bush proposes to welsch, cutting the amount the federal government would otherwise pay to today’s workers when they retire. The “private account” scam is just a smokescreen to hide a benefit cut.
By assuming that, due to a massive and unexplained failure in the capital markets, common stocks will continue forever to pay returns way above the risk-free rate, Bush can pretend that he’s not condemning tens of millions of people to penury when they get old: they’re supposed to make up for reduced public contributions to their retirement by speculating billiantly in the stock market.
Of course, they don’t have to, which is Ziwicki’s point. Instead of gambling in the market — risking real poverty if the market heads south, as it did from 1929-1946 and again from 1966-1980, or if they try to pick stocks and do badly at it — they could instead accept the certainly of a significantly reduced retirement standard of living.
That’s the choice Bush & Co. want to stick them with, simply because the adminstration is not willing to adopt the policies that would allow the federal government to meet its commitments. Those commitments, let’s not forget, were established under Ronald Reagan, the last time the Republicans engineered a Social Security “crisis.”
[Semi-technical point: As Max Sawicky and others have pointed out, the assumptions behind the Bush plan are inconsistent. The stock market can’t continue to yield excess returns unless the economy grows quickly. But if the economy grows quickly, there’s no fiscal crisis to deal with (unless, that is we continue to pursue reckless Bushite policies of cutting taxes for some while spending money like water). So either there’s no real problem, or the private accounts aren’t the solution.]
The right thing to do, obviously, is to raise General Fund taxes or cut General Fund spending so the government can meet its obligations to future retirees. As an alternative, the Social Security tax could be made less regressive by raising the cap on earnings (or even including capital income along with payroll income). But of course the administration has taken all of those options off the table, because they fail to benefit the rich at the expense of the non-rich.