A recent Washington Post poll indicated that the most effective argument against privatizing Social Security is that it involves transition costs. Huge transition costs. Fortunately, the interests of partisan hackery and sound policy analysis are, in this case, aligned. because one of the best reasons to worry about Social Security privatization is that it involves huge transition costs.
Privatizers used to acknowledge this. The Cato Institute's privatization advocacy website contains a whole page of commentary dedicated to the topic. At the beginning of that same year, Cato president Ed Crane advocated using the large projected budget surpluses of that era to finance the transition. Cato Social Security analyst Andrew Biggs wrote a 2000 op-ed, in support of the Bush privatization initiative. that tackled the transition-costs issue by saying "that is where the budget surplus comes in." And, of course, Bush won (or at least "won") that election and proceeded to use a combination of tax cuts, new wars, and domestic spending on subsidies for agribusiness conglomerates and the pharmaceutical industry to transform the surpluses into deficits. So wither the transition? By 2003, Biggs was teaming up with the New America Foundation's Maya MacGuineas to explain that the plan could be financed by eliminating corporate welfare.
By my count, the numbers don't actually add up here, even taking an expansive view of corporate welfare. That, however, a trivial concern. The reality is that it's easy to advocate that money currently wasted on corporate welfare be used to finance new initiatives, but it's very hard to actually cut corporate welfare. Certainly there's no indication that corporate welfare has, in fact, been eliminated since 2003 or that the president and the Congress have any intention of eliminating it in the near future. So the problem -- how to finance the transition -- still remains. Lately, though, the Cato approach has changed to simply denying that this is a problem. Senior fellow Jagadeesh Gokhale (who, I'm assured, is no hack) explained in December that "the so-called 'costs' of reform are already there. They're part of the current system and will continue to grow unless reforms take them fully into account." The transition costs, on this theory, are just a way of making explicit the implicit long-term shortfall Social Security already faces.
One problem with this is that it's false. Another problem is that it's irrelevant. Taking the second problem first, even if you accept Gokhale's description of the situation, the privatizers still need to find the money. Social Security advocates have put forward a number of proposals to close the long-term gap, primarily focused on modest increases in the payroll tax and modest decreases in benefits. Privatizers used to have proposals to cover the costs of their favored plan. Now that it's become clear those things won't materialize, they've decided just to ignore the problem.
Well, not "just" to ignore the problem but also to mischaracterize it. Privatizers want you to believe that the costs of their plan merely reflect the cost of closing the long-term shortfall sooner rather than later. In fact, the two costs are unrelated, as you can see by contemplating what would happen if we privatized a system that didn't have a long-term financing gap. Hypothetically, one year's payroll-tax revenues would fully finance that year's benefits each and every year until the end of time. Then, one day, you start allowing workers under 55 to divert their payroll taxes into individual accounts; those workers accept an offsetting reduction in benefits when they retire. The problem is: The year after privatization is implemented, payroll taxes will plummet; but benefits won't fall at all. For 10 years, revenue will keep dropping, and expenditures will stay the same. By year 11, the first benefit reductions will kick in, but the overwhelming majority of retirees will still be drawing full benefits under the old system -- except without anyone paying the taxes to finance their benefits. Around 50 years later, all of the people who were over 55 when the new system was introduced should be dead, and the gap will go away. The debt, however, won't ever go away unless some huge some of money is found elsewhere. That, as you'll recall, used to be "where the budget surplus comes in" -- until the surplus went away and until privatizers first started talking about it.
In the real world, of course, Social Security does face a financing problem. But as the thought experiment shows, the transition-financing problem is an unrelated one. The Bush plan is to close the financing gap wholly through large, unspecified benefit cuts. With this done, privatization would introduce a whole new financing problem that would need to be resolved either through further benefit cuts (the president has never suggested this); dramatic cuts in other spending (again, no suggestion of this from the White House); or borrowing on a truly massive scale.
As usual, the administration's favored tactic is to mislead. The 10-year increase in public debt caused by their plan would be, according to the White House, $743 billion. This is a replay of a tactic we've seen recently with the Medicare bill: Because the plan is phased in over time, this "10-year" window includes several years during which the president's plan has not yet been implemented. The true cost of the first 10 years of the Bush plan is more like $1 trillion. And the 10-year window is entirely arbitrary; things don't get better in year 11. Decade two would entail $3.5 trillion in additional borrowing. Now, does the problem go away in the third decade? Or in the fourth decade? After about 50 years, the ratio of debt to GDP should stabilize at 65 percent. Today, we're at 30 and projected to go higher, thanks to the large deficits existing in all the non-Social Security portions of the budget.
This is a problem. A huge problem. A problem for privatization that exists above and beyond the common challenge of meeting the current Social Security shortfall. A problem privatization's most ardent advocates were acknowledging as recently as 2003. But now they want us to ignore it. But the voters are right: This matters; it could push the government into actual bankruptcy or force a global financial meltdown. And the president has nothing whatsoever to say about it.
Matthew Yglesias is a Prospect staff writer.
