Pity the people who want to replace social security with private investment accounts. Their timing could hardly be worse.
The stock market is flat, and many economists believe it will be fairly flat for a long time to come. A lot of people who were looking forward to comfortable retirements on inflated 401(k) plans have been socked by a down market. They are very grateful for those Social Security checks -- the one part of our patchwork retirement system that is absolutely guaranteed. Meanwhile, the Social Security trustees' latest annual report projects that Social Security is healthier than previously thought. Last year's projection had the system needing a new infusion of funds in 2038. Now, thanks to better economic and demographic news, the system is fine until 2041.
Even the famous shortfall still leaves the system with an income stream adequate to pay three-quarters of its projected commitments for 75 years. A modest adjustment in taxes, benefits, or an infusion of general government funding (as its architects recommended in 1935) would leave the system solvent indefinitely.
If the news in the trustees' report had been bad, there would have been press conferences and publicity offensives. The administration just quietly released the report, as required by law, and hoped nobody would notice.
The Bush administration, much of Wall Street, and the privatization crusade need to portray a system in crisis in order to sell individual investment accounts as Social Security's salvation. But even with a healthier stock market, there's one huge fallacy in the argument.
Recall that Social Security is an inter generational compact: Current payroll taxes pay the benefits of current retirees. Unless we want to break faith with today's retirees (which is politically inconceivable), a massive diversion of today's payroll taxes into new private retirement accounts for the next generation of retirees would leave Social Security with a gaping deficit.
So Bush's supposed fix would actually make the financing problem worse, to the tune of several trillion dollars. If Bush were serious about such a shift, he would have refrained from cutting taxes by nearly $2 trillion and used that money to restructure Social Security for the long term.
The Democrats' version of that fix was the famous "lockbox" -- use budget surpluses in this decade to sock away money to shore up the present system four decades from now. But Bush, dishonestly, would spend the same money twice.
And the problem with privatization doesn't end there. The stock market has just enjoyed two decades of growth at a completely unsustainable rate. Even with the bust in technology stocks and a roughly 50 percent decline in the values of the broader market from its peak in 2000, price-earnings ratios are still above 1929 levels.
No reputable economist thinks the market can grow in the next decade at anything like its pace of the last two decades. Some predict a fairly long period of market stagnation.
So younger workers just putting money into 401(k) plans are very unlikely to get the returns projected by enthusiasts of privatization. Even older workers nearing retirement age did not benefit from the great bull market of the 1990s nearly as much as we might think, because stock ownership in the United States is so narrowly concentrated.
Advocates of privatization often make much of the fact that about half of Americans own some amount of stock, either directly or through pension plans. But only when you get to the top 10 percent of the population does this start adding up to serious money.
A study of 1998 data (the most recent available) looked at people aged 55 to 64 and found that even in this age group, 46 percent owned no stock at all. The median value of stocks held was just $47,000.
As corporations have shifted away from traditional pension plans that guarantee retirees a fixed pension as long as they live, fewer and fewer pensioners have adequate retirement income. Here again, the value of Social Security as the system's one absolutely solid anchor becomes more essential, not less.
Certainly it would make sense to broaden pension coverage and to help people of modest means to accumulate stocks and other financial assets for their retirement. A society where everyone is a stakeholder is an attractive idea -- but not at the expense of Social Security. Ironically, some $2 trillion in tax revenues, which could have brought such system about, have been sacrificed on the altar of Bush's tax cuts.
