Writing last week in Slate, economist Steven Landsburg explained that he likes the Bush Social Security phaseout plan because "it will encourage people to save." In a sense, of course, that's true. More private savings accounts would lead to higher private savings. The important thing, however, is not the private savings rate but the overall savings rate, representing how much of current production is going to investment in our capacity to produce more goods and services in the future. Privatizing Social Security in the manner the president has proposed won't increase this number at all. Indeed, it will make America's dire savings problem even worse.
Why? Because each dollar diverted into a private account and therefore saved is a dollar that's already needed to pay benefits to people who are retired today. But in order to maintain his plan's political viability, President Bush is proposing that everyone over the age of 55 would be exempted from benefit cuts. In other words, for every dollar saved in a private account by an individual, the government is going to need to borrow $1 from the foreign central banks that constitute the only remaining market for our nation's burgeoning debt load. Meanwhile, some individuals, mostly those with high incomes, already save a lot of money from for their retirement and don't get such a good deal from Social Security's guaranteed benefits. Privatization would be a boon for these folks, and they'd react to their growing private accounts by putting less money away in their 401(k) plans, IRAs, and other savings vehicles.
The result, in other words, would be to make total savings lower, not higher, than it otherwise would be.
This is a serious problem, and Landsburg is quite right to put the focus on savings. Irrespective of how we structure federal retirement programs, the basic fact is that old people consume goods and services but don't produce them. In the future, a higher proportion of the population will be old, and, therefore, consuming without producing. Different Social Security plans have the effect of redistributing the aggregate quantity of stuff that will exist in the future. And, of course, it's hardly irrelevant who gets the stuff. But the best thing to do is to make sure we have as much stuff -- i.e., goods and services -- as possible in the future. When there's lots of stuff, it's easy to make sure everyone has enough. When there's not so much stuff, things get difficult. Either poorer seniors would wind up with too little, or the workers of the future would wind up consuming a very small portion of the stuff they make thanks to high taxes.
The way to ensure that this doesn't happen is to make sure that right now -- when we have lots of people making stuff compared with the number of people merely consuming it -- we're saving an adequate amount, leaving some stuff aside to either be consumed in the future, or else used for future production. But just as privatizing Social Security would make the program's cash crunch worse rather than better, it would make the broader lack of future stuff worse by pushing our already too low savings rate even lower.
To be fair, some privatization plans don't have this feature. Senator Lindsey Graham, for example, has proposed that we raise payroll taxes on high earners in order to finance the transition costs, which could really lead to a higher savings rate. The president himself has vaguely hinted that he's open to this proposal. House Republicans -- including Speaker Dennis Hastert and Majority Leader Tom DeLay -- threw a fit when they heard about it. Nothing, according to the GOP's true believers, is more important than making taxes on the rich as low as possible.
Even if the Graham plan were politically feasible, though, it wouldn't be a very sensible way to increase national savings. It works by taking a complicated plan to reduce national savings and then patching it up with a tax increase. Because the federal deficit is already enormous, however, this same objective could be much more simply accomplished through bringing current revenues into line with current expenditures by canceling Bush's unaffordable tax cuts. Less public-sector borrowing would create an immediate increase in national savings without any offsetting effects. Nor would this plan rely on uncertain economic theories, or on hoping that future Congresses follow through on promised benefit cuts. The only problem is that Republicans won't dare admit the obvious -- that taxes need to be even higher to meet the modest level of public expenditure that Republicans have put into place.
In the real world, of course, the Republicans are not only pushing for a version of privatization that would drive the savings rate down, they're pushing for a whole raft of new tax cuts that would make things worse. As a result, even if we do manage to save the basic structure of Social Security, future generations would find themselves with fewer people around to produce new stuff and the need to pay off massive debts when we should have been saving for the low-production future. Fortunately for them, today's political leaders will probably be dead before things reach truly critical levels. I, however, won't be so lucky.
Matthew Yglesias is a Prospect staff writer.
