“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house . . .(to one of the men) . . . right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”
Christmas season is “It’s a Wonderful Life” season, and anyone who has seen that movie — which ought to be pretty much everyone by now — will remember Jimmy Stewart’s plain-spoken explanation of banking, delivered to angry customers who have begun a run on the bank where he works.
Today it’s the Bush administration that’s started a run on the institution of Social Security. And so far no one in Washington has had the gumption or the forthrightness to get up, like Jimmy Stewart’s George Bailey, and tell the American people what’s really going on.
The Democrats have long been accused of overstating the case in defense of the Social Security system and “scaring seniors” by warning them that the evil Republicans are going to cut their benefits. Seniors may not, in fact, be in too much trouble — but people in their mid-’40s like me, and anyone younger, have every reason to fear.
What am I so worked up about? This piece in yesterday’s New York Times, headlined “Bush’s Social Security Plan Is Said to Require Vast Borrowing.” Richard W. Stevenson’s article is a highly problematic example of pseudo-objective “on the one hand, on the other hand” journalism — but even through the haze of official mendacity, the message is clear.
For months — years, if you go back to the 2000 election cycle — serious economists have been saying that there is no way to pay for President Bush’s scheme to privatize part of the Social Security system without running up huge deficits. At this point in Bush history, of course, the huge deficits have arrived even without “reforming” Social Security. So the Bush line now appears to be: Hey, “vast borrowing” hasn’t hurt us yet; what’s a few huge deficits more?
As the economist Herbert Stein famously said, “If something cannot go on forever, it will stop.”
Let’s recap some of the history here: The Social Security time-bomb — a side-effect of the Baby Boom demographic bulge passing through the employment lifecycle — was evident a generation ago, certainly by the waning years of the Reagan administration. Bipartisan efforts — including the first President Bush’s acceptance of a tax increase, despite his famous “Read my lips” promise — set the nation’s finances on course again. By the late ’90s we began racking up significant budget surpluses.
These surpluses were supposed to be set aside to keep Social Security solvent for us and our children. That was the famous “lock box” that Al Gore was unfairly derided for talking about. This money wasn’t “ours,” as George Bush fatuously and insidiously told the nation in 2000, justifying his call for tax cuts. It was cash that had been raised to solve a long-term problem.
Bush and his team broke open the lock-box and handed the cash out, mostly to the wealthiest tier of Americans, and began running up deficits like there was no tomorrow. Now they want us to buy into a fraudulent scheme to hand chunks of the nation’s obligations to future retirees into 401k-like private investment accounts. But since the money today’s workers now pay in Social Security taxes actually pays today’s retirees, any cash diverted to such investment accounts will have to be made up somehow.
Bush’s answer? Charge it!
In theory, the economists who like this privatization scheme see it as a way to boost the nation’s total savings, which is a good thing for the economy and should increase long-term growth, ultimately helping put the federal budget back on track. But, er, if the feds are borrowing the money for the citizens to save, then there’s no real increase in total savings, and no long-term benefit — as Stevenson’s article lays out. All we get are bigger and bigger deficits as far as the eye can see, with the looming possibility that, sooner or later, our lenders will grow tired of the game, and we’ll face a catastrophic drop in the dollar, a skyrocketing inflation rate, and the prospect, at worst, of a Weimar-like fiscal collapse.
Meanwhile, what are we taking this huge risk for? For the sake of letting individual investors take a modest portion of their retirement money and put it into mutual funds? Of course, we’ve recently had a national refresher course in how the mutual fund industry works; even without crooked kickbacks and such, the service fees eat up a significant chunk of the ostensible advantage you get from investing long-term in stocks over more conservative choices. And those financial advisers who love to tout the long-term advantage of stock investments are rarely willing to come clean on the risk to retirees: Growing older is not a choice, and if you’re unlucky enough to need to retire during a market downswing, you will not find much consolation in knowing that your portfolio would have averaged out a winner if you’d only had another decade or two.
In the long term, stocks may be better; but as a famous economist once said, in the long term, we’re all dead, too. The long term is always iffy. That’s why the best retirement safety nets are built out of safer materials than stock-market investments — and why Social Security should be kept out of the hands of the brokers.
Consider this other piece from yesterday’s Times, in which Mary Williams Walsh explains a little-known paradox of the pension world: It seems that, despite the woes so many pension funds now face, a handful of them have managed to prosper by choosing conservative, safe long-term investments. Meanwhile, the pension funds that are in trouble are those that chose riskier stock-market portfolios. Imagine that! This, of course, is precisely the course that Bush wants to put Social Security on. In a better world, Walsh’s piece would have been put on the Times front page right next to Stevenson’s, as a cautionary counterpoint to the president’s folly.
Everyone in Washington knows we need to fix Social Security. But the Bush approach, while it could win support in the short term in a Republican-dominated Congress, is a long-term disaster. The worst scenario here is one that no one in the administration would ever admit to, but if you listen in on the loony right fringes (who are closer than ever now to the levers of power) you’ll hear it: The idea is that if we undermine Social Security enough today, when the fiscal train-wreck hits tomorrow the government won’t have any choice but to scrap the retirement system entirely — fulfilling, finally, the dreams of its original die-hard Republican opponents, who saw FDR’s pledge to America’s working families as an evil efflorescence of socialism.
The Bush economists are ready to begin the dismantling. Wall Street is teeming with brokers slavering to get the commissions on this vast new influx of accounts. And, just when we can no longer count on Social Security to cushion our retirements, the borrowing the Bush plan demands will spark inflation or undermine the dollar or both, devaluing whatever savings we may have been counting on to augment those Social Security checks.
Maybe seniors — and the rest of us — should be scared.