Is Social Security next?David Hoppe
I was in the kitchen last Saturday night, making soup and listening to a CD of Duke Ellington songs as sung by Tony Bennett. This is decidedly grown-up music, emotionally direct but complex. Once upon a time, before most people had air conditioning or TV sets, this was considered popular music. Now it's considered art. "We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits," Roosevelt would later say. "With those taxes in there, no damn politician can ever scrap my Social Security program."
Most of these Ellington songs were written in an America inspired by President Franklin Roosevelt's New Deal. And it occurred to me that what I was listening to had about as much hold on today's popular imagination as the New Deal does. If Ellington is art, the New Deal is history.
The New Deal was invented by Roosevelt to get America out of the Great Depression in the 1930s. It provided a new way of thinking about the social contract between America's citizens and their government. In short, it recognized that even though this country was based on self-reliance, there were some things, like global economic forces or catastrophic weather, that people, no matter how responsible they were, had no control over. The New Deal asserted that there was strength in numbers, that government represented the collective worth of all citizens. As such, it had a role to play in helping to shield people from risks they couldn't deal with by themselves.
The most notable and enduring example of this has been Social Security. Prior to the Great Depression, people were pretty much on their own when it came to saving money for their old age. But the stock market crash in 1929 showed how quickly peoples' savings could be wiped out of private accounts. Roosevelt called for "social security" legislation in January of 1935 and in August he got it.
The Social Security Act was an ingenious idea that set the U.S. apart from other nations. Rather than having the money come directly from government coffers, the U.S. act was financed by contributions drawn from taxes on individuals' wages and employers' payrolls. "We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits," Roosevelt would later say. "With those taxes in there, no damn politician can ever scrap my Social Security program."
But our short attention span and a politician beholden to Wall Street campaign contributors named George Bush could do just that.
Bush has said he wants to create what he calls an "ownership society." In the case of Social Security, this could mean cutting Social Security and payroll taxes and allowing people to put that money into private accounts of their own.
Bush gives a number of reasons for wanting to do this, the first being that unless we reform Social Security soon it will go bankrupt. But conservative estimates project no Social Security shortfall for at least another 40 years and, given a reasonably stable economy, the possibility, under the present system, of little or no shortfall after that. Privatizing the system, though, could throw everything out of whack.
So why even propose it? Bush claims the current system wastes money, that private accounts can get a better rate of return and that, if well-managed, they needn't be risky. In fact, the present system costs less to operate than private investment funds. Administrative costs of Social Security are less than 1 percent of benefits; administrative costs of private insurers are 12 to 14 percent. Economist Peter Diamond has shown that in countries like Britain and Mexico that have set up private accounts, administrative costs reduce benefits by 20 to 30 percent.
As far as the rate of return is concerned, private investments can pay off big - if you're lucky - but they are always a gamble, and highly unpredictable. As stock analysts will tell you, if a person acquired a broad stock portfolio over the course of his working life, retired and sold these stocks on Oct. 18, 1987, he would have realized 18 percent less income per year in retirement than a person who behaved exactly the same way in every respect, except that he sold his stocks one day earlier. Be honest: Which of these people would be you?
Social Security earnings today are relatively modest because they are invested in U.S. government bonds - highly secure, if conservative, assets. This minimizes risk. By contrast, between May 1999 and May 2000, the Nasdaq index varied by more than 100 percent. The S&P 500 index varied by more than 25 percent.
On the other hand, the diversion of Social Security and payroll taxes to Wall Street investment managers would be major payback for the contributions they made to Bush's campaign. Seven out of Bush's top 10 contributors were major securities firms.
"The memory of things gone is important to a jazz musician," Duke Ellington said. He might as well have been talking about those of us who thought the New Deal was a cornerstone of the American social contract. For years the New Deal was the North Star that defined our politics - - on both sides of the partisan debate. If George Bush gets his brave new world with Social Security, that deal is done.