Krugman: The simple truth about SS privatization

Michael Pollak mpollak at panix.com
Mon Jun 24 17:11:47 PDT 2002


New York Times June 21, 2002

Fear of All Sums

By PAUL KRUGMAN

"I t is difficult to get a man to understand something," wrote Upton

Sinclair, "when his salary depends upon his not understanding it." To

make sense of what passes for debate over Social Security reform, one

must realize that advocates of privatization of replacing the current

system, at least in part, with a system of personal accounts are

determined not to understand basic arithmetic. Otherwise they would

have to admit that such accounts would weaken, not strengthen, the

system's finances.

Social Security as we know it is a system in which each generation's

payroll taxes are mainly used to support the previous generation's

retirement. If contributions from younger workers go into personal

accounts instead, the problem should be obvious: who will pay benefits

to today's retirees and older workers? It's just arithmetic: 2-1=1. So

privatization creates a financial hole that must be filled by slashing

benefits, providing large financial transfers from the rest of the

government or both.

During the 2000 election campaign, George W. Bush was able to get away

with the nonsensical claim that private accounts would not only yield

high, low-risk returns, but save Social Security at the same time. For

whatever reason, few reporters pointed out that he was claiming that

2-1=4. But when it came time to produce concrete plans, the arithmetic

could no longer be avoided.

Sure enough, the plans laid out by Mr. Bush's Commission to Strengthen

Social Security, though presented as confusingly as possible, involve

both severe benefit cuts and huge "magic asterisks," infusions of

trillions of dollars from an undisclosed location. The extent of the

damage is documented in a new Center on Budget and Policy Priorities

report by Peter Diamond of the Massachusetts Institute of Technology

and Peter Orszag of the Brookings Institution. (Mr. Diamond, who is

one of the world's most eminent economists, and is arguably the

world's leading expert on retirement systems, was my colleague when I

taught at M.I.T.)

The Diamond-Orszag report is informative; even I was surprised by a

couple of revelations. For example, the mystery money infusions that

the commission assumes will somehow be forthcoming are almost enough

to preserve Social Security exactly as it is, with no benefit cuts,

forever. Also, the commission's plans include severe cuts in

disability benefits, a crucial part of Social Security that

privatizers have a habit of overlooking.

But in a way, the most interesting thing about the new report is the

administration's reaction. Charles Blahous, who was executive director

of the commission and is now on the White House staff, quickly

responded with a memo best described as hysterical. The number of non

sequiturs and misrepresentations Mr. Blahous manages to squeeze into

just a few pages may set a record. Among other things, he angrily

accuses Mr. Diamond and Mr. Orszag of failing to address issues they

cover quite clearly. Of one such accusation, Mr. Orszag remarks drily

that "in his haste to issue a response to our paper, the Executive

Director appears to have overlooked the final box . . . which

addresses precisely that issue and provides the comparisons he

requested (though he may not be pleased with the results). We direct

his attention to that box."

A sample of Mr. Blahous's tactics is his insistence that private

accounts don't weaken Social Security, because diverting money from

the trust fund into those accounts doesn't reduce the total sum of

money available if you still count private accounts as part of the

total. As they say in the technical literature, "Well, duh." Of course

the money doesn't disappear but it is no longer available to pay

benefits to older Americans, whose own Social Security contributions

were used to pay benefits to previous generations.

As the facts about Social Security privatization gradually emerge, the

general strategy of the privatizers seems to be to keep the public

confused as long as possible. Indeed, Republicans are now being told

to deny that personal accounts which expose their owners to all the

risks of any private investment constitute "privatization." "Do not be

complicit in Democratic demagoguery," urges one party memo. So it

looks like a duck and walks like a duck, but it isn't a duck not until

after the next election.

But whatever they say, it is a duck. And the administration economists

who claim that privatization will strengthen Social Security are, more

than ever, revealed as quacks.

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