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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