Published: Jul 18, 2007 in Knowledge@Emory
Harry Truman used to say that what he wanted was a one-handed economist, because every economist who advised him always ended his assessment by saying, “on the other hand….”
To an extent, scholars at Emory and its Goizueta Business School carry on this proud tradition in their discussion of President George W. Bush’s plan to include private accounts within Social Security. On the one hand, they say, forcing Americans to save more would be a good thing. On the other hand, some see a variety of logistical and financial obstacles to the success of such a plan – and question whether the plan would actually do much to solve the pension system’s projected funding shortfalls.
Jeff Busse, a finance professor at Goizueta, is positive about the idea of partial privatization, but has some questions about how it would work in practice.
“I personally think it’s a good idea, but maybe not for everybody,” he says. “On average, the stock market does pretty well as a long-term investment. That’s a good thing…. The downside is that there’s always going to be some subset of people who…aren’t going to make good decisions.”
But Jagdish Sheth, a professor of marketing and corporate strategist, argues that the aging of the country’s 70 million baby boomers will leave policymakers with few alternatives to privatizing the system. “There is nothing one can do to sustain the current Social Security system, unless the government itself changes its investment policies,” he says.
George Benston, a professor of accounting, finance, and economics at Emory and Goizueta, notes that privatization would have two positive results. First, it would create a forced savings plan that would boost America’s extremely low savings rate. Second, if funded from income or other tax revenues, would reduce the payroll tax, a tax that makes employment more expensive than it otherwise would be. However, he says, a privatized Social Security system would also create several practical problems.
For example, in Chile and other countries where such privatized pension programs have been implemented, such programs proved expensive to administer, Benston says. “It turns out that the administrative costs are very high proportionally because you’re talking about relatively small sums of money. It’s just hard to keep all of the records,” he explains. In contrast, the Social Security Administration is very efficient.
It’s also unclear whether by investing Social Security money in a 401(k)-style account people would be better off than they are now. “I have read papers on the subject indicating that– when given a wide range of choices– people tend to make bad choices,” he notes. “They often keep their funds in low-return, excessively safe investment (given their age), or risk it all in an undiversified portfolio.”
But would privatization solve Social Security’s projected funding shortfall?
While the President has implied that there is a connection between privatization and the program’s solvency, administration officials have privately admitted to reporters that there is none. In a recent column in the Washingtonpost.com, writer Dan Froomkin noted an especially telling exchange between an unidentified senior administration official and reporters, in which the official admitted that personal accounts will have no effect whatsoever on the solvency issue.
In fact, Benston believes that privatization would actually have a negative effect. He says that taking payroll tax money and placing it into individual private accounts would create huge new deficits for the current system, since most payroll taxes now go toward the benefits of current Social Security recipients. “If they continue the benefits and collect less of the tax, then there goes the deficit again,” he says.
Many professors say that changes in the benefit structure would be required to eliminate the projected deficit, particularly as the President has said that he is not open to raising payroll taxes but would consider other changes. The most common proposals include raising the current $90,000 ceiling on income subject to payroll tax, raising the age when retirees can begin collecting Social Security, or changing benefit formulas to freeze current benefits at today’s standard of living instead of raising it to keep pace with the general growth of the economy.
During the same briefing, the same anonymous senior administration official Froomkin quoted said that beyond the concept of freezing benefits, “we’re leaving it open to discussions with Congress as to how to fill that $3.7 trillion – actually, what we think is a $10.4 trillion hole.”
Ten trillion or $3.7 trillion? Despite the endless articles about Social Security, some professors say that the debate hasn’t yet helped people understand much about the true condition of the system’s finances. “I think what’s most lacking in the debate…is a clear, nonpartisan account of what the condition of the program really is. So much of the information is being spun one way or the other,” notes Emory political science professor Randall Strahan, who specializes in the study of federal politics.
Even from a nonpartisan perspective, however, the news is not very good. Although opponents of the President’s plan have noted that money in Social Security’s trust fund should be enough to ensure that the system will continue to meet its obligations until 2042, they sometimes neglect to mention that the $3.6 trillion surplus taken through payroll taxes and placed in the trust fund for future Social Security doesn’t really exist: the money is already spent.
“Trust-fund accounting obscures the magnitude of Social Security’s financing gap by assuming that trust-fund surpluses accumulated in prior years can be drawn down to defray deficits incurred in future years,” explains Robert L. Bixby, the executive director of the Concord Coalition, a nonpartisan group that advocates fiscally responsible solutions to Social Security, Medicare and Medicaid funding needs, in testimony submitted recently to the Senate Special Committee on Aging.
“However,” Bixby continues, “the trust funds are bookkeeping devices, not a mechanism for savings. The special issue U.S. Treasury bonds they contain simply represent a promise from one arm of government (Treasury) to satisfy claims held by another arm of government (Social Security).”
In other words, there is no trust fund, only a $3.6 trillion IOU that taxpayers owe themselves. “What we’ve done unconsciously is hollow out the assets that we should have had for a rainy day,” says Christopher Whalen, a writer and investment banker based in Hudson, NY who writes frequently on federal financial policy issues. Whalen is principal of Institutional Risk Analytics, a consulting firm that specializes in regulatory risk management.
The Social Security deficits that need to be filled aren’t expected to begin until 2018. At first, such deficits would be limited, but by 2042 the amount would eventually grow to about one-quarter of outstanding obligations.
Whatever the merits of the President’s plan, the chances that it will reach the Bush’s desk are looking slim. Already, House Ways and Means Committee Chairman Bill Thomas (R-Cal.), has been quoted as saying that partisan warfare is likely to turn the President’s plan into a “dead horse.”
While Emory’s Strahan believes something is likely to get through the House, he is not so sure about the Senate. “‘I would be surprised if anything resembling what Bush has laid out could pass without some Democratic support in the Senate and right now I don’t see that forthcoming,’” he says.
Republican senatorial support may be less than 100% assured as well, Strahan says. “One problem for the Administration is that—to make this even close to working financially—they will probably have to reduce the growth in benefits,”– a major problem for Republican senators who are running for reelection in 2006.
One possible indicator of the prospects for the proposal: the Republican senator with the most power to promote the plan has yet to endorse it. The Washington Post noted that in response to Bush’s State of the Union message last week, Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, issued a statement that said only “I give the President credit for taking on a controversial issue. . . It’s our responsibility to address this issue right now, before the situation gets worse.’ ”
Originally published in February 2005.