THE ATTEMPT TO PRIVATIZE SOCIAL SECURITY:
A YOYO CASE STUDY

So that is where we are.

Our response to Katrina exposed the underbelly of the opportunity society and in that sense makes the task of this chapter—to present the drawbacks of such a society—easier. But before we go back in time to explore the roots of hyper-individualism, let’s develop a better understanding of the problem by examining a present-day example of YOYO in action: the attempt by the Bush administration to change Social Security from a program that guarantees a benefit to a program that draws at least part of the benefit from a privately held account invested in the stock market.

The plan to partially privatize Social Security by giving individuals the opportunity to invest a portion of their Social Security payroll taxes in financial markets is, or really was, the major economic initiative of President Bush’s second term. Under this plan, the government would no longer guarantee a pension; instead, a pension would partially be a function of how well an individual did in the stock market during his or her working years.

In this chapter, the goal is less to critique this idea, and others like it, than to deconstruct it. What characterizes these initiatives and what do they tell us about where their advocates are coming from? Where are these ideas taking us?19

As its second term got under way, the administration of President Bush was working tirelessly on selling Social Security reform. Like a pop star promoting a new CD, the president toured sixty cities to make his case. But other than the handpicked fans that came to the “concerts,” the dominant consensus seemed to be that the new tunes weren’t very catchy.

Which raises the question: why, after a seemingly endless campaign yielded another narrow victory, did the newly reelected administration turn to a major restructuring of a program so popular with the electorate that it has been called a third rail, “killing” any politician reckless enough to touch it?

The Stated Objections

The “reformers” claimed to be motivated by concerns that Social Security would be unable to meet its financial obligations. But there were two pretty big problems with making this case. First, the program is not in nearly as bad a shape fiscally as its opponents have claimed. It’s sound for about forty more years and may require relatively small tweaks thereafter. And second, private accounts don’t change the fiscal outlook one bit. It’s simple arithmetic: we can address a fiscal shortfall by raising taxes or cutting benefits, and both were off the table.

In fact, the administration never had the chutzpah to put forth a plan. Some administration officials did say they liked a few ideas, including most recently, one that reduces benefits for recipients with higher family incomes. Needless to say, that didn’t get very far. One of the treasured aspects of Social Security is its universal application: it’s not a “means tested” poverty program. This is an important distinction, because programs for the poor end up being underfunded and politically unpopular. Thus, introducing an income test to Social Security was widely regarded as a back-door attempt to weaken it.20

The case against Social Security was also overshadowed by a real wolf at the door: the American health care system. The nonpartisan Congressional Budget Office has made this clear time and again, showing that the combination of an aging society and fast-rising health care costs means that health care spending is slated to sop up much, much more of our future resources than Social Security. (For the record, health care costs are by no means a burden only for the public sector; they are an equally serious problem in the private sector.) And let’s face it, whatever you believe about Social Security’s finances, the tax-and-spend policies of the Bush administration do not reveal much concern for fiscal sanity. Why, then, should its officials come out swinging so hard against Social Security?

The fact is that Social Security has long been in the YOYOs’ sights. While federal health care spending will grow much faster than Social Security in the coming years, Social Security has characteristics that keep hyper-individualists up at night.

The Real Objections

First, it’s a big government program on which many people depend. We spent about half a trillion bucks on Social Security in 2004, accounting for more than 20 percent of government expenditures that year. Social Security is the main source of income for two-thirds of the elderly. For YOYOs seeking to eviscerate the government, such a huge program, no matter how popular, is too important a target to ignore.

But it’s the very idea of Social Security that really goads them. Social Security takes a universal challenge—the need to protect the vulnerable (the program officially insures against old age, disability, and the loss of a spouse, but for brevity, I’ll just refer to the old-age component)—and shares the responsibility of meeting it among members of the working generation, whose income supports the aged.21

Though I grant you that we rarely discuss it in these terms, Social Security creates a strong link between the aged and the working-age population. The idea behind the program is that today’s workers create the capital, the technology, and the wealth that will support tomorrow’s generation. Embedded in its mind-numbing formulas is the notion that those of us who came before, whether they were teachers, accountants, homemakers, mail carriers, barbers, cashiers, or lawyers, have built up the productive capacity of our nation. When the children of these workers come of age (along with new immigrants), they will earn their living from this infrastructure while also making their own contributions. As they do so, we will peel off some portion of their earnings to provide pensions for their forebears, just as those forebears did for their own predecessors. If this were a Disney movie, music about the “Circle of Life” would swell up here, but suffice it to say, Social Security is an elegant collaborative solution to a universal challenge.

The YOYOs want to put a stop to all this cozy intergenerational sharing. Instead of using today’s earnings to pay for today’s retirees, they want you to be able to invest a portion of your Social Security payroll taxes into a go-it-alone “individual account.” Thus, Social Security stands as a testament to the benefits of collective action, of pooling the risks associated with becoming too old to work, or losing a spouse, or becoming disabled. Private accounts, conversely, are a great example of the “You’re on your own” approach to these causes of income loss. Some people would come out ahead under such a scheme, but many would not, and those with the lowest incomes and the least investment acumen (or the least time and the fewest resources to develop such acumen) would be least likely to benefit.

Moreover, according to the work of economist Robert Shiller, it’s likely that the majority of retirees would end up with a less economically secure pension than they have under the current system. It’s not that the stock market is always a worse bet than the reliable, albeit boring, Social Security investment in government bonds, the safest vehicle on the road. It’s really more a tortoise-and-hare situation.22

For most people, the slow and steady investment in government bonds under the current system yields higher returns at retirement than the stock market would. One reason is that the need for a pension grows with the age of the worker. Thus, if the employee/ investor is unlucky enough to hit retirement age during a down market, too bad. Sure, it might be possible to keep working and investing, but down markets can last years. The bottom line: most people don’t want to gamble with their pensions, which is why the private-account campaign has been such a bust for the YOYOs.

One researcher, for example, examined the hypothetical case of someone who retired at age sixty-five in 2000 (when financial markets were booming) versus another who retired in 2003 (when they were tanking). After forty years of investing 6 percent of his salary in a 401(k)-type plan and retiring in 2000, Happy Joe Boom could have bought an annuity that would give him 134 percent of his preretirement income per month for the rest of his life. But Sad John Bust, who made the same investments but retired three years later, would receive only 57 percent.

In this same spirit of risk aversion, it’s also worth noting that Social Security as currently structured provides benefits until death. You can outlive the returns from a private account.

Now, I wasn’t there when the administration officials came up with the idea of selling privatized Social Security. But I’ll bet the possibility that private accounts could underperform the current universal “We’re in this together” system, with its publicly held assets, never occurred to them. The YOYO ideology led these officials to assume that you’re always better off when you’re out for yourself. The idea of dismantling the “third rail”—to create millions of independent investors while surgically removing the collectivist heart of a policy that connects Americans across generations—also had appeal. YOYOs are unsettled by a system wherein the retirement of today’s older generation is financed by a new immigrant working a construction site as well as a young urban professional beginning a career in finance.23

It’s revealing that this latter point has not been the line of defense for keeping the program intact. Instead, those against privatization have promoted the work of analysts, like Shiller, who show that relative to the current system, individual investors could lose a hefty chunk of their retirement funds in the market.

I’m not sure why no one thought to tap Social Security’s collective risk-sharing aspects in its defense. Maybe they tried it and it polled badly with a focus group. But I doubt it. It may be the case that those who oppose privatization (and who argue at most for small alterations to the current program) are stuck in the dominant frame of “What’s better for me?” That is, they probably believed that they’d never convince the general population with arguments about pooling everyone’s risk under the banner of intergenerational interdependence. So they never proposed the alternative frame: We’re all in this together; we’ve all got productive years and retirement years ahead of us; there’s a time to sow and a time to reap. How, then, can we best come together to tap our resources to meet this challenge?

I readily grant that the other frame—”What’s better for me?”— is by no means unappealing, and the interesting question for someone of my persuasion is, what if the numbers had worked out differently? What if they had showed that a privatized system did yield better results? In that case I’d move to a hybrid that tapped the power of the market but preserved the core collective aspect of Social Security. Once the program is privatized, once one huge pool becomes a million puddles, something inherent that binds us together is lost. A privatized program would chip away at our fundamental connectedness. Under such a system, when I walk down the street as an aging baby boomer, I would no longer see younger generations contributing to my old age while building the economy for the progeny of their fellow citizens. I would see a bunch of competitors in the stock market.24