Fear of All Sums

SYNOPSIS: Once again Social Security privatization advocates who would put payroll taxes into private accounts forget to explain how we'll pay the benefits of present retirees

"It 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.

Originally published in The New York Times, 6.21.02