A RETIREMENT FABLE

SYNOPSIS: Why even some Economists can take the Bush plan

There once was a land where people lived only two years. In the first year they worked; in the second year they lived off their personal savings.

There came a time when the government decided to help out the elderly. So it instituted a system called Social Security. Every young, working individual would pay a tax, which would be used to pay benefits that same year to each older, retired individual.

For the first generation of beneficiaries, Social Security was a great deal. They had not been obliged to pay in when young, yet got the benefits anyway. But subsequent generations misunderstood the system. They thought of their required contributions as investments, though they really were tax payments, needed to pay benefits to their parents' generation. And they imagined that they could get higher returns investing that money in the market.

So eventually an ambitious politician came along, declaring: "It's your money! I trust the people, not the government!" He said he would let workers invest half their contributions themselves. When critics tried to point out that this money had already been promised to older citizens (whose own contributions had been used to pay benefits to the previous generation of retirees), they were drowned out by chants of "No fuzzy numbers!" And so the scheme was put into effect.

And the next year Social Security went broke. Without enough money coming in, retirees could not be paid their promised benefits.

I wish I could say that this fable oversimplifies this year's Social Security debate in some important way. But it really is that simple, and George W. Bush's proposal which calls for putting part of Social Security contributions into individual accounts, without any replacement for the diverted funds really is that irresponsible. Because Americans live more than two years, the drama will take longer to play out. Social Security won't go broke for about 30 years, so the victims will be those who are currently middle-aged, not those who are already retired. But the crisis will come much sooner, as the impending disaster becomes obvious.

Mr. Bush has made an important political discovery. Really big misstatements, it turns out, cannot be effectively challenged, because voters can't believe that a man who seems so likable would do that sort of thing. In last week's debate Mr. Bush again declared that he plans to spend a quarter of the surplus on popular new programs, even though his own budget shows that he plans to spend less than half that much. ("No fuzzy numbers!" roared the crowd but these are his own numbers.) And he insists that he has a plan to save Social Security, when his actual proposal, as it stands, would bankrupt the system.

But aren't there good economists, even experts on Social Security, who support Mr. Bush's proposal? Think of it as a Faustian bargain selling their souls not for power or wealth (maybe that too, but that's not my department) but for reform.

For there is a good case for Social Security reform if we are prepared to pay the price. The current system in effect promises today's workers that future generations will take care of them, just as they are taking care of today's retirees. As a Bush adviser, Martin Feldstein, has pointed out, this makes people feel richer than they really are, leading them to consume too much and save too little.

But to fix this problem would take a lot of money money to pay off the system's existing obligations. Or to put it differently (making the same point from a different angle): Since the problem with Social Security is that it makes people feel artificially rich, any real reform has to make them feel poorer. But that, of course, is not what Mr. Bush is selling.

What economists who support his proposal presumably believe is that after the election this can all be fixed. When the real plan is announced, it will actually make sense.

But it's hard to see how. Try to imagine a victorious Mr. Bush explaining that he has to slash benefits after all, or abandoning his tax cut so that he has enough money to pay for Social Security reform.

What is certain is that Mr. Bush's actual Social Security proposal would bankrupt the system. That's not a fuzzy number it's a cold, hard fact.

Originally published in The New York Times, 10.11.00