Saving Social Security?

The public is understandably puzzled by President Bush's recent appointment of a 16-member Social Security commission, whose members favor some form of privatization of Social Security and who would also cut benefits for workers, except for those now retired or near retirement.

If privatization is adopted, the world's biggest 401(k)-type plan will come into being: Up to 156 million workers would have an amount equal to about 2 percent of their taxable pay go into individual investment accounts - perhaps $80 billion-plus annually.

The president is either unaware of, or remains undaunted by, the illogic of privatization and its potential for mischief. While the projected long-term Social Security deficit is cited as the reason for this radical change, the cost of the changeover will exceed the amount needed to pay off such a deficit, so why bother?

Also, one can reasonably anticipate that a host of problems will arise from having to manage the data for up to 156 million accounts, from the destabilizing effect on the securities market of the great sums that will be added to it, from the politics of dealing with market downturns, and from the opportunities for fraud. Mr. Bush, however, continues to press on. His zealousness raises the question of what motivates Social Security privatization and benefit cuts.

A most compelling motivating factor is clearly the huge sums of money coming regularly into the Social Security trust funds. Contributions now total about $500 billion a year and benefit disbursements about $400 billion. The US Treasury receives the moneys, pays the benefits, and invests the surplus. Not surprisingly, these are functions the mutual funds, insurers, banks, and stock brokerage firms would like to relieve the Treasury of - for a goodly price, of course.

Assuming 2 percent of workers' taxable pay goes into individual accounts, the financial community's gross income could be augmented by more than $100 billion in the next decade and escalate rapidly from there.

The financial community also has to be discomfited by the fact that the government is not only running the mammoth Social Security program, but it is doing so efficiently and at a cost far below what the private groups would charge. Moreover, many of the financial companies have made a big investment to promote privatization. They have paid more than $60 million to the political campaigns of the president and numerous members of Congress. They have also given a tidy sum to conservative think tanks to come up with and heavily publicize messages that I call "think bombs," which worry the public about the soundness of Social Security and which are largely untrue (e.g., Social Security is going bankrupt).

A significant factor motivating benefit cuts is the politicizing of the Social Security surplus, rendering the surplus of great service to the president and Congress. This politicization was inaugurated by President Johnson in 1968, when he "unified" the federal budget to incorporate this surplus. This move changed the budget's position from a deficit to a surplus, enabling him to rebut Vietnam War critics who asserted that the country could not afford both guns and butter.

The unified budget immensely helped the Reagan administration as well when its 1980 tax cut created huge deficits. President Reagan's director of the Office and Management and Budget, David Stockman, sought to cut Social Security benefits in order to enlarge its surplus, in turn reducing the federal budget's deficit. He candidly acknowledged this, and also revealed in a book that the primary intent of the proposed benefit cuts was to salvage the budget, not Social Security.

But the cutbacks were hard to sell, and Mr. Reagan, to get the job done, appointed the 15-member Greenspan commission, made up of 10 conservatives and five liberals.

When this group hopelessly divided, a second group of six conservatives and two liberals was secretly formed, including three men close to Reagan: James Baker, David Stockman, and Richard Darman. They came up with the proposals that were then adopted by the Greenspan commission. Congress then passed the legislation needed to raise the surplus, including raising the retirement age from 65 to 67, the taxation of Social Security benefits, and a contribution increase. All was done under the rubric of saving Social Security, now also proclaimed by Mr. Bush.

The president also has plans, not yet clear, for the Social Security surpluses that will continue to emerge for many years and will total trillions of dollars. It is a given that he will attempt to gain political advantage from them.

Privatization and its related cuts in Social Security benefits have little to do, therefore, with what Social Security was set up to provide for: the financial needs of workers and their families upon retirement and death. Social Security is thus in the position of the wealthy heiress who has many suitors who claim to love her, but leave her in doubt whether it is her they care for or her wealth. But there is much less difficulty answering that question in the case of Social Security.

David Langer is chairman of David Langer Co., a consulting actuarial firm.

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