Speculating on privatization

Impeachment saved the social Security system.

Threatened with removal from office, President Clinton has gone somewhat against his New Democrat centrist inclinations and called for changes that keep today's system basically intact.

"He drew the line," says Jeff Faux, president of the Economic Policy Institute in Washington.

"It makes it much less likely we will get privatization, at least between now and the next election."

Mr. Clinton proposes that in the next 15 years, 60 percent of a projected $4 trillion in federal surpluses be put into the Social Security system, and of that, $700 billion would be invested in stocks. This, he assumes, will give a better return than Treasury bonds, where the present Social Security surplus is invested.

That plan keeps most Democrats and organized labor happy. They are dead set against any system of individual retirement accounts that would replace or supplement a shrunken Social Security system. And Clinton needs the full support of Democrats to ward off Republicans in the Senate.

Clinton did suggest creation of optional individual Universal Service Accounts that could be invested in stocks. But these would be separate from the Social Security system.

Six months or so ago, Mr. Faux says, Clinton might have been more willing to go along with the privatization ideas of many Republicans in the GOP-led Congress. He did, after all, concede to time limits on those receiving welfare - a principle opposed by most Democrats.

The president's Social Security plan set off a tumultuous debate. Liberals, such as Faux, tend to approve of the plan.

Most conservatives dislike it, either because it damages their goal of individual accounts or because it would involve the federal government in the ownership of companies - sneak socialism, some charge.

Various privatization plans, and in a degree the president's plan, assume the stock market with its higher returns can rescue the nation's governmental retirement system.

Largely ignored is a basic fact. At any specific time, now or in the next century, those who are working will provide most of the goods and services needed by those retired. These two broad groups will divide the economic pie, whatever its size. Whether Social Security funds are invested in stocks or bonds, by Washington or individuals, won't change that fact. Somehow or other, the retired will get the funds to pay for goods and services they use. It's not even certain investing more in stocks will enlarge future pies.

The problem seen for the next century, when baby boomers retire, is that there will be two taxpaying workers per retiree, instead of the three today.

So, it is held, working people will be heavily burdened in sharing with retirees.

But if productivity continues to rise modestly, workers 20 or 30 years from now will be far more affluent than those of today, even after splitting the economic pie with retirees.

Every year, the Social Security trustees make projections of the solvency of the system for 75 years ahead. Looking at demographics, they assume the economy will grow only slowly - 1.5 percent a year.

If that projection is right, it is unlikely the stock market will provide the average real 7 percent yield it has in the past when the economy was growing about twice as fast. Maybe only a 3.5 percent yield a year, reckon Dean Baker and Mark Weisbrot, economists with the Preamble Center in Washington.

If stock prices do continue rising 7 percent a year and the economy only 1.5 percent a year, the ratio of price to corporate earnings would hit 400 by the year 2070 - a giant bubble 15 times the current level.

But let's say Social Security is privatized and the stock market boom continues, like magic. Then retirees would be wealthy and workers could get a smaller chunk of that bigger economic pie. Workers might face a real burden in providing for retirees.

Interesting speculation.

*David R. Francis is the Monitor's senior economic correspondent.

You've read  of  free articles. Subscribe to continue.
QR Code to Speculating on privatization
Read this article in
QR Code to Subscription page
Start your subscription today