Privatized Social Security - Take 2

'If you don't succeed at first, try, try again." That could well be the motto of those trying to partially privatize Social Security.

It's already clear that most Americans don't back Republican efforts to divert some Social Security revenues into private accounts. And in the Senate, Democrats have enough votes to sustain a veto of any privatizing bill.

So a group of influential Republican members of Congress last week announced a plan to use the system's current cash surplus - rather than future payroll tax revenues - to finance these accounts.

The idea has a certain political appeal. The 11 Republican senators sponsoring the new legislation bill it as "Stop the Raid on Social Security."

Here's the logic: Social Security has big surpluses. For years, Congress has "borrowed" them to make the "unified" budget deficit look smaller. Their plan, the senators note, would end that. Neither party could use the surplus to mask the true size of the deficit. Instead, it would be legally owned by workers who decide to open personal accounts.

So far, so good. However, it's far from the full story.

Take the senators' math, for example. They calculate that since 1985, Congress has spent $1.67 trillion of the Social Security surplus on other government programs. But they conveniently overlook that in return, the Social Security Trust Fund holds $1.67 trillion in federal bonds. Those bonds are already earmarked for Social Security retirement benefits down the road when there will be more retirees and proportionately fewer workers to support them.

Future surpluses will amount to $792 billion through 2017, before the surplus disappears, according to the Social Security trustees. So if they're drained today to fund private accounts, Uncle Sam would have to borrow an extra $792 billion to make promised benefit payments to future retirees, widows and their children, and the disabled.

A private account appeals most to young people, since they might gain from it - especially if they're skeptical that traditional Social Security will be around when they retire and suspect Trust Fund bonds will be worthless. But they are ignoring political reality: Future retirees will have major political clout.

"There will be enormous numbers of older people and these older people are voters," notes Alicia Munnell, director of the Center for Retirement Research at Boston College. "They can't be dismissed."

Another problem with the Republicans' bill is that the Trust Fund bonds would be used up sooner - by 2039 rather than the Social Security Trustees' current estimate of 2041.

After that, the system will still hand out benefits, but at a reduced level, funded by payroll taxes paid by workers of that era. That cut isn't as bad as it sounds in absolute terms. Assuming living standards continue to rise as they have in past decades, pensions of that era will be based on salaries with substantially more purchasing power than today's Social Security benefits.

Nevertheless, retirees may feel poorer. That's because the system under current law will provide less retirement income relative to previous earnings than it does today. The average earner who retires at 65 today gets benefits equal to about 42 percent of preretirement earnings, or 39 percent after deducting Medicare premiums. By 2030, a 65-year-old retiree will find his Social Security pension replaces 29 percent of his preretirement wages - not even a third, calculates Mrs. Munnell. That's because "normal retirement age" is scheduled to advance to 67 by 2022. Also hurting: increased taxation of Social Security benefits and higher Medicare premiums.

So, if any Social Security "reform" cuts future benefits further - say by indexing benefits to inflation rather than prevalent average wages - many retirees may experience a huge and sudden decrease in their incomes.

Of course, it's possible that a private account might offset that factor - if an account's investments do particularly well.

Many conservatives hope that this plan will lead to lower government tax levels, already at the lowest level in relation to gross domestic product in many decades.

Sen. Jim DeMint (R) of South Carolina, one of the plan's backers, calls the Social Security money "a secret slush fund for Congress."

The Trust Fund assets "probably" have increased federal debt held by the public by, in effect, encouraging Congress to spend more and tax less, argues Kent Smetters, an economist at the Wharton School in Philadelphia.

"It's a psychological factor," he says.

But "it's almost impossible to test this empirically," Munnell counters. She doubts the Trust Fund had any impact on the debt level, at least until 2001, since both Congress and the White House were pushing for deficit reduction.

Democrats and their sympathizers are attacking the DeMint bill. It's seen as a "nose in the tent" for privatization. And, they note, it will require hiring thousands of federal employees to administer it, costing an estimated $25 billion over 10 years.

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