Center on Budget & Policy opposes privatization

The Center on Budget and Policy Priorities provides analysis of issues related to economic and policy initiatives in the United States. Since privatization of Social Security became an issue last December, the Center has been researching competing claims about Social Security, its fiscal health, and various plans to change the system.

The first paper notes that in a December 20, 2004 news conference, "The President suggested or implied that Social Security presents a greater budgetary problem than Medicare or his tax cuts, and that the Medicare prescription drug bill will help to reduce the overall cost of Medicare by averting unnecessary hospitalizations. The reality is that the Social Security shortfall, while sizeable, is not gargantuan...Both rising health care costs, which drive much of the projected growth in Medicare costs, and the long-term cost of the President's tax cuts pose much larger budgetary problems." (Related article: Why Bush wants to privatize Social Security?)

Specifically, the paper finds that the tax cuts (if made permanent) and the prescription drug bill -- the President's two principal domestic priorities during his first term -- will together cost at least five times as much over the next 75 years as the Social Security shortfall. The cost of the tax cuts just for the top one percent of households, if made permanent, will be about the same size as the Social Security shortfall.

The second paper addresses comments by Senator Larry Craig about a Congressional Budget Office analysis, released Dec. 22, 2004, of a Social Security plan designed by M.I.T economist Peter Diamond, one of the world's foremost experts on retirement issues, and Peter Orszag, an economist at the Brookings Institution.

This Center paper explains that "...the CBO report demonstrated the soundness and fiscal responsibility of this plan...CBO found the plan would restore Social Security solvency both over 75 years and into perpetuity, would do so without borrowing money or transferring funds from the rest of the budget, and would provide substantially higher benefits than the principal plan that the President's Social Security Commission proposed, even when the income from the private accounts under the Commission's plan are taken into account.

"Nevertheless, within hours of the CBO report's release, Senator Craig, outgoing Chairman of the Senate Special Committee on Aging, used the report to launch an attack on the Diamond-Orszag plan that generated some media coverage portraying the plan in an unfavorable light. Senator Craig claimed the report showed the Diamond-Orszag plan would injure the American economy. Craig also stated that an earlier CBO report showed the plan the President's Commission designed would expand the economy..."The Senator's remarks suggest that any plan to restore Social Security solvency that includes revenue measures, no matter how modest, and does not include individual accounts is likely to be denounced in coming months as causing damage to the U.S. economy."

In fact, the Center's paper shows, Senator Craig's statements distorted the CBO findings. CBO projected that both the Diamond-Orszag plan and the principal plan that the President's Commission designed would have tiny effects on the economy. Where CBO found large differences between the two plans was in the level of benefits that seniors would receive, with the benefits being much smaller under the Commission plan than under the Diamond-Orszag plan. Benefits would be cut substantially under the Commission plan, even when income from the plan's private accounts was factored in.

The paper explains that the large difference in benefit levels between the two plans is itself the main reason that CBO projected some very small differences in the long-term economic effects that the plans would have. "CBO projected that because retirement benefits would be reduced so much under the Commission plan, workers would feel compelled to consume less and reduce their standard-of-living during their working years in order to save a bit more. This modest addition to saving would produce a tiny long-term economic gain.

"The most striking finding from the CBO analyses is not the marginal...difference in economic growth rates between the plans, but the dramatic differences in benefit levels." CBO projected that future retirees would receive several thousand dollars less in benefits each year under the Commission plan than under the Diamond-Orszag proposal.

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