No net gain to younger Americans from private accounts

While President Bush failed to make a convincing case to the American people why Social Security should be privatized, he also did not discuss the downsides of privatization. And we are not talking about the kind of issues that AARP is worried about or what various women's groups have been saying about the serious impact on widows and children.

What we are talking about is that creation of private Social Security retirement investment accounts has enormous costs and American people will have to pay for them. Many analysts predict that the costs are so high that they will actually eliminate all the potential benefits of Social Security privatization highlighted by the President.

Then there is the issue of how much younger Americans will benefit from having private accounts. So far in the marketing of private accounts, the picture that has been promised is that of instant riches and wealth using the buzzword "ownership society". However, a closer analysis shows that there is actually a scary fine print to it. Jason Furman and Robert Greenstein of the Center on Budget Policy Priorities find that for these workers, their entire private account balance would be recaptured by the government when they retired, in order to repay the Social Security trust fund for the revenue that had been diverted to the worker's private account. A senior Bush Administration official explained that this repayment would be made by subjecting people who elected the private accounts to an additional Social Security benefit reduction. As a result of this additional benefit reduction, the official's explanation revealed, people opting for the accounts would get no net gain from the accounts unless their accounts produced a return more than three percent above the inflation rate. If the return on their accounts was lower than three percent above the inflation rate, people would lose money as a result of the private accounts, and that loss would be on top of the other Social Security benefit cuts (such as price indexing) to which they were subjected. Summary: There is a small upside to the private accounts but a huge downside. (Related article: Americans concerned about lower retirement income under Bush plan)

According to the Center on Budget and Policy Priorities, the details disclosed in the State of the Union address also mean that we will need to borrow trillions of dollars and still not have solvency of Social Security guaranteed. But if private accounts do nothing to help with solvency and retirement benefits will no longer be guaranteed, then why is this program being pushed so aggressively? Don't American economists and experts have a better system that restores the solvency of the system, keeps some degree of stable retirement income at a time when Americans are most vulnerable, and also allow younger Americans to invest their savings into the stock market? (Related article: Bush's real agenda in privatizing Social Security)

Yes, they do, but no one is listening. President Bush, using the same approach that he used for the Iraq war (listen to no one, go it alone, plan as you go), is not listening to anyone who has a different idea. (Related article: Why Bush wants to privatize Social Security so bad?)

Furman and Greenstein met with a Bush administration official who acknowledged what analysts have long known - private accounts themselves do nothing to restore solvency. The official stated:

• "So in a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government." (Transcript, page 5.)
• A reporter subsequently asked the senior Administration official: "...am I right in assuming . . . that it would be fair to describe this as having -- the personal accounts by themselves, that it would be fair to describe this as having - the personal accounts by themselves as having no effect whatsoever on the solvency issue?" The senior Administration official replied: "That's a fair inference." (Transcript, page 7.)

The senior official said the borrowing costs over the first ten years – 2006 to 2015 -- would be $664 billion without interest costs, and $754 billion when interest costs on the debt are included. These figures are misleadingly low, according to Furman and Greenstein. They are generated by using a ten-year budget window (2006 to 2015) that includes only five years of the fully phased-in plan. The plan would not be launched until 2009 and not be in full effect until 2011.

Over the first ten years that the plan actually was in effect (2009-18), it would add more than $1 trillion to the debt. Over the next ten years (2019- 28), it would add over $3.5 trillion more to the debt. All told, the plan would add more than $4.5 trillion to the debt over its first 20 years.

The reported $754 billion estimate is for 2006-15. The plan does not begin until 2009, however, and would be open that year only to somewhat older workers. It would not be until 2011 that all eligible participants could divert payroll tax revenue to the private accounts. Thus, only five full years of the plan are included in the White House's $754 billion cost estimate.

When estimates are generated for the first two decades that the plan would actually be in effect, the borrowing costs are seen to be much higher. (Related article: What happened to the Social Security trust fund?)

At the briefing, the senior Administration official declined to offer any proposals to close Social Security's shortfall, despite acknowledging that the private accounts would themselves do nothing to close it. The official punted on the issue, indicating it was something for the Administration and Congress to work out subsequently. (Related article: Personal retirement accounts will not solve the problem of Social Security)

The principles that the President directed his Social Security Commission to follow, and that he subsequently reaffirmed, call for no new revenue-raising measures to help close the shortfall. If revenues are ruled out, however, the $3.7 trillion, 75-year gap would have to be closed entirely through cuts in Social Security benefits.

The one proposal that the President's Social Security Commission advanced to close the gap through benefit cuts was to change the formula for computing initial Social Security benefits from one that uses "wage indexing" to one that uses "price indexing." Administration officials have talked up this proposal in recent weeks.

Recommended article: Social Security privatization explained

Source: Center on Budget and Policy Priorities