Social security privetisation: Just Say No
Paul Krugman tells why:
Once you realize that privatization really means government borrowing to speculate on stocks, it doesn’t sound too responsible, does it? But the details make it considerably worse.
First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government’s fiscal health than the mere promise that government could save money by cutting benefits in the distant future.
After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren’t immutable: in the past, Congress has changed things like the retirement age and the tax treatment of benefits. If a privatization plan passed in 2005 called for steep benefit cuts in 2045, what are the odds that those cuts would really happen?
Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street’s point of view that’s a benefit, not a cost.
There is, by the way, a precedent for Bush-style privatization. One major reason for Argentina’s rapid debt buildup in the 1990’s was a pension reform involving a switch to individual accounts – a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina’s economic crisis.
If Mr. Bush were to say in plain English that his plan to solve our fiscal problems is to borrow trillions, put the money into stocks and hope for the best, everyone would denounce that plan as the height of irresponsibility. The fact that this plan has an elaborate disguise, one that would add considerably to its costs, makes it worse.