Tuesday, March 01, 2005

Social Insecurity, Or, You Bet Your Life, Part I

An article in a recent issue of this blog titled, “The Invisible Man and the Hidden Agenda—Part I” stated: [Roger] Norquist has already begun to implement a strategy first described and named by David Stockman, President Reagan’s Director of the Office of Management and Budget. The process is termed, “starving the beast”—the beast in this case being the federal government.”

The article ended by questioning “whether a sitting administration has the justification to embrace what many (perhaps most) would consider to be a radical doctrine [starving the beast], promote and enact legislation to support that doctrine, but conceal the ultimate goal from the American public.”

According to the newspaper Financial Times, the Bush administration has indeed implemented and intends to continue a “starve the beast” initiative. In an editorial on February 8, 2005, the headline read, “White House Seeks to Slim down the Beast.” It made reference to “Republicans [who] claim that Mr. Bush’s earlier decision to slash taxes and push the U.S. deep into deficit was part of a strategy to “starve the beast”—force reduction in government spending by denying resources.” It should be noted that Financial Times is not considered a bastion of liberal “Democratic” ideology.

Supporters of this doctrine have a perfect right to advocate its implementation since they believe this is the best way to assure that the size of government is minimized, and expenditures on social benefits are limited. However, the recent blog asks, “Shouldn’t a radical strategy of this nature be the subject of debate? Is this what the Bush administration has been doing? Has it adopted a “starve the beast” doctrine as a hidden agenda and kept it a secret for four years?” According to the Financial Times, that is exactly what has been done. As a result, a question must be raised as to whether the administration’s obsession with “privatizing” Social Security is really just another piece of this overall objective.

A recent op-ed piece in The New York Times by Princeton Professor Paul Krugman answers in the affirmative. He wrote, “President Bush isn’t trying to reform Social Security. He isn’t even trying to partially privatize it. His plan is, in essence, to dismantle the program, replacing it with a system that may be social, but doesn’t protect security. And the goal, as with his tax cuts, is to undermine the legacy of Franklin D. Roosevelt.”

Unlike the Financial Times, Krugman is an unabashed liberal. However, in his article he quotes Stephen Moore who is president of the ultra-conservative organization, Club For Growth, and is also associated with the equally conservative Cato Institute. An example of his philosophy can be found in his following statement: “I can say this because I’m not an elected official: the most selfish group in America today is senior citizens. They have become the new welfare state, and given the size and political clout of this constituency, it’s very dangerous. One of the biggest myths in politics today is this idea that grandparents care about their grandkids. What they really care about is that Social Security check and those Medicare payments are made on a timely basis.” You get the idea!

More to the point, Krugman provides the following quote from Moore: “Social Security is the soft underbelly of the welfare state. If you can jab your spear through that, you can undermine the whole welfare state.” Moore and others like him (including Grover Norquist), view our current system of social benefits, including Social Security, Medicare, and Medicaid as an unwanted and undesirable intrusion on the free market system, providing benefits that eat up tax dollars unnecessarily, thus perpetuating an offensive and intolerable welfare state.

Those readers old enough to know the name Groucho Marx will also remember the hit TV show he hosted for 11 years titled “You Bet Your Life.” There are those who equate President Bush’s strong advocacy of “privatization” of Social Security (or as Republicans now favor “personal savings accounts”) as the equivalent of a “You Bet Your Life” gamble. Others, mainly Republicans, believed initially that the concept would help create an “ownership society,” provide the potential for higher ultimate Social Security benefits, encourage savings, and even solve the problem of the unsound fiscal conditions surrounding Social Security.

Unfortunately, the administration now admits that assumptions related to the latter two supposed advantages were unrealistic. Private accounts within Social Security will not fill the huge gap in future security deficits. In fact, both political parties acknowledge that the transition costs involved in establishing private accounts would add up to two trillion dollars to the budget debt over the next decade. (See below for further details.) In recent testimony, Alan Greenspan maintained that private accounts would not add to national savings.

The argument put forth by President Bush that a “carve out” of personal accounts from the Social Security system that would be invested in the stock market would provide the potential for higher ultimate returns cannot be refuted. The basic problem is that because of the propensity of the market to move down as well as up, it also poses the possibility of merely equal, or at worse, lower returns. Thus, the “You bet your life” gambit. On the other hand, the current system imparts a predictable guaranteed income that would not be possible with the introduction of personal accounts.

The most compelling and logical argument relating to this subject was incorporated in an editorial in the February 7th edition of U.S. News & World Report. Written by its publisher, Mortimer Zuckerman, the title almost says it all: “A Cure Worse Than the Cold.” Mr. Zuckerman cites a number of relevant and significant statistics to consider: “An American reaching the retirement age of 65 today has an average life expectancy of 18 years which means that roughly half of those who reach 65 can expect to live longer than 18 years. Four out of 10 have no non-work-related retirement savings. Currently, 48 million people —retirees, dependents, survivors of deceased workers, and the disabled all receive a Social Security check. Roughly two thirds depend on that check for at least half their income, and roughly 20 percent rely on it for their entire income.”

Let’s assume that all, or some of these pensioners opted for personal accounts. Whether individual investors are sophisticated enough to choose investments that would equal the higher returns being forecast by those advocating personal accounts is questionable. Mr. Zuckerman provides proof by citing 10 studies analyzed by the Security and Exchange Commission that indicated “a disturbing level of financial illiteracy. For example, only 12 percent of the investors studied could distinguish between a load and a no-load mutual fund; only 14 percent understood the difference between a growth stock and an income stock; only 38 percent knew that when interest rates rise, bond prices fall; almost half somehow believed that diversification guarantees that their portfolio would not suffer if the market dropped; and 40 percent thought that the [Social Security] trust funds’ operating costs would not be deducted from their investment return.” Talk about the potential for a real “You bet your life” debacle!

As it is, any effort to privatize would require “the government to borrow some $2 trillion in the firsts decade, over $3 trillion in the second decade, and approximately $5 trillion in each of the third and fourth decades—a run up of about $15 trillion in the national debt, based on a Congressional Budget Office estimate widely believed to be close to the Bush plan.” For obvious reasons, neither President Bush nor anyone from his administration has seen fit to publicize these numbers. Zuckerman continues: “Privatization does not begin to save money until 2050—hardly a solution to a crisis the administration has described as imminent. Even worse, it might create a fiscal crisis, inflating future budget deficits to unpredictable levels and send the economy into a tailspin.”

Zuckerman ends his editorial with this comment: “Privatization thus gets things upside down. Social Security was not meant to re-create the free market; it was intended to insure against the vagaries and cruelties of the market and to permit Americans to count on the promise that the next generation will take care of them in their old age.”
When Franklin D. Roosevelt signed the Social Security Act into law in 1935, he said, “We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty ridden old age.”

The “starve the beasters” will undoubtedly consider that thinking as heresy, and symbolic of the welfare state. Yet, this system has existed for 70 years during which time it has worked well. It has delivered on its promises—and despite all the controversy, it will continue to deliver until 2042 or 2052, depending on which government agency you wish to believe. Is that an imminent crisis? The effort to drastically alter the basic rules that have accomplished Roosevelt’s goal introduces a level of risk to the system that seems unsupportable when compared to the potential rewards.

While it may be arguable as to whether or not the system is in a near term crisis stage that requires urgent action, there is no question that the long-term viability of the current system is problematic. Unfortunately, most proposed solutions conflict with the ideological stance of one or the other political party. Ironically, however, solutions do exist. Next month’s issue will cover several plans that incorporate a form of personal account that avoids the detrimental implications inherent in the plan thus far submitted by the Bush administrations. These proposals also eliminate the potential nightmare of a “bet your life” scenario.

The two part series titled the Invisible Man and the Hidden Agenda that appeared in previous blogs have been included in the web site: www.therightiswrong.us.


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