The options for financing President Bush's plan to partially privatize Social Security might well be as unworkable as his plan to cut taxes five times, while increasing defense spending by starting two wars in the Middle East -- to say nothing of his other ambitious, but underfunded, plans such as No Child Left Behind. On the face of it, the near-term prospects for national solvency in any form of Social Security privatization -- especially in the undertaxed, overspent configuration of the current U.S. budget -- conform to the old adage, slim to none. A quick glance at the figures even during the pre-tax-cut, economic boom times of the middle of the Clinton presidency foreshadow the potential for disaster lurking in Social Security privatization. At that time, U.S. national debt amounted to "not $5 trillion as our politicians tell us -- it is between $14 and $17 trillion!" (Lamm, 1996) After five tax cuts, two wars, an economic slowdown and high-paying jobs moving to India any way they can, arguably those numbers are dwarfed by the fiscal realities of 2004.
The Bush plan to partially privatize Social Security calls for what appears at first glance to be a simple shift of funds. If an individual has ten dollars in his wallet and can give eight of it to his banker to keep for his old age and put two of it into some speculative deal -- let's say his nephew's Gator Aid-powered car design -- then the bank has lost his $2 and along with it, one might assume, the costs of administrating that $2. On the other hand, he also has the opportunity to make millions with that minor investment. Since most of the current proposals would diminish Social Security income by the amount an individual earned in the private portion beyond a poverty-line-linked minimum income, the Social Security administration would save enormously on the successful investors by not having to send any checks. For someone who invested in Mr. Buzzbrain's Political Campaign No-Fail Exit Poll Predictor, however, and lost his or her $2, the Social Security administration would kick in to raise that person's retirement income to a poverty-line-linked minimum income.
The plans currently being discussed would allow individuals to redirect between 2 and 4 percentage points (out of 6.2) of their payroll tax into personal accounts. "At retirement, the Social Security pension based on the regular (defined benefit) portion of the scheme would be proportionately reduced to reflect lower contributions to that part of the system. This plan calls for the addition of about $1.1 trillion in additional funding from general revenues between the years 2016 and 2043 to finance the transition" (Williamson, 2002). Williamson also notes that even after 2043, the plan would still run a deficit, but lower than the deficit would be if the current configuration of Social Security is allowed to remain.
One of the budget problems in this funding any privatization plan is administration, the costs of which would rise dramatically in a partially privatized system. "The current one-size-fits-all system costs very little to administer. Even with a limited range of choices (of investment vehicles), economists believe the administrative costs for private accounts would rise sharply" (Schalch, quoted by Montagne, 2004). Moreover, that does not even consider the human costs. As Henry Aaron of The Brookings Institution pointed out, the current system factors inflation into (not against) retiree income, but under the proposed system, currently, "a retiree, a disabled person knows that he or she is going to get a benefit with certain real purchasing power, essentially come hell or high water. And that isn't something that any of the private account proposals can claim" (Aaron, quoted by Montagne, 2004).
Arguably, the plan Bush might support would be one of the three issued by the commission he appointed during his first presidency to study the issue. Of the three, one plan was viewed as more promising than the others, the one that proposes diverting "2% of workers' payroll taxes into private accounts. The remaining 4.2% -- and the payroll taxes employers pay -- would go into the system, helping fund benefits for current retirees. That leaves an estimated shortfall of about $2 trillion to continue funding benefits for current retirees" (Strope, 2004). That money would need to be found somewhere, and with a national debt that must certainly exceed Lamm's figures, the question is where? Bush wants to immortalize his tax cuts, which began as temporary measures, by making them permanent. "Bush has not said how the $2 trillion transition costs would be funded, nor did his commission. Record deficits, Bush's desire to make his five rounds of tax cuts permanent and the rising cost of war in Iraq and Afghanistan are major obstacles" (Strope, 2004).
At this point, the terror word of the 1970s -- the word that brought nations such as Brazil to their financial knees -- threatens to pop up. That word is devaluation, although no one seems to be using it at the moment. The only conclusion to arrive at, short of devaluation of U.S. currency, is that the privatization plans are so unlikely to happen that the issue is an exercise in semantics and fantasy accounting. "Weird economics" is also called upon for possible solutions. One suggestion for financing privatization would be that, regarding the government-funded portion of retirement income, "base benefits would be cut by tying them to inflation instead of wage growth, with stock market gains assumed to make up any shortfall. The concept gained support in the stock market boom of the late 1990s" (Strope, 2004). It should have no currency now, however, because there is no market boom. Whether there is a market boom or bust, however, Sen. Sen. Lindsey Graham, R-S.C., suggests that the "price tag of $80 billion to $100 billion could be funded by closing tax loopholes, cutting pork barrel spending, borrowing money or temporarily raising the payroll tax cap on earnings" (Strope, 2004). Michael Tanner, of the Cato Institute (a libertarian think tank) suggested making "more efficient use of the money you have within the system by investing in real capital assets, such as stocks, bonds and things that earn an actual rate of return and increase the amount of money that you have within the system" (Schalch, quoted by Montagne, 2004). The absurdity of the federal government investing in capital assets is obvious; indeed, it is unlikely that he has considered the effect on those very markets of the huge infusions of cash a government is capable of making; arguably, in effect, it would constitute a government takeover of business. That has been done, of course, but at the time, it was called Communism.
The argument for closing tax loopholes -- in the aftermath of tax slashing that constitutes a slash and burn policy for government income -- seems a useless gesture. Human behavior being what it is -- and the need for re-election being what it is -- the probability of cutting pork barrel spending has about the same chance of happening as the adage used above; slim to none. That leaves "borrowing money or raising the payroll tax cap on earnings" (Stripe, 2004). It does not take Nostradamus to predict which of these possibilities is more likely.
In fact, the predicted budget shortfalls are arguably likely to be even bigger than anyone's best guess. Lobbying groups have, naturally, entered the fray. A Washington Post editorial called the Bush tax cut plans and Social Security privatization scheme "manna for almost everyone within a mile of the White House. "The lobbyists on K. Street could hear their cash registers dinging. Social Security privatization? At last AARP could justify its vast office in Washington" (Mallaby, 2004).
However, it will not take lobbyists to hide disaster in what…