Enough introducing -- on to substance. Nicholas Kristof's gone and written what you might call an "objectively pro-privatization" column. He doesn't endorse Bush's privatization drive, or even so much as mention it. But the theme of the column is that the government spends too much money on old people and this plays an important role in shaping the meta-context in which this debate plays out in favor of the sort of sharp benefit cuts the White House is putting on the table. What's more, it contains a plug for the work of Laurence Kotlikoff. If you're not familiar with the man or his book what you need to know is that he's perhaps the chief useful idiot of the privatization drive.
Kotlikoff, as you can tell from Kristof's column, is very concerned that the government spends too much money on the people who are old right now, and the people who will be retired soon, and not enough on younger people. The phase-out crowd is a great fan of his book and mentions it constantly. I spent the day a couple of weeks ago at a Heritage Foundation event on Social Security where, naturally enough, you had a lot of privatization advocates, and several of them mentioned Kotlikoff and the analysis presented in his book as an important reason to support the phase-out. Funny thing, though, was that none of them said anything about Kotlikoff's views as to what we should do about it.
Kotlikoff favors replacing Social Security with something that's been given a name that sounds like "private accounts" or "personal accounts" or whatever it is we're supposed to call them nowadays. But his accounts are nothing like the ones Bush is pushing for. Individuals have no control over them -- each and every citizen's money is going to be invested the exact same way according to a formula devised by a government computer somewhere. In essence what he's proposing is simply that the Social Security administration invest the Trust Fund partially in stocks and other private assets. In order to overcome a couple technical problems with that plan, he splits the money up into a whole bunch of pseudo-personal accounts as a kind of accounting device. This bares about the same relationship to accounts Ã la Bush as the administration's claim that it doesn't ship terrorism suspects abroad to have them tortured does to the truth.
The other, even bigger difference, is that while Bush's accounts are financed through massive amounts of borrowing from some unspecified source, Kotlikoff's accounts are financed through a hefty sales tax. This is important not just because of the difference between a fiscally responsible plan and an irresponsible one. It's important because consumption taxes, like a sales tax or a VAT, are taxes that fall much heavier on old people than do the income and payroll taxes that the government depends on for the vast majority of its revenue. Retired people, by definition, don't earn much income. They also tend not to save any money, since they're at a point in their lives when they're focused on spending down whatever savings they may have. But they do buy stuff, so a 10 percent sales tax would wind up taking a lot of money from them. This is key, because the whole point is that Kotlikoff and Kristof think the government spends too much money on the people who are at-or-near retirement, and not enough on younger people.
What Bush is pushing -- and what's being pushed with many a reference to Kotlikoff's book -- does the reverse. If you're 55 or older when the plan passes, nothing changes for you. If you're 50 or 45, you do face some benefit cuts, but they're not all that big. That's because the way switching from price indexing to wage indexing (whether fully or, as we're now being asked to swallow, partially) works is that there's a little cut the first year, then a little cut the next year, then another cut, then another cut, then another, and so on down the road until quite literally the end of time. Once you get to somebody Josh's age, the cuts are looking pretty steep. If, like me, you were born in 1981, they get even steeper. My younger brother's benefits will be cut even more, and our little cousin Rebecca gets the biggest cuts of all.
Now as it happens, I think this whole Kristof/Kotlikoff analysis is off-base. Yes, meeting all our promises under Social Security and Medicare will cost a lot of money in the future. But the great thing about the future, is that between now and then our economy will grow, just as today's economy is much larger than was the economy back when Social Security was first created. With that additional wealth, we should be able to take care of retirees and children alike without too much trouble. But even if you do buy what Kristof's selling, don't buy Bush's brand of snake-oil. He's not taking from granny to help out my generation. He's taking from us -- and even more from our future children and grandchildren -- to finance tax cuts and generate administrative fees for his contributors in the financial services industry.