Nick Kristof has a column today in the Times in which he argues that Democrats are wrong to flatly oppose President Bush on Social Security privatization, both substantively and perhaps also politically.
Democrats themselves, he argues, were serious in pressing the issue of reform in the 1990s. And they were right then and wrong now because even if the president has exaggerated the problems facing Social Security, it does face very real problems. Democrats may object that “Mr. Bush will use his reform as another occasion to soak the poor,” as he puts it. But if that is the case, then that is only another reason for them to constructively engage the president rather than flatly oppose him. The heart of the column is contained in the passage in which he says that there is but “one powerful objection to private Social Security accounts.” And that is that under present fiscal circumstances we cannot or may not be able to afford them.
Reading Kristof’s column I can’t come to any other conclusion but that Kristof doesn’t grasp either the policy proposals up for discussion or the social purposes for which Social Security exists and that for him both are clouded by rhetoric meant to obscure the issues at stake.
Kristof’s column, actually, provides an opportunity to review and expand upon the essentials of this debate. So let’s have at it.
President Clinton tried to devote the final two years of his presidency to “saving” Social Security from the threat of future insolvency — a threat which appeared substantially closer then than it does today, less than a decade later. His plan was to shore up the nation’s fiscal standing so that it would be better able to cope with the pressures created on Social Security by the baby-boom generation in the early and middle decades of this present century. (For more on this point, see this earlier post on Social Security and the question of aggregate national indebtedness.)
Let’s stop and understand what that means. He wanted to take steps now so that Social Security could continue to exist for future generations as a defined benefit social insurance and old age pension system. President Bush, on the other hand, is trying to phase that system out and replace it with a defined contribution system of 401k-style private accounts.
These are not two spins upon or flavors of putting Social Security on a solid footing. The difference is a category difference, as clear as it ever is between preserving something and trying to bring it to an end. The difference is fundamental. And anybody who does not understand this either doesn’t grasp the policies involved, has been fooled, or is at work trying to fool someone else.
Let’s grab this by the root.
Is it fair to say that President Bush is trying to “phase out” Social Security? Well, what is Social Security? For seventy years it has existed as a defined benefit social insurance program. What does that mean? It is a social program in which everyone who works during their lifetime gets a guaranteed benefit in retirement. It’s not meant to be a sole means of support. Those who pay in more get more back; and those who pay in less a bit less. But everyone who works is guaranteed a benefit which provides at least a modicum of comfort and dignity in old age. Have the benefit structures changed over time? Yes. But they change for everyone together, not by the vagaries of chance or individual fortune.
Social Security envisions a retirement in which recipients, hopefully, have three sources of income: Social Security, some employer-based pension and personal savings. The latter two, in varying degrees depend on how hard you work, how much you make, how wisely you invest and the vagaries of chance. Social Security, as a defined benefit program, is meant to be the one leg of the stool which is a flat guarantee.
At root, with all the statistics and flimflam over words, President Bush wants to change that. He wants to phase out Social Security in favor of private investment accounts. In the latter case, there is no guarantee at all, just as there is no guarantee in private nesting, which of course is just as is should be. He wants to get rid of the defined benefit program and change it to a defined contribution program — not partially, but totally. Indeed, he said this in his recent press conference quite clearly. But few of the reporters present latched on to the statement or its significance. Social Security, he said, is “now in a precarious position. And the question is whether or not our society has got the will necessary to adjust from a defined benefit plan to a defined contribution plan. And I believe the will will be there. (emphasis added).”
There’s no ‘partial’ here. He’s talking about phasing out one and replacing it with the other. Reporters and commentators don’t seem to get that this is a category difference, though this is something that is widely understood in the pension policy community.
Let’s look at the words they use.
Take this article from the trade publication Business Insurance from August 30th of last year. The headline reads: “More employers freezing, phasing out DB [i.e., defined benefit] pensions; Companies closing defined benefit plans may experience unwanted side effects.” And the lede reads: “Faced with increasing pension funding liabilities and an unfriendly regulatory environment, more employers are phasing out their traditional defined benefit plans and opting to beef up their defined contribution offerings.” Or take an example from the mass circulation dailies in which the same issue is discussed. This from the Miami Herald back on January 22nd, 1995: “If you work for a big corporation, you may still qualify for a defined benefit plan. But don’t count on it. Many employers that offer both defined benefit plans and 401(k)s are phasing out their pension plans and beefing up their 401(k)s.”
As those who follow these matters well know, going from a defined benefit plan to a defined contribution plan is seldom a good thing for recipients. Under the president’s plan benefits would be far lower and they would not be guaranteed in any way. Whether you think this is a good thing or not, the change is a fundamental one.
A number of wavering Republicans are now saying that they will only sign on to the president’s plan if it still maintains the guaranteed benefit. But that’s silly. Not only is it obvious that his plan doesn’t do that; as we’ve noted above, he’s already said himself that it doesn’t do that.
It’s easy to get lost in verbiage about defined this and defined that and mazes of actuarial figures. The key, though, is the difference between an unsecured system and a secured one. That’s why it’s called Social Security and why phase-out is really the only candid way to describe what the president wants.
Privatizers have tried to confuse this issue in a number of ways — most recently by referencing President Clinton’s willingness to consider investing a portion of the Social Security Trust Fund in private securities rather than in Treasury bonds. In his 1999 State of the Union address Clinton said “I propose that we commit 60 percent of the budget surplus for the next 15 years to Social Security, investing a small portion in the private sector just as any private or state government pension would do. This will earn a higher return and keep Social Security sound for 55 years.”
Whether investing a part of the Trust Fund in private securities is a good idea or not is a complicated question. In retrospect, at least in the short run, doing so in 1999 would have been a very bad idea since, as we now know, the stock market was at the height of an historic bubble. Tricksters like Brit Hume on Fox and various easily-bamboozled hosts on CNN are now saying that what Clinton was proposing is what Bush is proposing today. But anyone who says this is either being dishonest or is simply ignorant.
What Clinton was proposing was simply a different way for the Trust Fund to invest its money — perhaps a good one or a bad one. But it would still be a defined benefit program. The risk of investing would be borne by the government, not the individual. Making a higher rate of return would make it easier for the Social Security program to pay guaranteed benefits down the road. But for the individual the benefits would remain the same regardless. As Clinton noted, many state defined benefit plans invest their money in this way. Under the Bush plan, it’s different. Individuals invest their own small sums in the market and they’re on their own. No guarantee.
So, to sum up this lengthy discussion. Our current retirement system envisions people going into retirement with three sources of income: the guaranteed benefit from Social Security, private savings and hopefully, though less and less frequently, an employer-based pension. Democrats have no beef with private investing, though privatizes try to imply otherwise. They want families to save more for retirement than they are today. The issue is no more complicated than a simple one of diversification — the need for Social Security and private savings, both of which complement each other. (Later we’ll discuss why the decline of employer-based pensions is an argument for the add-on accounts favored by Democrats.)
Anyone who looks honestly at the numbers realizes that under private accounts the average beneficiary would almost certainly get less money in retirement than they will now under the current Social Security system. But the key is that the president wants to phase out the defined benefit Social Security system and replace it with 401ks, the defined-contribution approach. Or, in other words, to get rid of Social Security and have people make up the shortfall with private savings.
Kristof says that the only “powerful objection” to phase-out is that at the moment we can’t easily handle the transition costs. So it would seem that the entire issue of defined benefit versus defined contribution plans, Social Security versus 401ks, is lost on him.
Another problem is Kristoff’s claim that there are a “variety of ways to organize retirement accounts so the poor are better off.”
Social Security is not welfare. The issue is not principally one of “the poor.” For coming up on a century, Social Security has been the sheet-anchor of the American middle class. It is about preventing people who have been middle class during their working lives from becoming poor when they retire. (In a later post we’ll discuss how Social Security honors the value of work.) In so doing the guaranteed benefit of Social Security ramifies through the economy and through the generations in ways that the current debate has scarcely begun to explore.
For instance, Social Security has been instrumental in preventing parents from the necessity of deciding whether to support aging parents or spend on education for their children — a devil’s choice which was always a key route by which families were yanked out of the middle class, since investment in education has long been key to preserving middle class status.
In any case, we can go into more detail on all these points. And I haven’t even touched on the survivors’ and disability insurance portions of Social Security, which the 401k model wholly ignores. But let me return to my central point.
Getting rid of Social Security and preserving it are not two versions of the same endeavor, even if the distinction is intentionally obscured by the rhetoric of ‘reform.’ They are opposite objectives. Since President Bush is now trying to do the former nothing is more obvious or logical than that the Democrats are opposing him root and branch since they want to do the latter.
This is all another way of saying that the Democrats do have an alternative on the table: preserving Social Security rather than phasing it out. (Once again, let me say that in a later post I’ll discuss why our values are only honored by a system like Social Security.) Democrats already have and will continue to propose adjustments to the system to handle potential shortfalls which are decades in the future. But this debate — for anyone who understands it, indeed even the White House now concedes the point — is not about solvency. And the fact that Kristoff does not grasp that point is not their problem, though his confusing the two issues certainly complicates preserving the program.
