Social Security.

• Author: MACGUINEAS, MAYA
• Position: Privatization and liberals

The liberal case for partial privatization

DEMOCRATS ARE ALREADY LINING UP in opposition to the President's plan to reform Social Security. Bush has put forth only an outline of what he proposes to do--allow workers to use part of their payroll tax to fund private investment accounts, which, upon retirement, would be used to help augment Social Security benefits. Beyond that, the President intends to leave the specifics up to a bipartisan commission. But bipartisan commission or not, it appears that the president is in for one hell of a fight.

To liberals, privatization appears, at best, a risky gamble that would leave unsophisticated investors vulnerable to the perils of the turbulent stock market. At worst, it's a plot by anti-government radicals to entirely dismantle the Social Security system. Mainstream moderates who support privatization have tried to diffuse the visceral responses to the idea by developing friendlier labels. Still, whether it's "privatizing," "personalizing" or "capitalizing," most Democrats aren't buying it.

Certainly, many of liberals' concerns are legitimate. As Vice President Gore never hesitated to point out, investing in the stock market is risky. Many workers are unfamiliar with investing. The stock market does indeed seem like a dangerous place to park retirement benefits. For the many Americans who care about preserving a strong social safety net, risking the promise of a secure retirement is precisely the wrong way to go about reforming Social Security. Bush's pronouncement that he "trusts Americans to make their own decisions and manage their own money," does little to ease their minds.

But the types of reforms many liberals favor instead, from means-testing benefits to lifting the cap on payroll taxes to increasing the retirement age, if taken alone, would not create a fully viable reform package. For one, support for the communal retirement system will erode if it is transformed into an overly redistributive welfare program. Second, when Social Security began, it was a tremendously good deal for earlier participants. People got out far more than they paid in. But the returns participants receive on what they pay into Social Security have declined precipitously and are now expected to be roughly one to two percent; for many, they will actually be negative. Increasing what is paid into the program or decreasing what is paid out, will only exacerbate the problems of the discouragingly low returns--increasing the generational inequities and tensions that already exist. Finally, even a package of benefit cuts and tax increases large enough to return the system to solvency in the short run would not do so in the long-run. It would simply postpone the problem.

Assuming certain concessions from Republicans, Democrats should embrace private investment accounts, combining the idea with traditional Democratic proposals. By recognizing the benefits private accounts have to offer, while structuring them to ensure that the risks are mitigated and the neediest retirees are protected, Democrats can, in fact, create a plan that would tackle not only the problem of the Social Security funding shortfall but that of declining returns head on. Republicans, at the same time, should be structuring their privatization plans to retain the progressivity so important to giving all the elderly security.

Searching for Compromise

The existing political standoff between the two parties does nothing to change the financial and demographic realities facing Social Security. According to our best estimates, because of the upcoming retirement of the baby boomers and growing life expectancies, the dedicated payroll tax used to fund the intergenerational transfer system will no longer provide enough money to cover promised benefits starting...