Nest eggs, over easy: everyone who still wishes your Social Security benefits were invested in the stock market, raise your hand

Washington Monthly, Nov, 2001 by Robert Shapiro

RARELY DO POLICYMAKERS GET THE chance to test the viability of a controversial proposal before it's enacted. But that's what happened on September 11. up until then, Washington was rushing headlong into a knock-down-drag-out debate over the Bush administration's proposal to allow Americans to invest a portion of their payroll taxes in private accounts. The administration was promising that the stock market, over time, would produce better returns than money held in the Social Security trust fund.

In turn, those private accounts, supporters have argued, would make up for the deficits threatening the Social Security trust fund in another decade or so, when the baby boomers start to retire. The president himself has shown no pretense of objectivity in the matter, appointing to his Commission to Strengthen Social Security only those who already support partial privatization.

During last year's presidential campaign, privatization might have been considered with a straight face, if only because the risks involved in sinking one's retirement nest egg in the stock market seemed like a thing of the past. Not investing in the exuberant market, in fact, seemed almost foolhardy. Then came the collapse of the NASDAQ, followed by September 11, and the biggest one-week plunge in the Dow since the Depression. Those events have effectively wiped out the investments of thousands of Americans.

Former Federal Reserve Vice Chair Alan Blinder has calculated (with others) that the annuity value of a retirement account for someone retiring in March 2001 would have been one-third less than that of someone who happened to retire 12 months earlier. The decline would be even more drastic--roughly half--if one happened to retire six months later, in October 2001.

Today the notion that millions of voters would throw their support behind a libertarian plan that would cast aside the security of a government pension seems far-fetched. But diehard privatizers are undeterred. Michael Tanner, director of the Cato Institute's Project on Social Security Privatization, insists that recent events have not killed privatization. "In the short term it will probably scare some people," he said. "In the long term, it could actually be beneficial. The market will recover and it will show people that down markets are not forever."

Besides, he argues, "There is no guarantee of secure and known benefits in the present Social Security system. In the current Social Security system, people have no legal rights to benefits. Congress is free to change benefits at any time."

The White House is apparently toeing that line as well. In the weeks after the World Trade Center and Pentagon attacks, former New York Senator Daniel Patrick Moynihan, chairman of the President's Commission to Strengthen Social Security, moved to postpone the commission's report until next spring, given the country's new political focus. But the White House wants to push forward, still firm in its belief that privatization is a viable policy option.

It will have to make a pretty strong case to people like 59-year-old Rita Bregman, who was recently profiled in The Washington Post because she was on the verge of retirement until her stock portfolio plummeted from $120,000 to $4,154 in the course of a year. Instead of retiring, Bregman has had to take a second job. For her, traditional Social Security probably looks better and better.

Like it or not, the Bush administration is eventually going to have to reboot. But so too will all the other ideological factions warring over what to do about boreal Security. As with so much else, the events of September 11 have shaken the foundations of the debate over the future of America's biggest social program. With a little luck, this might actually lead to a real solution.

Warring Factions

Before September 11, nearly everyone acknowledged that Social Security faced what Bill Clinton used to call a "high-class problem" We're living longer and having fewer children, and so the system faces a financing challenge as the huge baby boom generation prepares to retire and collect its benefits from the less numerous Generation X. Apart from that, the major players in the debate haven't seen eye to eye on virtually anything, including whether this prospect calls for major reforms.

The factions in this debate generally fall into three camps. First are the privatizers, headed by President Bush. Their idea of changing Social Security to allow recipients to invest in the stock market is headed politically in the same direction as the stock market: downward.

Second are what might be called Washington's professional Scrooges, people like Newsweek columnist Robert Samuelson and organizations like the Concord Coalition. These folks see in Social Security another exasperating example of trans-generational self-indulgence. They've long argued that the program can be rescued, and our characters cleansed, only by some bracing benefit cuts for the boomers and salutary tax increases for the Gen-Xers. But with incomes slowing and Americans feeling unaccustomedly vulnerable, Congress is also not about to pass--nor should it--hefty benefit cuts for boomers and tax increases aimed at Generations X and Y to pay for the baby-boomer retirement.