Feeling a cold draft that seems odd for midsummer? You're not imagining it: It's coming from Washington, where President Bush and like-minded folk are talking about cutting Social Security benefits.
They don't put it that way, of course. They're talking about rescuing the system by allowing workers to put part of their payroll deductions into stocks, bonds or other investments. But the unstated implication is clear: The guaranteed benefit, the mainstay of the system since the Depression, will have to shrink.
As everyone knows, the pay-as-you-go Social Security system will begin running shortfalls around 2016, as payments to beneficiaries get bigger than contributions from workers. At that point, the system will begin drawing on the "trust," the excess payroll deductions collected over the years to make up for the predicted shortage.
But those reserves are, in fact, being spent on other government functions as fast as they are coming in, reducing the trust to a mere IOU. If you bust into the vault now, there will be nothing there. To tackle the Social Security shortfall, money will have to come from somewhere else from new taxes or by cutting other government operations, perhaps.
During the presidential campaign, Bush proposed a partial privatization of Social Security, allowing workers to put part of their payroll deductions into stock and bond investments. The healthy returns historically provided by stocks, he said, would make up for the trust fund's shortfall.
As president, Bush then appointed the Commission to Strengthen Social Security, composed of eight Republicans and eight Democrats. Sadly, this was the kind of sleight of hand we're accustomed to in Social Security debates, since even the committee's Democrats generally buy into the privatization scheme. Lots of other Democrats and other folks, too don't agree, but there was no room on the committee for them.
You can make a case for privatization, but only after examining the tradeoffs. Bush and Co. skip that step. The strategy seems to be to give privatization so much momentum that it easily can roll over pesky details that come up at the last minute.
A more honest approach would say something like this: "In order to balance the books and make it look like we've solved the problem, we're going to shift the financial risk from the government to you, the Social Security participant."
Risks don't add up to security
Allowing workers to divert contributions to private accounts would leave the traditional system even poorer. Consequently, creating private accounts would force a reduction in the level of guaranteed benefits probably a dramatic one. Proponents don't talk about this much.
Does it matter? Won't participants' stock gains make up for this?
Who knows? The case for privatization hangs on the average stock market returns of something like 10 percent a year in the 20th century. But that comfort-inducing number masks a lot of misery. Broad indexes such as the Dow and S&P 500 frequently have lost money for years on end. Over decades, thousands of individual stocks have been wiped out.
An individual putting Social Security money into the market has no assurance he or she will match the long-term market averages. Indeed, the average mutual fund investor through bum luck, poor picks, bad timing and other wrong choices earns considerably less than the market average.
There's nothing wrong with investing retirement funds in stocks, but is that where Social Security money belongs?
Traditionally, retirement finances were thought of as a three-legged stool investments, pension and Social Security. In the past, traditional pensions and Social Security offered guaranteed benefits based on one's years of service and wages. Risk, for the most part, was confined to one's personal investments.
Pensions fade away
But every year, fewer Americans have traditional pensions. Most employers are switching to 401(k)s and similar plans, allowing workers to invest in stocks and bonds and relieving employers of the risk of having to make up for an investment shortfall to provide promised benefits. The risk shifts from employer to employee.
Now privatization forces want to do the same with Social Security. Workers once could count on a guaranteed and predictable retirement income from two of the stool's three legs pension and Social Security. In the future, they may have an assured income from only a portion of one leg the shrunken part of Social Security that's still guaranteed.
This is pretty risky. After all, if stocks weren't risky, the government could offer private accounts and promise to make up the difference if poor returns left participants with less than they would have received with the old system. But you won't hear Bush propose that, because it would leave the system on the hook. Privatization is cover for politicians who want to wash their hands of responsibility.
People who worry that the government may incur enormous debt shoring up Social Security should also consider what it might cost to rescue millions of seniors thrown into poverty if the securities markets go into a long slump in the middle of the next century, the way they did in the last one.
Or are we to shrug our shoulders and say those poor retirees made dumb investments? We won't be happy saying that: Those impoverished seniors could be us.