At the vice-presidential debate Thursday, Rep. Paul Ryan was asked about the time when, back in 2005, he pushed to partially privatize Social Security. Here’s how Ryan replied: “What we said then, and what I’ve always agreed, is let younger Americans have a voluntary choice of making their money work faster for them within the Social Security system.” Ryan was quick to add that Mitt Romney isn’t proposing anything like this now.
So what was the plan to privatize Social Security anyway? And what were the main criticisms of the proposal? Here’s a quick refresher.
Where it started: Back in his 2005 State of the Union address, George W. Bush declared that Social Security was “headed for bankruptcy.” As a remedy, he outlined a proposal for younger workers to divert some of their payroll tax contributions to the program into private accounts, where people could invest in a “conservative mix of bonds and stock funds.” He argued that these personal accounts could deliver a higher rate of return than what Social Security offers.
In the ensuing months, several Republicans in Congress sponsored legislation to allow younger workers to steer a portion of their payroll tax contributions to Social Security into private accounts. The bill sponsored by Paul Ryan and Sen. John Sununu (R-N.H.) would have allowed workers under the age of 55 to take around half of their payroll tax contributions and place it in a private account, if they so chose.
The criticisms: The main budgetary hurdle with these privatization proposals is that they would make Social Security less solvent in the short term. There’s a transition problem. If younger workers can divert their payroll taxes into private accounts, then the Social Security Trust Fund has less money available to pay current retirees. So the government would either have to borrow money or raise taxes or cut benefits to make up the difference.
At the time, the Center on Budget and Policy Priorities estimated that the Ryan-Sununu plan would create an $85.8 trillion shortfall by 2050. (Ryan’s plan was the most far-reaching, but even more modest proposals like that of Lindsey Graham would have left Social Security about $17.1 trillion in the hole.) The Social Security Administration concurred that carving out personal accounts would increase the deficit. The Congressional Budget Office found that diverting payroll taxes into private accounts would not improve the health of Social Security — unless the plan included sharp payroll tax hikes and benefit cuts.
Was privatization a better deal? Think tanks in favor of privatization, such as Cato and Heritage, argued that workers could earn a higher rate of return by investing in stocks than the Social Security program gets by investing in Treasuries. But other conservative economists, like Harvard’s Robert Barro, disputed that there was any sort of “free lunch” here — stocks do carry a premium, but they are also riskier. The CBO, for its part, argued that when you account for this extra risk, personal accounts wouldn’t yield a higher return.
A related worry was that privatization would leave retirees vulnerable to the whims of the stock market. What would happen, say, if a person retired just as the financial crisis hit? An analysis (pdf) by the Center for American Progress’s Ben Furnas found that a worker who had retired in 2008 would have lost $26,000 in Social Security benefits if he had been enrolled in private accounts his whole life.
Why it died: The Republican proposal met with furious push-back in 2005 — almost no Democrats supported it — and the GOP decided not to even bring it up for a vote. Bush turned his attention elsewhere, giving Social Security just a perfunctory mention in his next State of the Union address, and eventually dropped the subject.
Republicans used to support private accounts, but they’re quieter on the subject now: Ryan, obviously, has been a major backer of private accounts in the past. His “Road Map for America’s Future” in 2010 contained a Social Security privatization proposal, though his most recent 2012 budget didn’t include the idea.
Mitt Romney, for his part, has been supportive of carving out private accounts in the past. Here’s what he said in a 2007 Republican primary debate: “The president said let’s have private accounts and take that surplus money that’s being gathered now in Social Security and put that into private accounts. That works.” Romney also wrote favorably about privatization in his 2010 book, “No Apology.”
But more recently, Republicans have been shying away from idea. In last night’s vice-presidential debate, Ryan stressed, “That’s not what Mitt Romney’s proposing.” In the previous debate, Romney himself simply said “neither the president nor I are proposing any changes for any current retirees or near retirees, either to Social Security or Medicare.” Instead, Romney supports raising the retirement age for younger workers and curbing the growth of benefits for higher-income Americans.