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Michael Kinsley

If It's Right, It's Wrong

Social Security Privatization Theories Don't Hold Up

By Michael Kinsley
Sunday, December 26, 2004; Page B07

As I wrote last week, I'm convinced that Social Security privatization is not merely a bad idea but a certain failure, and I offered to provide a logical proof, challenging supporters to find the flaw or give up.

My argument, as condensed as possible, defines success as bringing in more money than the current system does. More money is necessary either to reduce the gap between projected benefits and revenue or to make retirees better off. Supporters variously promise both of these benefits.

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More money can come from only two places: increased economic growth and other people. Increased growth can come only from higher private investment or smarter private investment.

Privatization would deflect some money from the Social Security trust fund into private investment, but the government would have to borrow an equal amount to replace it. As for investment decisions, the only change caused by privatization would be a new role for millions of small, naive investors. There is no credible theory that this would improve the overall wisdom of capital investment decisions.

Many people believe that stocks pay better than bonds in the risk-adjusted long run. If so, letting people buy stocks with part of their Social Security tax payments would improve the Social Security system's overall return. The cost would be borne by people who bought bonds instead of stocks.

Privatization, in other words, rests on persuading Americans to accept a theory that must be widely disbelieved in order to be true. It's like Tinker Bell in reverse: If too many people are convinced that the theory is right, it's wrong. And the White House is campaigning hard to convince everyone the theory is true. If the campaign succeeds, the theory fails.

Where am I wrong here? Gregory Mankiw, outgoing chairman of the Council of Economic Advisers, sent me a polite e-mail saying now was not the best time "to engage in an on-the-record debate . . . on the validity of your economic theorems." He also sent excerpts from a speech on Social Security reform that may help explain why he is outgoing, because he declared, "There are no free lunches here." For this bromide he (laughably) was dissed by Republican apparatchiks, though his point -- partisan enough, you would have thought -- was: Don't let Democrats make unfair comparisons between our reform and current arrangements that are unsustainable.

Many responders made a related point, "Compared to what?"

Whatever its flaws, is privatization inferior to the current system, with its looming inability to keep its promises? One problem with this question is that privatization itself doesn't address this looming gap. Privatization plans call for borrowing a "transitional" gazillion dollars to close the gap. With a transition like that, any plan will work, including no plan at all.

Berkeley economist Brad DeLong and blogger Mickey Kaus, among others, challenged my argument that nothing about privatization promises to increase private investment. They cited the well-known research by economist Martin Feldstein showing that Social Security reduces personal savings. Big surprise: If you know you've got a bit of a nest egg coming from the government, you may not be as avid a saver. It follows that less Social Security should increase personal savings.

But privatization is not supposed to produce a net loss in anyone's retirement nest egg. In fact, if it worked as promised, it would enlarge the nest egg. By the Feldstein thesis, that would reduce private saving. So, once again: Privatization relies on a theory that is wrong if it's right, and right only if it's wrong.

Stephen Moore, known as "the Club for Growth" (actually, that's the name of his organization, but it fits him pretty well) is an omnipresent Washington operative and talking head, and probably the leading non-administration voice in favor of privatization. His e-mail, direct from Bush's economic conference last week, made only two fresh points.

One was that the Social Security money that people keep and invest for themselves amounts to "a big supply side tax cut." If Moore envisions reducing what people owe the government in taxes without reducing what the government owes people in benefits, if he therefore plans to solve the problem of a huge deficit by making it bigger and if he fantasizes that cutting Social Security taxes will increase Social Security revenue, we are indeed back in the dream world of supply side tax cuts, with predictable results. But if he contemplates reducing Social Security payments proportionally to the reduction in taxes -- and counting on people to make up the difference with their new investments -- people will be, and will feel, no richer than they were before and there will be no supply-side incentives.

Moore also argues, as did others who wrote in, that a smaller Social Security trust fund to borrow from will lead the government to cut spending rather than borrow the money elsewhere. Maybe. But justifying some government policy on the grounds that it will indirectly create pressure in some way to cut government spending has become a tired old game.

Republicans control the entire federal government. If they want to cut government spending, they should do it. They don't need to trash Social Security along the way.

The writer is editorial and opinion editor of the Los Angeles Times.


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