You've got to give President Bush an A-plus for the way he marketed the Social Security proposals in his State of the Union address last week.
"If you've got children in their twenties, as some of us do, the idea of Social Security collapsing before they retire does not seem like a small matter," he said -- a sentiment with which even a skeptic like me, who has twenty- and thirty-something kids, totally agrees.
You can't argue with Bush's stated goals of making Social Security financially sound to allow Americans a secure retirement. But the centerpiece of his proposals -- allowing workers the option to divert up to 4 percent of payroll taxes into private accounts -- doesn't do anything to fix Social Security's financial woes. Instead, it's a fiendishly clever device that serves the political goal of remaking the nation's most popular social program so that it's "a better deal" for younger workers. There was a twinkle in Bush's eye when he said that, a clever allusion to the New Deal of Franklin Delano Roosevelt, father of Social Security. You could almost hear the Democrats gnashing their teeth.
In their current incarnation, you'd almost certainly want to sign up for these accounts if you were younger than 55. Yes, you'd have to accept a smaller guaranteed benefit. But you'd come out ahead if your account produced an annual return -- cash income and price gains -- of more than 3 percent above inflation. That's not a slam-dunk, but it ought to be attainable because you would have a choice among a handful of high-grade, very-low-cost, very diversified mutual funds. But there's a catch. You would own the account, sort of, but you wouldn't control it. And you'd have to fork over the aforementioned 3 percent return -- by taking a smaller benefit -- when you cash in your account.
Bush, brilliantly, is marketing these accounts as empowering people who'd have no other assets. But I don't think things would work out well for these folks. There would be strict limitations on the accounts -- you couldn't take money out of them before you retire or even borrow against them. And the odds of low-income people being able to leave a significant account to their heirs -- one of Bush's major selling points -- strike me as remote.
Here's why. When it's retirement time, low-income people would probably have to convert most or all of their private accounts into annuities to have enough money to live on or to meet requirements that their guaranteed benefits plus annuity income would exceed certain levels. If you had to convert your entire account into an annuity, there would be nothing left for your heirs when you died. Higher-paid people, by definition, would have bigger private Social Security accounts and less need for annuity income than lower-income people would. This gives them a far greater chance of having something left to hand down to their heirs and gives lower-paid people less chance. Not to be snotty, but we higher-income types hardly need additional breaks. We've already got plenty.
Staying power matters big-time, too -- and higher-income people have more of it than lower-income people do. Although stocks tend to rise over the long term, you'd have to cash in some or all of your retirement account to buy an annuity when you retire. That puts you at the mercy of events. Consider the following, produced at my request by the Center on Budget and Policy Priorities. Say you retired in March 2000, with a private account that held $100,000 of stock in a Standard & Poor's 500-stock index fund. (Index funds match the performance of a benchmark; they don't try to beat the market.) Your inflation-adjusted annuity would have been $7,558 a year -- about $630 a month -- by the center's calculation. But if you had had the same number of shares in your account and instead retired in October 2002, your account would have had less than $60,000 in it. Your annuity: $3,352 a year, or $279 a month. The combination of lower values and lower interest rates is a double whammy. You see the problem? You can get much less -- or much more -- than someone who has saved at the same rate as you but retired a little earlier or later.
If you've got financial staying power, you could wait for better days or buy the smallest annuity the government will permit. If you don't have staying power, you have to take what the market gives you. Higher-paid people thus have a big advantage. The guaranteed Social Security benefit, by contrast, is tilted toward lower-income people, with a benefit of about 56 percent of Social Security-covered wages for a minimum-wage earner, 30 percent for folks like me who have reached the Social Security maximum every year. You're swapping benefits skewed toward lower-income people for investment opportunities skewed toward higher-income people.
I'm in favor of private accounts constructed along the lines that Bush suggested. But the accounts ought to be in addition to the basic benefit, not a replacement for about half of it. Democrats are crazy to oppose private accounts. They really do empower you. The current generation is used to investing and is understandably skeptical about government promises. This isn't the 1930s, when only a handful of people bought stocks and many of them came to regret it. It's the aughts, guys, get with it. FDR's been dead for 60 years. The world has changed.
If the president really wants to fix Social Security rather than pick a political fight -- and the Democrats feel the same -- it wouldn't be difficult. They'd compromise by putting more money into the system by raising wage taxes a tad, taking less out by increasing the retirement age and trimming benefit formulas and setting up private accounts funded by wage earners, not by government borrowings. Put a few willing negotiators in a room and a deal's done in a month. I won't hold my breath, though.
Bush has marketed the pants off the Democrats by setting the terms of debate. Do you want to pay higher taxes or lower taxes? Clearly, lower. Do you want to pay estate tax or not? Do you want private accounts, or don't you? He has done a fabulous job of showing the goodies -- and of hiding the costs. People, naturally, have opted for the goodies. The Bushies are in full sales mode, including sticking recordings on Social Security's phone lines preaching that the system has to change. In the name of empowering my kids, he's asking them to pay full freight for my retirement and for trillions in new borrowings, while forking over the same wage taxes for lower benefits. If he can sell this one, the Marketing Hall of Fame should start planning his induction ceremony.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.