Math doesn’t work on privatizing Social Security

Over the years, most if not all of the current Republican presidential field have advocated reforming Social Security by guaranteeing the benefits of those in or approaching retirement while giving younger Americans the option of putting at least some of their contributions in personal or private accounts.

Rick Perry, for example, has called Social Security “a monstrous lie” for young people, although he has backed off that recently. Michele Bachmann last year also talked of wanting to wean younger Americans off the program, although she too has softened that rhetoric. In the 2008 primaries, Mitt Romney repeatedly endorsed the privatization approach suggested by President Bush, repeating that support in his 2010 book. (Yes, he too has now changed his tune to a degree.) And Herman Cain has consistently advocated using the example of Chile as a model for how to privatize the program here in the United States.

Like President Bush in 2005, however, none of the candidates addresses the enormous financial challenges of such a transition. It’s just an idea that they throw out there, with no evidence of serious thought.

Here’s the problem: To finance benefits at promised levels for those 55 or older, we would need to continue to collect payroll taxes from today’s working-age population. However, we would also propose to divert a significant share of those payroll tax into personal accounts. In effect, we would be trying to spend the same dollar twice, and we would do it trillions of times.

When Chile made that transition in 1981, it was being ruled by the brutally repressive Pinochet military dictatorship, which took the need for political compromise right out of the picture. The country also enjoyed a budget surplus at the time of more than 5 percent of its GDP, which is not exactly the financial situation we enjoy today.

Chile’s plan requires that workers deposit 13.3 percent of their monthly pay into private accounts, including 3.3 percent to cover mandatory purchase of private disability and life insurance. That’s right: I doubt he realizes it, because I doubt he’s actually looked at it seriously, but the Chilean plan cited by Cain as his model includes — gulp — a government mandate for the purchase of insurance.

To offset that additional cost to workers, private employers in Chile were ordered by the military junta to increase wages across the board by 18 percent. The Chilean government also went deeply into debt to finance the transition to the new system while trying to honor commitments under the previous system.

In a study exploring the possibility of copying the Chilean example here in the United States, the Congressional Research Service outlined some of the major obstacles:

Absent other measures, keeping Social Security’ s commitments would require the government to raise taxes, cut spending on other programs, or borrow more from private financial markets. Put another way, a generation or two would have to pay twice, bearing both the cost of pre-funding the new system and the costs of benefits under the old system.

The United States already is faced with chronic budget deficit problems, leaving little or no room for the massive tax hikes or public borrowing that would be necessary (the Social Security Administration estimates if all workers currently under age 40 were to stop paying into Social Security, the system would need an infusion of $6.9 trillion in order to pay promised benefits to those remaining in the system).

That was written in 1998, at a time when — to put it mildly — our nation’s finances were in considerably better shape than they are today. That $6.9 trillion figure would also be considerably higher today, considering inflation and the fact that the Baby Boomers are now 13 years closer to retirement than they were in 1998.

All in all, a reasonable ballpark estimate of $10 trillion in additional resources would probably be needed to finance such a transition. So until you identify a source for that kind of money, talk of personal or private accounts is mere wishful thinking.

– Jay Bookman