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May 07, 2005

What's at Stake in the Social Security Debate

David Wessel writes:

WSJ.com - Capital: More significantly, the president's prime-time comments highlighted the contrast between his vision for Social Security and his critics', sharpening the choice that politicians and the public now face. The president argues that Social Security should be a safety net to keep the elderly out of poverty, not a broad social-insurance plan that pays retirement benefits to the poor, the middle class and the rich. He says it should be a way for Americans to save and build wealth, not a way for them to share the risk of death, disease or destitution.... 'Why should people not be allowed to own and manage their own assets who aren't the...investor class?' Mr. Bush said. 'I think everybody ought to be given that right.' In Mississippi this week, he said, 'I want it so that people can say: 'I own something.''...

Contrast that with Franklin D. Roosevelt's words in 1934: 'These three great objectives -- the security of the home, the security of livelihood and the security of social insurance... constitute a right which belongs to every individual and every family willing to work.'... Adding Bush-style private accounts would further reduce traditional benefits: Private accounts would grow or shrink with stocks and bonds, but traditional benefits would be reduced to reflect the payroll taxes a worker diverts from the government program. This two-fisted squeeze on traditional benefits means some high-wage workers would still pay into the government Social Security program, but would see a very small benefit check, perhaps none, when they retire in midcentury.... [T]his is a very big change in the essence of Social Security.... The erosion of FDR-style social insurance -- not just Social Security, but Medicare and unemployment insurance, too -- would be applauded by some. 'Unemployment-insurance programs raise unemployment,' Harvard University economics professor Martin Feldstein declared recently. 'Retirement pensions induce earlier retirement and depress saving. And health-insurance programs increase medical costs.'... Others fiercely argue that individual accounts have merit but not as a substitute for social insurance. 'It's extrapolating the germ of a good idea to wildly inappropriate settings,' says Peter Orszag, a Brookings Institution economist.... The Social Security debate is often bogged down in dueling myths and incomprehensible arithmetic... this actually is a debate about the fundamental nature of America's most popular government program.

I do wish David had pointed out that "own and manage their own assets" is *not* in Bush's plan. Bush's plan--what we know of it--allows you to place your private account in one or more of three and only of three places: a money-market index fund, a bond index fund, and a stock index fund. (If they're smart they'll limit beneficiaries' ability to churn among these three as well.) I suspect that Bush doesn't fully understand how tightly constrained and regulated his individual accounts are--if he did, he wouldn't be talking about people managing the assets in their private accounts.

Posted by DeLong at May 7, 2005 04:42 PM