The Coming Fight Over Privatizing Social Security

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Social Security isn't a subject you normally picture protesters going to the streets over. But this week, rallies and other public events are planned in 43 states on it. Congressmen and senators will be climbing onto podiums and shouting at the top of their lungs about it.

What's got everybody stirred up? A commission George W. Bush formed to retool Social Security has issued a preliminary report warning that the system is badly "broken" and headed for a train wreck in the future unless part of it is privatized. The panel's members, whom W hand-picked because they all like the idea of privatization in the first place, will be reviewing the draft report this week. Anything this commission does becomes politically explosive because politicians not only can't agree on how to fix Social Security, they're still arguing over what ails it in the first place.

The commission's co-chairmen, former New York Democratic Sen. Daniel Patrick Moynihan and AOL-Time Warner executive Richard Parsons, painted a dire picture in their draft report. Unless repaired, Social Security will need tax increases or "massive" deficit spending by Congress to keep it afloat, their report warns. By 2020, Social Security's shortfall will equal the combined budgets of Head Start, the Women, Infants and Children nutrition program, the Environmental Protection Agency, plus the Education and Commerce departments. Baby boomers will be shortchanged. Women, minorities and the poor will suffer.

Pretty scary stuff. Privatization opponents complain it's scarier than what will actually happen. The report, they charge, is riddled with errors to frighten people into Bush's privatization plan. "It recycles old alarmist arguments that portray the financial shape of Social Security in the worst possible light," says William D. Novelli, executive director of the AARP. Social Security will need fixing, but it is far from being on the brink of financial collapse, argue critics of the commission. The panel's report tries "to convince younger Americans" that Social Security is "falling apart and that a radical solution is needed to fix it," says Congressman Robert Matsui, the senior Democrat on the House Ways and Means Committee's Social Security subcommittee. "Unfortunately, this commission's foregone solution of individual [retirement]accounts is the worst possible reform for Social Security."

Indeed, the cure is more hotly debated than what ails the system. Bush and his top aides argue that allowing Americans to put a part of their Social Security nest egg into personal retirement accounts makes good sense for the retirees and the system as a whole. The return on Social Security is pitifully low, they complain, an argument appealing to younger voters who are just starting to pay into the system. They have more experience than their elders in playing the stock market where there can be higher returns. "It's wrong to mislead people with promises of 'trust the government, you'll be fine,'" says Treasury Secretary Paul O'Neill. "People can do better if they own their own retirement nest egg."

Even some moderate Democrats agree. Sen. John Breaux, who chairs the Senate Special Committee on Aging and has served on past commissions studying privatization, believes that Americans ought to have the option of investing some of their Social Security payroll tax in the market--just as congressmen and senators now do. "The current beneficiaries, I think, have been unfortunately scared into believing that if the government doesn't do it all, like we have been doing since 1935, then it won't be safe," Breaux told me in a recent interview. "I think that's not correct. The stock market has never had a 20-year period of negative return. Since most people work much longer than 20 years, they ought to have some flexibility. You just can't go invest it in a Las Vegas blackjack table. But you ought to have some options so you can at least put some of your current payroll tax into it so it would be able to create wealth for your retirement."

This may not be a great time to be touting the virtues of the stock market. Employees who depend on 401K's for much of their retirement have seen that nest eggs dramatically shrink this year because of the current bear market. Privatization critics also dispute the conventional wisdom that Social Security provides a low rate of return. It's not just a retirement program, they contend, but an insurance and disability program as well, and when you factor in all those potential long-term benefits, Social Security is a package few Wall Street houses could match.

Privatization also favors the better off who have the resources and knowledge to dabble in the stock market, say its critics. Low-income workers would be out of their element. It could also put a heavy administrative burden on both the Social Security system and small businesses not experienced in running 401K's. The Social Security system is a fairly straightforward operation for both the government and businesses. Taxes are deducted from paychecks and sent to the federal government at regular intervals. Checks are mailed out to retirees. That's about it. But managing a 401K plan can be a complicated exercise, more so if it's for the entire country. The Social Security Administration would have to hire 40,000 extra people, claims Hans Riemer, director of the 2030 Center, which opposes privatization. "It would take 10,000 more people just to answer the phones." Small businesses, which before just had to make deductions and send checks to the government, would now be snarled administering individual retirement plans, with employees constantly changing their portfolios.

So there's no easy answer in the debate over privatization. The best advice for voters at this point is probably what a stock broker would give: read the prospectus carefully before you buy either side.