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"Private Ownership, Collective Default"--A Commentary by Jerry Mashaw and Ted Marmor

(This essay originally appeared in the January 10, 2005, edition of New York Newsday.)

Private Ownership, Collective Default;
The Bush proposals for Social Security are about dismantling the current system -- and not saving it

By Jerry Mashaw, Sterling Professor of Law, and Ted Marmor, Professor of Public Policy and Management, School of Management and Professor (Adjunct) of Law

President George W. Bush has promised to make Social Security secure for future generations, but claims not to have decided on the details for doing so. Perhaps not, but the trial balloons are getting pretty thick over the Rose Garden.

The emerging plan has three crucial elements. First, permit diversion of part of workers' FICA taxes into private accounts. Second, change the Social Security benefit formula from a wage-indexed to a price-indexed system. Third, exclude all proposals for increasing Social Security trust fund revenues if they involve any increases, however small, in anyone's taxes.

The first element, private accounts, does nothing to make Social Security financing secure. As a number of astute commentators have correctly argued, this part of the plan makes the short-term financing problem much worse. It can make the long-term picture better only by indulging in pie-in-the-sky economic assumptions. This balloon is suspended by nothing but hot air. Unfortunately, too many press reports simply repeat the illusions in the name of journalistic "balance."

The benefit formula change does make a difference. Indeed, it can bring the system back into close actuarial balance while preserving the purchasing power of today's benefits. Sound great? It's not. Indeed, this plan to secure Social Security is the exact equivalent of doing nothing at all.

To see this, just remember a basic principle from high school algebra: Things equal to the same thing are equal to each other. If no changes are made in taxes or benefits, Social Security's actuaries project that, after 2042, Social Security will be able to pay only about 72 percent of promised benefits. Changing the promise by changing the benefit formula speciously solves this problem. But do the math. It can only do so by making post-2042 benefits equal to the payment of 72 percent of currently promised benefits. This proposal, purged of its wage-index versus price-index technical jargon, is simply a 28-percent benefit reduction - the same thing the actuaries say would happen if we did nothing at all.

Is this a fair and sensible way to fix Social Security financing? Clearly not. The current formula is meant to keep the standard of living of pensioners in a stable relationship to that of wage earners, with price-indexing pensioners steadily dropping behind. By 2050 wage earners are predicted to have a 40-percent higher standard of living than today's workers. Social Security pensioners would be stuck at the living standard of 2005.

Creating large and increasing differentials between the standard of living of wage earners and retirees is not a trivial matter. Every 1 percent decrease in Social Security benefits increases the elderly poverty rate by roughly 1 percent. Loading the whole burden of fixing Social Security financing onto the backs of future beneficiaries would have disastrous social consequences.

There are many sensible ways to make Social Security secure without putting disproportionate or unfair burdens on anyone. Why has President Bush chosen to avoid all of the plans that make modest adjustments in benefits and taxes in favor of a radical dismantling of Social Security? Why rule all tax increases off the table?

The president gave his answer at his December "economic summit." "I love the idea of people being able to own something," he said. Privatizing Social Security is a key element of his "ownership society." Social Security, Bush reasons, has to be quietly dismantled because it is not about ownership. It is about social solidarity. It is built on the understanding that we run common risks that can be ameliorated only by collective action. And by making everyone a contributor as well as a recipient it affirms that we recognize our common fate and our obligations of both self and mutual support.

The president's vision of an ownership society is starkly different. He sees citizens as "owners" with the usual ownership right to exclude all others from sharing in their "property." If we end up poor in old age it is because we failed to manage our property successfully. We can then throw ourselves on the mercy of private charity or residual, means-tested welfare benefits.

This is an "us"/"them" vision of society. Every ship is to float on its own bottom. In this view, increasing taxes to finance Social Security benefits is not an option. In the ownership society taxes truly are theft. The current debate about Social Security reform will often be mind-numbing in its complexity. Benefit formulas, battling indices, earnings forecasts and debt projections will fly thick and fast. But make no mistake. While the devil is often in the details, the real debate is about values, about what kind of nation we think we are - one that recognizes obligations of mutual support and collective responsibility, or one dedicated entirely to the individual pursuit of private wealth.

Ted Marmor and Jerry Mashaw, co-authors of America's Misunderstood Welfare State, teach at the law and management schools of Yale University.