`Meathead Proposition' shows Bush scheme can't work

February 13, 2005|By Michael Kinsley

HERE IS another proof that President Bush's designs for Social Security cannot work. I first heard it from the actor and liberal activist Rob Reiner. Like the argument I have been hawking, this one doesn't merely suggest that Mr. Bush is making bad policy. It demonstrates with near-mathematical certainty that the idea he endorses cannot work. Period.

The Meathead Proposition (in honor of Mr. Reiner's most famous role) is this: The case that there is a Social Security crisis and the proposal to address it through "personal retirement accounts" both depend on assumptions about the course of the economy over the next few decades. These assumptions are highly speculative, but that's OK. What's not OK is to assume one thing when you're claiming there is a problem, and something different when you're claiming that you've got the solution.

Actually, Mr. Bush last week abruptly gave up his claim that privatization will solve the problem of a looming shortfall in Social Security funds. The truth is that privatization schemes assume that the shortfall will be addressed - by borrowing trillions of dollars - as part of the "transition" to privatization. But Mr. Bush still claims that letting people keep and invest for themselves part of what they now pay into Social Security during their working years will leave them better off than if they get the benefits they are now entitled to.

How much better off depends on how much your government benefits will be reduced for every dollar you choose to keep and invest for yourself.

My previous argument, in a nutshell, was that even if these private investments do better than the government bonds in which the current Social Security surplus is invested, this won't change the total amount being invested in the private economy - or increase the economic growth that comes from private investment - because the government will have to borrow elsewhere to replace the dollars it isn't able to borrow from Social Security.

And that means that every time someone puts a Social Security dollar into a private account, someone else must be persuaded to take a dollar currently invested in the private economy and put it in government bonds.

To get the scheme enacted, Mr. Bush must persuade Americans of the exact opposite: that private-sector investment will make them better off than government bonds. Basically, privatization schemes assume that government bonds can be our little secret for the next few decades. And so we can just unload a few trillion in government bonds (this is on top of the trillions we unloaded during the "transition") on all those two or three Americans who aren't in Social Security.

Privatization schemes assume that this will have no effect on how much interest the government will have to pay or what kind of long-term return you can expect on investments in the private economy. For example, the right-wing Heritage Foundation assumes that private accounts can earn a long-term risk-free return of 4.7 percent after inflation.

But if free markets work the way they are supposed to, the effect of the government announcing that government bonds are a bad investment, and officially pushing people to put their money elsewhere, will be to make it more expensive for the government to borrow money. So even if private stocks and bonds are a better long-term investment than government bonds, they won't stay that way for long.

Meanwhile, the Social Security trustees assume that growth in the nation's gross domestic product will slow from 4.4 percent to 1.8 percent in 2015, and will stay there for the next six decades. They predict productivity growth of 1.6 percent and average unemployment of 5.5 percent. From this and other data, the trustees predict that the trust fund will earn 3 percent a year (5.8 percent interest minus 2.8 percent inflation). This is their "intermediate" assumption, from which Mr. Bush concludes that shortfall will hit the fan in 2042.

These assumptions about the unknowable are not unreasonable. Nor are the assumptions of the Heritage Foundation. What is unreasonable is using both sets of assumptions at the same time. Can a conservative investment in stocks and bonds grow by 4.7 percent a year, for decades, while productivity is growing by 1.6 percent and the economy is growing by 1.8 percent?

If you start by assuming that one investment pays better than another, it's not very surprising if this is also your conclusion. A dollar a year invested for 37 years (now until 2042) at 3 percent interest produces $66 dollars. At 4.7 percent, it's $95. If the Heritage Foundation is right, there is no crisis to fix. And if the Social Security trustees are right, the Heritage fix won't work.

If Meathead can figure this out, why can't W?

Michael Kinsley is opinion page editor and editorial page editor of the Los Angeles Times, a Tribune Publishing newspaper. His column appears Sundays in The Sun.

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