Bush plan to fix Social Security against the grain of conservatism

February 20, 2005|By Jay Hancock

PRESIDENT BUSH sincerely sees his push to change Social Security as compassionate conservatism.

But conservatives ought to be troubled by the plan, which would let younger workers invest some Social Security assets via payroll taxes in corporate stocks and bonds, presumably through mutual funds. The proposal and its underlying assumptions breach rules that conservatives ought to hold dear.

Among them:

Keep business and politics separate. The world spent the 20th century learning the bad things that happen when the state owns the means of production. Conservatives dislike the idea of even glancing government contact with business.

Yet here we are, talking about injecting billions of federal dollars into corporate ownership. Yes, the stocks would be assigned to personal accounts. But Washington would be the looming, gray middleman any way you slice it, with great opportunities for mischief.

Stick with what works - pretty much the Webster's definition of conservatism. By any measure Social Security is a screaming success. It all but banished poverty among the elderly. To mess with the tradition of 70 years risks squandering the bequest of previous generations.

Control risk. Diversifying bets is the foundation of modern portfolio theory, but America is moving toward putting all its retirement-system eggs in one kind of basket: 401(k) plans, IRAs and other vehicles that let workers control assets.

Traditional corporate pensions and their trustee-managed assets are headed for extinction. Should we undercut the last plan that could furnish small, guaranteed pensions when all else fails?

Think of Social Security as a stodgy, predictable certificate of deposit that ought to have a small place in the larger, increasingly risky American retirement portfolio.

Be fiscally responsible. "Transition costs" to set up personal Social Security accounts could reach $1 trillion or more over the next decade. Plus, if beneficiaries make bad choices, political pressure to bail them out will be irresistible, adding to the cost.

On the other hand, fixing Social Security as now designed would be relatively simple. Raise the retirement age a few years, trim benefits a little and raise the salary levels subject to tax. You're done.

Limit the size of government. Social Security has 64,000 employees, and they have to deal with only one kind of investment: Treasury securities. Adding mutual funds, annuities or who knows what to the menu would probably require hives of new drones and mountains of red tape. Imagine a smaller version of what government-controlled, Hillarycare medicine might have looked like in the 1990s.

At the same time, graft and grandstanding would blossom. Government employees or legislators would decide which mutual funds and other investments are "suitable" for billions in Social Security placements. Should money go to T. Rowe Price or Vanguard? Into French companies? Tobacco companies? The brain boggles.

Don't press your luck. The president says he wants an ownership society, but he already has one. U.S. homeownership has reached record highs in recent years, and so has U.S. stock ownership. Americans are exposed as never before to benefits and hazards of holding title to assets.

In trying to squeeze Rooseveltian artifacts from the economy Bush is using up sweat and political capital that might be better spent elsewhere.

Avoid populist pandering. Reform backers say it's insulting to suggest that some Americans will blow it if they control Social Security funds. Yet not only do we know intuitively that they will (the 1990s stock bubble was not a hallmark of rational investment); it also is a mathematical certainty.

The appeal of putting Social Security money into stocks and bonds is the higher return they would generate. But higher return requires higher risk. And higher risk generates losers as well as winners.

Reform proponents implicitly acknowledge the danger of beneficiary incompetence by promising to ban investments in pork bellies, currency futures and other wild stuff. But with such restrictions, what's the point of the exercise? You're back to running a nanny state, but you just made it a lot more expensive.

A true conservative might leave Social Security pretty much the way it is.

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