Sunday, August 08, 2004

Campaign issues - 1 -- Social security debate still to come

The Christian Science Monitor echoes one of the most powerful statements from the Democratic National Convention, made by the head of the Black Caucus, Elijah Cummings: security isn't just protecting us from terrorists. As Cummings noted, more Americans feel directly threatened by what would happen if one of their family had a medical emergency than by the risk that they or their friends and loved ones will be victims of a terrorist attack. An editorial in the CSM highlights another big security issue for Americans, financing their retirement, on which the Presidential candidates have been mostly silent about specifics.

President Bush has generally given lip service to the notion of privatizing all or a portion of Social Security, but no action has been forthcoming in his first term, and it is unclear what he would do in a second. "His 2001 Commission to Strengthen Social Security set out three reform plans, but the White House has yet to spell out its detailed choices."

John Kerry has promised not to privatize Social Security, not to reduce benefits, and not to raise the retirement age. The urgency of "fixing" Social Security has been somewhat reduced with the recent assessment by the CBO that the current pay=as-you-go system should be able to continue paying 100% of promised benefits through 2052, and thereafter at a rate of 80%. But to make up that future gap, is Kerry counting on higher rates of economic growth? Or a tax increase? As the CSM notes:

The International Monetary Fund estimates that paying for future obligations would require a 13-percentage-point increase in payroll taxes.

Higher taxes are not just an issue for Kerry's approach. For Bush, the process of switching from a pay-as-you-go to a fully-funded privatized scheme is estimated to cost upwards of $1 trillion, which will have to be financed somehow.

Once the political debate becomes joined over the future of Social Security, opposition to privatization is unlikely to focus solely on the matter of government financing and taxes. As employees continue to have a greater and greater portion of financial risk for their retirement shifted to them from employers -- due to the rapid decline in defined pension plans -- a growing number of Americans are likely to see Social Security as an important safety net for themselves and others, unaffected by the vagaries of business cycles and volatility of capital markets.

The Bush proposal for individual retirement accounts has great uncertainties. Can most Americans be asked to wisely save and invest for their retirement and accept the risks? Even many of those eligible for 401(k)s haven't signed up or, if they have, make poor choices on investments or don't contribute enough. The average balance in 2001 in 401(k)s of households age 55 to 64 was about $55,000 - hardly a comfortable provision for, say, 20 retirement years.

In Sweden, a partial privatization of its system in 2001 has had trouble. One reason is that it was badly designed and run. But also, participants were too passive in choosing funds, with many of them having lost money.

The CSM editorial leaves out another major cost of the individual retirement account approach that is frequently overlooked -- the cost of regulating the financial services available for IRAs. If the British experience with rampant, scandalous "misselling" of annuity products by the entire consumer insurance industry is any indication of the potential costs of giving choice to consumers, a limits on eligible investments and a robust regulatory scheme will be prerequisites.

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