McCain and ‘Privatizing’ Social Security
Quite a few commenters are accusing John McCain of flip-flopping because he favored privatization of Social security in 2004 and now adamantly rejects the insinuation that he supports it now:
This is a clumsy rhetorical game rather than a policy shift. Then and now, McCain’s position is that Social Security would remain as a government program but that younger workers should be allowed the option of placing part of the money they would have been required to remit to FICA into a private retirement account in return for reduced future government benefits. Sometime during the 2004 campaign, though, Republican learned in focus groups that “privatization” was an unpopular label for this policy and started talking instead about “reforming” or “strengthening” Social Security instead.
Hilzoy makes a more interesting, related argument, which she illustrates with a clever cartoon:
McCain talks as though letting younger workers put some of their FICA taxes into private accounts would help fix the Social Security shortfall. This is not true. Private accounts would make the Social Security shortfall much worse.
Recall the way Social Security works. I pay Social Security taxes. My taxes are used to pay the benefits of today’s retirees. When I retire, my benefits will be paid by the taxes of the generation behind me, and so on. Suppose that we start allowing people to put some of their FICA tax dollars into personal accounts. That means that I will be paying not for the generation of workers who are now retired, but for me.
As it turns out, she and McCain are both right; they’re just talking about different things. McCain’s point is that we’re trapped in an unsustainable cycle. As the number of retirees increases while the number of workers decreases, this generational transfer won’t work. Getting young people off the merry-go-round, at least partly, helps solve the problem long term.
But, yes, the short-term impact is that there are fewer dollars going into the kitty to pay for the retirees who were fed the lie all along that they were actually paying into a “trust fund” for their “own retirement.” Considering that we all agree — and McCain emphasizes — that we’re morally obligated to pay current and future retires whose potential savings we siphoned off into a Ponzi scheme, Hilzoy concludes:
That means one of three things. Either it will come from the Social Security Trust Fund, in which case it will make the Trust Fund’s solvency problems worse; or else it will come from Our Tax Dollars, which doesn’t sound very pleasant, or else it will come from the Fiscal Fairy, who makes our numbers add up by magic.
That last option is the most favored by Democrats and Republicans alike, especially during campaign season. In reality, of course, Option 1 and Option 3 are identical given that neither fairies nor the Social Security Trust Fund actually exist. Social Security payments will therefore continue to come from our tax dollars, unpleasant though it may be.
Regardless, substantial privatization of Social Security in the near future is a dead letter. The Baby Boomers are incredibly powerful politically, the Democrats will control the Congress regardless of who wins the presidency, and confidence in the stock market is lower now than it was four years ago. The debate is, therefore, almost entirely academic.
As I wrote nearly four years ago, our alternatives are rather bleak:
- The status quo. This is unsustainable without a massive influx of young people into the system willing to shell out an increasing share of their income to comparatively wealthy elderly folks retiring at what is now a relatively young age.
- A sustantial increase in the retirement age. When FDR established this program in 1932, 65 was very old. Indeed, it was past the expected lifespan. Now, people who reach 65 can expect to live another 15-20 years. We’ve already gradually increased this for the out years. But raising it to, say, 75 will be incredibly difficulty politically and doesn’t take into account the fact that even 65 is relatively old for those in more labor intensive occupations.
The “massive influx of young people” caveat is actually more plausible than I thought at the time, if we’re willing to have this happen through immigration. We’d need to do it on the books, though, so that we’re actually collecting FICA taxes. The “guest worker” option, wherein we collect FICA taxes but then send them from whence they came before they can collect benefits would be even better from a fiscal standpoint but has the drawback of being horribly immoral.