Sat, Feb 19, 2005 - Page 9 News List

Bush's pension reform plan will make old age less safe

Intelligent policy could improve and stabilize the US' Social Security system. But Bush's ideologically-driven plan exaggerates the problem

By Joseph Stiglitz


It is almost an optical illusion: looming on Japan's horizon, and on Europe's and on the United States', is a pensions crisis. The problem is real, though exaggerated. The illusion is in some of the plans being devised to deal with it.

The main question is whether privatizing pension systems, as President George W. Bush has proposed for Social Security in the US, would solve the problem or merely make matters worse. With many countries pondering whether to adopt variants of the Bush plan, the question requires careful examination.

By itself, privatization is clearly not the solution. The US' troubled private pension system -- now several hundred billion dollars in debt -- already appears headed for a government bailout. There was a time when privatization ? allowing individuals to set up individual savings accounts -- seemed better than Social Security, which invests in lower-yielding Treasury bills. Advocates of privatization argued that funds would do much better if invested in stocks, predicting a return of 9 percent.

But the stock market does not guarantee returns; it does not even guarantee that the stock values will keep up with inflation -- and there have been periods in which they have not. The US' Social Security system insulates individuals against the vagaries of the market and inflation, providing a form of insurance that the private market does not offer.

It does so with remarkable efficiency. The costs of managing the Social Security system are far smaller than those likely to be associated with privatized accounts. This is understandable: private investment firms spend an enormous amount on marketing and salaries.

It is possible that to reduce these transactions costs, Bush will propose restricting choice, which was the main argument for privatization in the first place. But these limited kinds of choices -- for example, a T-bill fund with 90 percent in T-bills and 10 percent in an indexed stock fund -- could easily be introduced into the public social security system.

Bush says that reform is urgently needed, because the system will be insolvent in about a quarter-century. But the problem depends on the US growth rate: if the growth rates of the late 1990s return, there is no problem. Even if there is a problem, it can easily be fixed; spending a fraction of the money that went into Bush's two tax cuts would have fixed Social Security for 75 years; slight benefit cuts, adjusting the age of retirement, or minor adjustments in the level of contributions could fix the system permanently.

Moreover, Bush's proposals won't fix social security -- unless they are accompanied by drastic benefit cuts. For how could they? He proposes diverting almost a third of the Social Security tax to private accounts. That means less money coming in. If benefits are not reduced, the gap between receipts and expenditures will increase. One doesn't need a Nobel Prize to figure that out.

So privatization would not protect retirees against the Social Security system's insolvency; it would merely add enormously to today's fiscal deficit, because partial privatization entails diverting money to private funds that would have been used to close the gap between government expenditures and revenue.

The anticipated increase in the fiscal deficit is striking: the central plan discussed by Bush's Council of Economic Advisers would -- according to the Council's own estimates -- increase the US fiscal deficit by US$2 trillion over the next decade. Advocates of privatization claim to believe in markets, but they are proposing budget gimmickry that would move those losses off the books, as if markets could be easily fooled.

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