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Bush’s Social Insecurity

Dan Tortorice

On Wednesday, May 2, President Bush formed a White House panel to reform Social Security. According to Bush, a key component of any reform must “offer personal savings accounts to younger workers who want them.” But this is surely a mistake, for personal retirement accounts create a host of problems for the Social Security system, and provide no benefits which can not be attained with less drastic reforms.

Social Security can only provide a meager return on its contributions, since it is funded entirely by those currently working. If Social Security tax rates are left unchanged, then contributions to the Social Security system grow only as fast as total wages grow. But total wages only grew by 2.5 percent over the last 30 years; compare this to a growth rate of 9 percent on corporate investment, and one immediately sees missed opportunity for increased returns in the Social Security system.

Bush sees this problem, and rightly understands that providing people with individual retirement accounts would enable them to take advantage of these higher returns. However, individual retirement accounts are not the best way to allow individuals to reap the benefits of higher returns; a government Social Security fund which invests in corporations is.

The main opposition to a government Social Security fund which invests in stocks is that the government would unduly influence corporations if given this opportunity. But this argument ignores the reality that the federal government already heavily invests in corporations, managing a retirement plan for all federal workers. There are checks in this system ensuring that the government does not abuse its power -- for example, limits on the percentage of a company the government can own. These checks could easily be carried over to a Social Security fund system to insure the system does not unduly influence corporations.

Unlike a system where the government invests funds in the stock market, Bush’s plan for individual retirement accounts goes against the very nature of Social Security. Social Security is to be just that: secure social insurance. You are to pay in, and then be guaranteed income when you retire. An individual with a personal retirement account has no such guarantee. The few stocks he holds, most likely representing a small sector of the economy, may lose value, resulting in no income when it comes time to retire. The government, on the other hand, can take this individual’s contributions, pool it with the contributions of many others, and invest it in a well-diversified portfolio of stocks representative of the whole economy of the United States. Barring the total collapse of the economy, the government will have money to pay out when it comes time for that individual to retire.

Bush claims his commission will place Social Security on “sound financial footing,” but individual retirement accounts will do just the opposite. Government forecasters have projected that the Social Security fund will eventually begin to pay out more than it will receive in contributions, eventually going bust around 2037. The way to fix this is either to increase the return the government gets on its current Social Security surplus, or to increase contributions to the fund. Bush, by creating individual retirement accounts, will actually decrease the amount of money placed in the fund, hastening its bankruptcy.

While individual retirement accounts are intuitively appealing because they allow individuals to have control over their own money, we must ask who is going to be able to take advantage of these possibilities. The poorest members of our society, who will depend on Social Security as their main source of retirement income, most likely do not have the time or the financial know-how to manage their own retirement portfolio. Most likely, the better-off members of our society will benefit from the individual retirement accounts option. By including personal retirement accounts as a key component of reform, Bush has tacitly shifted the priorities of Social Security from the poor to the middle class. He has transformed the Social Security safety net from a way for the middle class and wealthy to meet their moral obligations to help the poor of our society, to an insecure system where the middle class and wealthy abandon the poor for their own personal gain.