Here’s a fearless prediction: President Bush’s vision of Social Security reform with private investment accounts will be enacted into law in his second term. It’s in the bag.
What makes me so sure? Two reasons. First, I can see how much the liberal establishment fears it. Second, their arguments against it are utterly impotent.
Here’s a case in point. On Tuesday, bellwether “angry liberal” pundit Paul Krugman dragged himself back from an urgently needed post-election mental health break to rail against Social Security reform in the op-ed pages of the New York Times. Krugman must see this as a battleground issue. But if his latest missive is the best he can do, then he’s not likely to be any more successful at using his column to turn back the tide of reform than using it to nominate Howard Dean — or, when that failed, using it to elect John Kerry.
The core argument of Krugman’s Tuesday column is that Social Security is not in the crisis that the proponents of reform through private accounts say it is. At most, Krugman argues, the system has small, distant, and easily cured funding problems:
Projections in a recent report by the Congressional Budget Office (which are probably more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. … But it’s a problem of modest size. The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P.
Only a liberal could argue that raising taxes by more than half a percent of GDP for 100 years is “modest.” But even at that, Krugman strongly misrepresents what is actually a dire message in the Congressional Budget Office report. Yes, the report found that the system’s shortfall between the present value of its revenues and the present value of its expenditures projected out 100 years is indeed 0.54 percent of GDP. But the report states — and Krugman ignores — the fact that this very calculation means, even with new revenues of 0.54 percent of GDP injected into the system, that the system will end up exhausted: “at the end of the 100 years, the balance would be large enough to authorize paying one year’s worth of benefits.” After that, the report projects there will be a mismatch between revenues and expenditures of more than 2 percent of GDP.
Even that is all based on the idea that the assets in the Social Security trust fund — Treasury bonds being accumulated during the current years while system revenues exceed system expenditures — will be there to pay retirement benefits in the future. Of course, those Treasury bonds represent nothing but IOUs, in essence promises by the government to pay itself. The same CBO report that Krugman cites points out, correctly, that “Those trust funds are mainly accounting mechanisms and contain no economic resources.”
As I was told by David John, Research Fellow at the Heritage Foundation, Krugman’s belief in non-existent Social Security trust fund assets is typical of the unrealistic way academic economists approach real-world problems. “It’s like the old joke: How does the economist escape from a desert island? First, assume a rowboat.” It’s worse than that, though: “Here, Krugman is assuming a luxury yacht.”
Not a very rosy picture, is it? Yet Krugman chooses to cite the CBO report because at least it paints a rosier picture than the Annual Report of the Trustees of the Social Security trust fund. The trustees say the trust fund will run out in 2044 — eight years sooner than the CBO estimates. New Krugman Truth Squad member Victor Davis, writing on the Dead Parrot Society blog, notes that according to the CBO, the difference between the two reports is mostly in their underlying economic assumptions — and CBO’s are far more optimistic. CBO uses higher estimates for real wage growth, and lower estimates for inflation and unemployment, than the trustees. How remarkable that Krugman — perhaps the world’s most relentlessly pessimistic economist, who has written for years about our “age of diminished expectations” and “depression economics,” and about how America is turning into a “banana republic” — now finds it “more realistic” to look beyond “cautious projections.”
This burst of economic optimism is all the more surprising considering that Krugman himself, in the past, has argued — in his typically shrill style — that the Social Security system is in crisis. For example, he wrote in the New York Times in 1996,
Where is the crisis? Just over the horizon, that’s where … In 2010 … the boomers will begin to retire. Every year thereafter, for the next quarter-century, several million 65-year-olds will leave the rolls of taxpayers and begin claiming their benefits. The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as almost to defy comprehension.
If there is no crisis — as Krugman claims now — then what motivates those who seek Social Security reform through private accounts? Krugman says,
They come to bury Social Security, not to save it. They aren’t sincerely concerned about the possibility that the system will someday fail; they’re disturbed by the system’s historic success. For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people’s lives better and more secure. And that’s why the right wants to destroy it.
But whom, exactly, are these destroyers that Krugman is talking about? As Krugman Truth Squad member Jon Henke points out on the Q and O blog, Krugman himself once wrote in his Times column that “There is a case for reforming Social Security; there is even a case for privatization.”
Social Security policy experts have even longer memories. Economist Eric Engen, resident scholar at the American Enterprise Institute, reminded me that President Clinton’s hand-picked Advisory Council on Social Security spent three years investigating reform options, and in 1997 recommended to Health and Human Services Secretary Donna E. Shalala two different plans involving private accounts — plans which received the endorsement of the majority of the council’s members.
The best Krugman can do is pretend there’s no crisis — and impugn the motives of anyone who disagrees with his deeply conventional liberal wisdom. Why? Because he has no defense against the best arguments for Social Security reform with private accounts.
The reality is that, crisis or not, the present system is inadequate and unfair. It denies Americans choice, control, and property rights in their own retirement savings. It offers a mediocre return on invested capital, lower than even the worst market investments. It sucks up the entire savings-and-investment capacity of tens of millions of lower-income Americans. And it is unfair to minority members whose life expectancies are lower, and thus can expect fewer payments over a lifetime.
Reform of Social Security with private accounts is an issue that shows compassionate conservatism at its best. I am convinced that the more the angry liberals like Krugman sputter and fume about it, the more inevitable it is.
– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your comments at don@trendmacro.com.