Tuesday :: Jan 11, 2005

Krugman: Bush Social Security Plan Won't Save Money For 45 Years


by Steve

Paul Krugman points out today that Bushs privatization plan, if based on the option generally assumed to be his preferred choice, would actually cost the government trillions in debt before it saves any money.

The administration expects us to believe that drastic change is needed, and needed right away, because of the looming cost of paying for the baby boomers' retirement.

The administration expects us not to notice, however, that the supposed solution would do nothing to reduce that cost. Even with the most favorable assumptions, the benefits of privatization wouldn't kick in until most of the baby boomers were long gone. For the next 45 years, privatization would cost much more money than it saved.

Advocates of privatization almost always pretend that all we have to do is borrow a bit of money up front, and then the system will become self-sustaining. The Wehner memo talks of borrowing $1 trillion to $2 trillion "to cover transition costs." Similar numbers have been widely reported in the news media.

But that's just the borrowing over the next decade. Privatization would cost an additional $3 trillion in its second decade, $5 trillion in the decade after that and another $5 trillion in the decade after that. By the time privatization started to save money, if it ever did, the federal government would have run up around $15 trillion in extra debt.

Under Plan 2, payroll taxes would be diverted into private accounts while future benefits would be cut. In the short run, this would worsen the budget deficit. In the long run, if all went well, cutting benefit payments would reduce the deficit.

All wouldn't go well; I'll explain why in another column. But suppose that everything went according to plan. Even in that unlikely case, privatization wouldn't even begin to reduce the budget deficit until 2050. This is supposed to be the answer to an imminent crisis?

While we waited 45 years for something good to happen, there would be a real risk of a crisis - not in Social Security, but in the budget as a whole. And privatization would increase that risk.

No real savings for 45 years? Then aside from destroying FDRs legacy and the safety net under seniors and the disabled so that Wall Street can get corporate welfare, why do it?

If the Bush plan doesn't have any real savings for 45 years, cripples the country with massive debt in the interim, wipes out the safety net for seniors and the disabled through significant benefit reductions down the road, then why not opt for a plan that deals effectively with the funding shortfall now without large benefit reductions and saddling the country with decades of crippling debt?

Why would any Democrat look at the Bush plan with these drawbacks and support it over the Orszag-Diamond plan, unless those Democrats are in the back pocket of Wall Street? Better yet, we should be asking those Republicans in high-risk districts why they would support it as well, and make them feel the heat in next year's election.

Steve :: 7:10 AM :: Comments (14) :: Digg It!