Partial Privatization of Social Security Looks Very Possible

By: Peter Passel
The New York Times, April 9, 1998

Two years ago Social Security privatization probably had no more support in Washington than the legalization of marijuana. Today, the notion is being entertained by such heavyweights as Daniel Patrick Moynihan, the senior Democrat on the Senate Finance Committee. Privatization has become a very real possibility in part because big budget surpluses are apparently available to help pay for the transition.

"Something labeled 'partial privatization' is bound to be included in any broad-based Social Security reform," predicted Sylvester Schieber, an economist at Watson Wyatt Worldwide, a pension consulting company, and a member of the Government's Advisory Council on the system. But getting from here to there will be tricky. The seeming convergence on the idea of privatization masks deep differences of opinion. Consider the playing field:

THE LIBERTARIANS For some conservative intellectuals - namely Carolyn Weaver of the American Enterprise Institute and Jose Pinera at the Cato Institute - privatization is a matter of cutting Washington down to size. As long as the Government stands ready to play nanny, workers will have little incentive to plan for their own retirement. And as long as pension income amounts to a gift from Government, political coalitions will work to keep the checks rolling in.

This is surely the oldest and most principled argument for privatization. Though legislators talk the libertarian talk, few really walk the walk. The libertarian stance does, however, offer a high-minded rationale for policies based on other considerations.

THE ECONOMISTS To many technocrats - Edward Gramlich, the former chairman of the Social Security Advisory Council who is now a governor of the Federal Reserve, comes to mind - Social Security's "crisis" boils down to the collective failure to save enough to pay for the retirement of the huge baby-boom generation. Higher taxes, or bigger budget surpluses achieved through lower Government spending, would do the trick. But forced saving impersonal pension accounts could prove more palatable since people would rather Put away dollars in their own names than send them into the black hole of the Treasury.

This argument for partial privatization apparently carries a lot of weight with the pragmatists in the Clinton Administration. And while he would hardly put it in these terms, the idea meshes with the proposal from John Kasich, chairman of the House Budget Committee, to dedicate budget surpluses to private Social Security accounts.

THE GENERATIONAL PEACEMAKERS While Social Security taxes and benefits create a tangled web of income redistribution, most of the transfer is from young to old. Not surprisingly, some politicos fear the losers will eventually take out their wrath on pensioners - and on Washington. In this scheme of things, partial privatization would serve as a peace offering to the young and the restless.

Senator Moynihan, for example, wants to cut payroll taxes and retirement benefits along opening the door to tax-sheltered personal Security accounts. This would mean lower and subsidized savings for those not yet re and would make friends for the embattled pension system.

THE NEW DEALERS For some analysts, including the M.I.T. economist Peter Diamond and Aaron of the Brookings Institution, privatization a solution in search of a problem. There is right with Social Security, they say, and no that cannot be fixed with a few nips and tuck modest tax increases.

But, they reason, if you can't lick 'em, join The privatization could be transformed into s thing useful, namely a broader Social Sec trust fund that includes private stocks, which historically generated bigger returns than government bonds.

Most who favor private investment by the fund don't kid themselves that the shift increase the total size of the economic pie. probably would give lower- and middle-income retirees a bigger slice, since Social Security counts for a bigger portion of their retire funds than it does of the wealthy. "Why should rich get all the benefit from the equity premium that comes with taking modest risks in the s market?" asks Mr. Diamond.

The lure of privatization has turned a no political debate about how much to cut benefits and how much to raise taxes into an exercise interesting possibilities. That fact alone make major overhaul of Social Security more likely the next few years.

But the new form is hardly clearer than it when privatization was just a gleam in the eye assorted libertarians. So much of the support privatization is purely as a means to an end that policy makers inclined toward big changes will be deeply reluctant to clarify the issues. Something akin to a consensus on Social Security privatization is perhaps within reach. But consensus is more rhetorical than real.


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