On March 11 and 12, the CBS Evening News broadcast a two-part
"Eye on America" segment by Ray Brady focusing on Social Security
privatization. What started out as a compelling case for reform of
the soon-to-be bankrupt pension program ended up as a broadside
attack against the most promising reform -- privatization.
First, the background. Social Security now has an unfunded
long-term liability of more than $5 trillion -- which exceeds the
entire national debt. In 35 years, the system will be financially
insolvent. Kaput. As CBS rightly pointed out, in 1950 there were 17
workers for every retired person. Today there are three; by 2030
there will be just two. To keep the system solvent at current
benefit levels would require the tax rate to rise from 15 percent to
as much as 30 percent. If there were ever a program that needed
major reform, it is this one.
CBS discussed one potential way out of the box: to privatize the
system and allow individual workers to place their payroll tax
dollars into a personalized account, like an expanded IRA. Under
rules established by the government, workers could invest this money
in mutual funds and other investments. Brady interviewed Jose Pinera,
the former economic minister of Chile, where privatization was
adopted some 15 years ago. The results there have been remarkably
successful. Chilean workers are now receiving a 13 percent annual
rate of return on their Social Security investments.
Brady then cited a Cato Institute study documenting that in the
United States, if a low-income worker were permitted to place his
payroll taxes into an IRA, and that worker earned just the average
rate of return on stocks and bonds since 1946, that worker would
receive a benefit of $1,650 more per month from the IRA than under
Social Security. As one of the editors of that study, I can attest
that the results were reviewed by well-respected actuaries who found
no fault with the methodology.
Brady, however, launched an attack against privatization by
arguing that the Cato study made "dangerously optimistic
assumptions." The "dangerously optimistic assumption" was that over
the next 50 years investors will yield roughly the same average real
rate of return in stocks and bonds as was recorded by financial
markets over the past 50 years. No one knows for sure whether the
markets will perform better or worse. Still, it is worth noting that
over the past several years the stock market has substantially
outperformed the average rate of return since 1945.
Then CBS rolled out objections to the plan, such as claims that
the plan only works if "workers work their whole lifetime in a boom
stock market." This is patently false. If we had a boom market for
the next 50 years, and we privatized Social Security, most American
workers would be millionaire pensioners when they retired. But even
if workers placed all of their payroll tax into low-risk, low-return
bonds, privatization is still a very good deal for workers of all
incomes, vis-a-vis a non-privatized system.
The CBS report saved its heavy artillery for last. Brady said
that instead of "making educated guesses about the future, like the
proponents of privatization, we took a look at how a Social Security
stock plan would have performed using real data from the past."
(Note the false inference here, that the Cato Institute study did
not "use real data from the past.") "Using an independent firm," CBS
reported that a wealthy worker would get $30,000 more under
privatization, but a low-income worker would get $13,000 less.
Conclusion: privatization is unfair.
Just how were those numbers derived? Alas, we will never know.
After repeated requests for the methodology, CBS has refused to
reveal what firm produced them, what actuarial assumptions were
used, and any other information about the results. While CBS was
quick to attack privatization advocates for using "dangerous
assumptions," that charge can't be made against CBS; the company
won't tell us what their assumptions were. For all we know, the
numbers were simply made up out of thin air.
Finally, CBS concluded that most Americans oppose Social Security
privatization. How should the system be fixed, then? "Cut benefits
and raise Social Security taxes." Two problems here. First,
virtually every poll over the past ten years shows that raising the
payroll tax is by far the least popular "fix" to the Social Security
system. Second, raising the tax level and reducing the promised
benefit make Social Security an even worse deal than it already is
for young workers. Now they would have to pay more in for a lower
benefit. What a deal! If we "reformed" Social Security in the way
CBS suggests, privatization would be manifoldly more attractive to
workers. Was this taken into account when CBS said low-income
workers would be worse off under privatization?
Social Security reform is perhaps the single most important issue
to young workers in America. What is needed is a careful, balanced,
and reasoned presentation of the options. Too bad Ray Brady and CBS
failed to provide it.
Stephen Moore is director of fiscal policy studies at the