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The Hazards and Vicissitudes of Social Security Privatization

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Opponents of Republican proposals to privatize Social Security must contend with a painful irony: It was not George W. Bush, but Franklin D. Roosevelt, who first popularized the notion that workers have an individualized, proprietary stake in Social Security. It was FDR who planted the bomb, in the form of the workers' portion of the payroll tax, which now threatens to explode Social Security's identity as a social insurance program. Yet FDR also provided a powerful response to this threat, by characterizing Social Security as a bulwark protecting against economic disaster in old age, most importantly from the very market forces to which conservatives seek to yoke Social Security.

In 1935, Roosevelt overrode strong opposition to the payroll tax from key New Deal advisors who argued that the tax was inherently regressive, such as Labor Secretary Frances Perkins and Brain Trust economist Rexford Tugwell, saying, "I guess you're right on the economics, but those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program." Indeed, Roosevelt felt so strongly that the contributions were essential to the long-term political viability of the Social Security Act that he ignored the objections of the entire staff of the Committee on Economic Security and insisted that the plan be contributory. It was this decision to tie benefits to highly visible worker contributions (along with subsequent developments, like annual Social Security "statements" mailed to current and future beneficiaries) that gives Bush's proposal for privatization its powerful political appeal: when the president tells workers that they should be able to invest their own money, he is only telling them what they already know: it's their money, after all.

Turning Roosevelt against himself is a clever move by proponents of private accounts, one that helps to explain the persistent popularity of a plan that virtually all analysts agree will be incredibly expensive and complicated to implement. We would be wrong, however, to abandon Roosevelt as a guide to the political defense of Social Security. After all, Roosevelt was a highly skilled student of the politics of social insurance, and he learned two more lessons that we can master as well: (1) Social Security occupies an emotional terrain – between fear of destitution in old age on one hand, and a desire for security and comfort on the other – in which economic and policy arguments are always in danger of being overwhelmed by more elemental impulses; and (2) selling Social Security requires understanding how to reframe a program that is, on its face, peculiar in the American context – a federally-run, nearly universal social insurance program – as something that seems familiar, even necessary. For Roosevelt, one such reframing, and the one that vexes us today, was to cast Social Security as a kind of individual retirement savings account.

But Roosevelt also reached for another analogy, one that is ideally suited to counter the current press for privatization and at the same time to support positive proposals to make Social Security stronger and more equitable. Roosevelt and the New Dealers cast Social Security as a disaster relief program, with the goal of protecting Americans from what FDR famously termed the "hazards and vicissitudes" of old age itself. Today, this may strike us as an improbable analogy: while earthquakes, fires, floods and hurricanes are sudden and unpredictable, nothing is more foreseeable than growing old. Yet Roosevelt successfully described old age as a landscape of uncertainty and risk, just as full of unexpected storms and droughts as the physical American landscape, and just as deserving of government aid. Growing old without support was the "most tragic of all hazards," as he put it in 1934. I have traced this argument, with particular reference to its legal potency in securing constitutional approval for the New Deal's unemployment and old-age insurance programs, in a series of articles and in my forthcoming book, The Sympathetic State.

In Roosevelt's telling, the old-age equivalent of a hurricane is a bear market on the eve of retirement. New Dealers making the case for Social Security frequently drew an analogy between fires, floods, and hurricanes, and "economic earthquakes" which, they said, could strike without warning, wiping out savings and leaving the elderly unable to fend for themselves. Moreover, they argued, during periods of recession, the children of retirees are less able to help their parents as they lose their jobs and struggle to keep their own families afloat. Roosevelt repeatedly asserted that the government had an obligation under these circumstances to "aid those overtaken by disaster." He made speeches in support of social security against the backdrop of disaster sites and explicitly reminded local audiences of the federal disaster aid they had received, encouraging them to support similar aid to the unemployed and elderly. Social Security Board Chairman (and former New Hampshire Governor) John Winant noted in a 1936 speech that the government had always relieved a variety of disasters including wars, famines, floods, and droughts. The Depression was no less a disaster, and according to Winant, by enacting Social Security the nation had rejected the "assumption that blind economic forces will forever take their cyclical toll of human misery." Likewise, Arthur Altmeyer, one of the key architects of Social Security, described it shortly after its passage as affording the individual "some measure of protection when he is tossed about by economic forces beyond his control."

As Roosevelt knew, an important part of the political logic of natural disaster relief is geographic risk-spreading: since the next disaster may strike anywhere, everyone has a stake in supporting relief of disasters elsewhere to ensure relief at home if necessary. Figure 1 below, which depicts current federal disaster relief efforts from the FEMA web site, illustrates this point.

FEMA Map

Figure 1: Current federal disaster relief efforts from the FEMA web site

Roosevelt saw that the political logic of disaster relief could also apply to temporal risk-spreading: because no one knows what economic hazards might occur in the period of their own old age, that uncertainty provides a powerful motivation to support a general program of old age disaster relief. As the New Yorker editorialized in 1936 in favor of Social Security, "fear accumulates in a man's life, like fluff balls in his pocket, and the security program will, for multitudes of people, wipe out the long, insistent dread of eventual poverty. This, not its monetary relief, is its most important benefit to the race." That fear was particularly acute in times of large-scale economic transformation (then, from agriculture to manufacturing) and attendant social dislocation.

Obviously, the "hazards and vicissitudes of life" that Social Security guards against are just as threatening today as they were in 1934. The transition from a manufacturing to a service-oriented economy, globalization, the outsourcing of middle class jobs, the rising cost of higher education and housing that is depleting the ability of the middle class to save for retirement, fears of being a burden to children, lingering illness, and extended widowhood – all of these things strike the same chords of panic today that they did in 1934. The market is still a potential disaster for those without time to wait out its fluctuations. As Christian Weller, senior economist at the Center for American Progress, pointed out in his June 15, 2004, testimony before the U.S. Senate Special Committee on Aging, even those retirees who have the means to invest for their own retirement face widely divergent outcomes based on the state of the equity and debt markets during their working lives and retirement. Compounding this uncertainty is the potential "disaster" of outliving one's retirement savings – the timing of one's own death is usually as difficult to forecast in advance as the state of the economy.

Roosevelt proved the political plausibility and potency of the analogy between "natural" disasters and market disasters 70 years ago. All we have to do to defeat privatization is to place our feet firmly in his tracks and draw this analogy as clearly and vividly as possible. People still have the same short time horizon, and they still don't want to spend the last 15 years of their lives in the grip of forces beyond their control. Privatization would trigger the return of the "long, insistent dread of eventual poverty."

Politically, the deep flaw of the privatization effort is that it is aimed at exposing people to precisely the risk that Social Security draws its support from guarding against. The argument that, on average, the market will provide better returns for retirees than the current benefit structure misses this point: people are concerned about their local temporal economic conditions, just as residents of the west coast of Florida are concerned with Hurricane Charley, not the average wind speed over the entire U.S. The temporal equivalent to Figure 1 above is the chart below (Figure 2), showing the average 35-year rate of return from investing in the S&P 500 from 1906 to the present. The extreme variability of returns, depending on when the retirement age falls, means that there is substantial uncertainty about local conditions at any particular moment in the future. This variability is even more extreme when we realize that many people can expect to collect less than the average return, and that investing for less than 35 years would produce yet more variability and uncertainty. Attempting to insure against the "hazards and vicissitudes" of the market through privatization is like encouraging residents of a flood plain to diversify their risk by investing in ocean-front trailer parks in Florida.

Click here for figure two, which illustrates the 35-year average total real rate of return for S&P 500.

What would happen if we were to move to a fully or semi-privatized Social Security system? The history of federal disaster relief is instructive in this regard: from the early days of the Republic, payments to disaster victims have been broadly politically popular and regarded as something akin to entitlements. The rare politician who has opposed relief for blameless disaster sufferers has faced repudiation at the polls and in history books, most famously Herbert Hoover. Faced with widespread shortfalls in retirement income security as the result of market conditions (e.g., a major market reversal like the collapse of the Internet boom), a future Congress and president would almost certainly accede to widespread calls to aid retirees and bail out the program. This is made more likely by the fact that benefits paid by the program are crucial to the vast majority of Americans. According to Weller, Social Security is the largest source of retirement income for everyone but the wealthiest quintile of the population. The choice is therefore not whether to insure the elderly against market forces, but what form that insurance should take: a predictable, orderly system for providing a basic level of retirement subsistence, or an unpredictable series of reactions to market events.

The history of emergency supplemental appropriations for FEMA (Figure 3 below) is helpful in understanding what the latter might look like in practice: reacting to disasters, ranging from forest fires to terrorist attacks, after they occur has produced a wildly variable pattern of spending. We can only imagine the potential budget impact of a similar strategy, whether planned or de facto, for handling the risk of economic shocks to the livelihoods of tens of millions of retirees. These bailouts of "private" investment accounts ravaged by the business cycle would be accompanied by other, potentially massive, bailouts of failed investment schemes, all at taxpayer expense. Privatization would quickly transform Social Security for the aged and disabled into corporate security for money managers, mutual funds, and Internet scam artists.

FEMA Expenditures

Figure 3: FEMA expenditures from 1990-2003

This, of course, is why we have Social Security in the first place. It's a fight we progressives have already won, and we need only stand on the shoulders of the political giants who crafted and defended this program in order to turn back the movement to repeal it now.

We shouldn't stop there, however. Roosevelt's vision of Social Security as a program for mitigating the potential for economic disaster in old age provides a positive basis for a stable, universal Social Security program as one component of a strategy aimed at helping Americans to secure their retirements. Linking Social Security to disaster relief clarifies that Social Security's strongest political appeal is in sheltering retirees from the winds of economic chance, not in serving as an all-purpose vehicle for retirement savings. Private savings (perhaps with government subsidy through the adoption of a universal 401(k) program) is the appropriate method for supplementing this base level of support, not replacing it. These insights emphasize two policy thrusts: expanding the reach of Social Security to include all elderly Americans, because our government has always come to the aid of those in need through no fault of their own, and ensuring (probably by raising the wage base) that the payroll tax rate does not rise to heights that would deprive any American of the ability to generate private savings. Providing every American with a base level of protection from disaster, plus the opportunity to save beyond that, is a far more appealing program than betting old age economic security on the vagaries of the market.

Michele Landis Dauber is an adjunct scholar at the Center for American Progress. She is also an associate professor of law and sociology and Bernard D. Bergreen faculty scholar at Stanford University.

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