The Washington Post

Bush's Shaky Retirement Plan

Most of us are instinctively skeptical about sales pitches that seem too good to be true. Our defenses go on high alert, and we hold onto our wallets. But when it comes to politics, many seem willing to believe that it is possible to get something for nothing. Only such credulity can explain the failure to greet George W. Bush's Social Security proposal with the disbelief it deserves.

Gov. Bush has provided few details, but he wants us to believe that he can reduce the money flowing into the Social Security system without cutting benefits—even though we all know that the system already faces a projected long-term deficit.

Bush has claimed that his plan would sustain retirement benefits and close the deficit without raising payroll taxes. Because he proposes tax cuts and other initiatives that would absorb the projected surpluses outside the Social Security system in the coming decade, he cannot solve the problem by proposing to shift any general revenues to Social Security without recreating the budget deficits we have just spent two decades trying to close.

How, then, does he balance the books? The governor and his spokesmen claim that returns on new individual accounts, to be financed by diverting payroll taxes, would be so high that they would fully replace the cuts in Social Security—or do even better. That's a tall order. But there's more.

In a column on this page last month [July 17], Martin Feldstein went Bush one better by claiming he could close the projected deficit and raise benefits for no added cost. Think about it. If you were spending more than you earned, and someone told you that you could earn less, spend more and still reduce your debt, you might smell a rat. You should, for the Bush-Feldstein claims rest on suspect assumptions.

In a recent report, we (together with Alicia Munnell and Peter Orszag) showed that Social Security retirement benefits would have to be cut as much as 54 percent to restore balance under a Bush-style privatization plan. Even if returns on stocks remained as high as they have been historically—a decidedly rosy assumption in view of the ethereal heights to which stock prices have ascended—total retirement benefits (including both Social Security and individual accounts) of single average earners would fall 20 percent, and those of married couples could fall by as much as 38 percent, depending on age and earnings. Furthermore, in preparing these estimates, we made several assumptions that minimized the cuts the Bush plan would necessitate.

Feldstein disputes our conclusions. But the assumptions he makes are so unrealistic that he unwittingly confirms our original contention: The Bush plan would cripple Social Security, expose workers to increased risk and reduce their pension income.

You be the judge. First, Feldstein's arithmetic requires that the Social Security trust fund go into the red and stay there for about 20 years, which is contrary to current law and to a previously inviolable 65-year-old pledge. During that time, it would have to borrow about $3 trillion from the Treasury in order to meet Social Security pension obligations while diverting revenues into private accounts. Is this scenario politically credible? More important, is it good public policy?

Second, Feldstein assumes that retirees leave their pension funds invested in common stocks even after they retire, which in theory gives them more years to rise in value. But stock prices rise and fall, making such a policy a recipe for insecurity and possibly—should stock prices collapse—for destitution. It is not what financial experts advise, and it is not what average people normally choose to do with their pension money.

His third assumption is that Bush, Vice President Al Gore and the Republican Congress are all to be disbelieved when they promise that the Social Security surplus will be saved. No, Feldstein says, they will actually spend it. With this crucial political assumption, Feldstein turns what appears to be merely shifting payroll taxes from one account (the Social Security trust fund) into another (individual accounts) into a major source of new national saving. If Feldstein's political judgment is correct, the Bush plan would dramatically boost investment, and therefore corporate profits. We don't believe it, but even if you do, a fourth assumption is necessary.

If corporate profits are much higher, corporations will naturally pay much higher taxes. In fact, Feldstein's numbers imply that corporate taxes would almost double as a share of GDP. Would such a thing really be allowed to happen? By Republicans? Furthermore, Feldstein assumes that all of the additional corporate tax revenue would be transferred to the Social Security trust fund. In other words, the plan relies on the kindness of strangers: future Congresses, which, it is assumed, will willingly collect much higher taxes from corporations and then transfer all of this to Social Security.

Perhaps one should not impute Feldstein's particular assumptions to Bush. But if not, what should one assume? Feldstein has at least been honest enough to explain how his numbers add up. The American people are entitled to demand no less from Bush. He should explain how he proposes to avoid devastating the major source of income for 60 percent of America's seniors.

Henry J. Aaron is a senior fellow at the Brookings Institution. Alan S. Blinder, an economics professor at Princeton, has served as vice chairman of the Federal Reserve Board and as a member of President Clinton's original Council of Economic Advisers.