Wash. Post editorial on Social Security privatization left out key facts

A February 11 Washington Post editorial, which offered some support for President Bush's plan for privatizing Social Security, overlooked the transition costs of such a plan, glossed over the guaranteed benefit cuts that would accompany privatization, and relied on an analysis by an investment firm that would benefit from privatization.

The Post editorialized:

Mr. Bush's proposal gives workers the option of diverting part of their Social Security taxes into personal accounts; in return, workers who exercise that option accept a cut in future payments from the traditional Social Security system. This exchange is designed to be financially neutral for the government.

In arguing that privatization would be “financially neutral for the government,” the Post ignored the trillions of dollars in predicted transition costs required to implement the changes. Even Vice President Dick Cheney has admitted that the government would need to borrow trillions of dollars for promised Social Security payouts over the next few decades to replace funds that would be diverted into private accounts.

The Post continued:

But this doesn't mean that personal accounts have no impact on Social Security's solvency. By investing partly in stocks, personal accounts would boost benefits for the average retiree -- and hence make it politically easier to take the tough steps necessary to fix the solvency problem.

The Post is employing the type of obfuscation and euphemism one might expect out of a politician, not a newspaper. When the Post uses the phrase “take the tough steps necessary to fix the solvency problem” in this context, it means “cut guaranteed benefits.”

The Post then discussed projections of higher rates of return on private accounts versus Social Security:

Even though these projections are produced by nonpartisan scorekeepers, the administration's critics claim that the promise of extra returns from personal accounts is somehow illusory. They argue that, if investors are rational, there can be no real “equity premium”: The proposition that you can conjure up money by shifting Social Security resources into equities presupposes that the sellers of those magical equities are idiots.

Here, the Post is setting up a straw man, suggesting that opponents of privatization don't think it is possible to make money in the stock market. But that isn't what opponents of privatization are worried about; instead, they are worried about the increased risk to individuals of shifting money out of Social Security and into the stock market. As the Post itself admits, privatization “would transfer investment uncertainty to individuals, the poorest of whom may arguably be ill-placed to shoulder it.” Further, some opponents of privatization note, as Princeton economist and New York Times columnist Paul Krugman did in a February 1 column, that “if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.” Finally, they also note that the ultimate beneficiaries of such a plan could well be Wall Street fund managers, anticipating billions of dollars in investor fees that will come directly out of individual workers' private accounts.

Finally, the Post relied on “Goldman Sachs researchers” to support its pro-privatization arguments:

The critics also argue that mass Social Security purchases of equities will drive their prices up. So even if equities are a bargain at the outset, they soon won't be. But Social Security purchases of equities would not be big enough to trigger serious price moves in the nation's extremely deep and liquid capital markets. Goldman Sachs researchers recently noted that annual equity accumulation by personal account holders would peak at 0.6 percent of the value of the market. That modest spike in demand for equities would be swamped by potential swings in the supply.

Though the Post didn't mention the conflict, Goldman Sachs isn't a disinterested observer. It is, in fact, a Wall Street investment firm that stands to reap enormous benefits from the establishment of private accounts. As a March 5, 2001, Mother Jones article noted:

Bush's Social Security plan would also be a bonanza for Goldman Sachs, which would be “well-positioned to benefit from higher trading volumes, more public offerings, and rising equity prices.” Dan Cook, a partner at the investment bank, gave $151,000 to Republican campaigns. When not trading securities, Cook sits on the board of the National Center for Policy Analysis in Dallas. Last October [2000], the center kicked off a nationwide television advertising campaign to tout the benefits of privatizing the entire Social Security system. As the campaign headed into the final stretch, the group released a study designed to counter criticisms of Bush's proposal and claimed that Gore's competing plan would lead to huge budget deficits.