01 December 2004

A Bush binge for Social Security

CREDIT the Bush administration with this. It is at least imaginative in its improvidence. The administration's plan to modernize Social Security rests on this novel concept: We should embark on another borrowing binge, this time in the name of increasing national savings.

That, according to The New York Times, is the method the administration has apparently settled upon to fund personal investment accounts as part of Social Security. Or, as Joshua B. Bolten, director of the Office of Management and Budget, told the Times: "I believe there's a strong case that this approach not only makes sense as a matter of savings policy but is also fiscally prudent."

There's a much stronger case that it isn't.

Granted, there's a certain first-glance appeal to the president's notion of allowing younger workers to invest some portion of their Social Security payroll tax in the market. But like much of what this administration proposes, that nostrum sounds better at first hearing than it turns out to be upon subsequent investigation.

The principal sticking point is that of transition costs. If Social Security truly saved today's dollars for tomorrow's expenses, Bush's goal of individual accounts would be far easier to achieve.

It does not, however. Instead, today's workers pay for today's retirees, with the understanding that tomorrow's workers will, in turn, fund their retirement.

Thus, to allow today's employees to devote some of their Social Security levy to personal accounts would normally present a difficult choice. Cutting benefits for current retirees would be one way to free up transition funds. Hiking the Social Security payroll tax would be another.

Instead, the administration wants to escape that Scylla and Charybdis dilemma by paying for those personal accounts with borrowed funds.

But anything you borrow you have to pay back, and with interest. Nationally, all we would be gaining under such a system is the possible difference between what an investor might make with the borrowed dollars and the interest that lenders receive.

"It's crazy," says Peter Orszag, a senior fellow in economic studies at the Brookings Institution. "They are avoiding hard choices."

Politically, however, there are benefits. Given the time horizons involved, such a borrowing scheme would allow the president to deliver on a campaign promise while passing the costs along to tomorrow's decision-makers and taxpayers.

There are far better ideas abroad in the land.

In his recent book "Running on Empty," former commerce secretary Peter G. Peterson, a Republican, proposed requiring workers to put 2 to 3 percent of their annual earnings toward mandatory retirement accounts.

That's a way of doing something similar to what Bush has proposed, but as a supplement to Social Security rather than as part of the foundation program, putting those accountants completely out of reach of the spendthrifts in Washington.

Australia employs that approach to retirement savings, although here it would probably meet opposition as a tax increase, even though the revenue raised would be entirely for individual use.

Several other pragmatic proposals also offer more real promise of boosting national savings than Bush's plan would. For example, says Orszag, by having employees automatically enrolled in a 401(k) savings plan unless they specifically opt out, a participation rate that is usually less than two-thirds can be hiked to 90 percent or better.

Indeed, professors David Laibson of Harvard and Brigitte Madrian of Wharton and Harvard graduate student James Choi have shown that if 401(k) plans are designed such that the default (that is, passive or do-nothing) course means an employee is automatically enrolled, and at a recommended contribution rate, most employees will stay enrolled and continue saving at or near that rate. In their study, after three years on the job, 401(k) participation was 20 to 34 percent higher with automatic enrollment.

"You don't need a hard mandate," says Orszag. "It is just a matter of changing the default."

Further, research by professor Peter Tufano of Harvard Business School and several others suggests that by allowing taxpayers to split their direct deposit income tax refunds into more than one account, the nation could also encourage savings significantly. That simple change, which the administration favors, would make it much easier for families to pre-commit a portion of their income tax refund -- the largest lump sum many taxpayers will see all year -- to savings while retaining some for more immediate needs.

Those are much more prudent ideas than an easy-way-out borrowing binge in the name of national savings.

Scot Lehigh's e-mail address is [email protected].  © Copyright 2004 The New York Times Company 

By Scot Lehigh
Boston Globe Columnist

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