Social Security and the 2006 Elections

Before yesterday, I had no idea who Ed Perlmutter was, but I like his style:

Republicans will revive their effort to overhaul Social Security after the November elections, a “dangerous” plan that would cut benefits to older Americans, the Democratic candidate for a Denver-area House seat said Saturday. “We can and must stop them – right now, before it’s too late,” Ed Perlmutter said in the Democrats’ weekly radio address. “Just last year, Democrats stood up to President Bush and the Republicans in Congress, and fought back against this dangerous proposal and defeated it.” … Bush and many Republicans say Social Security is in danger of going bankrupt. The president promoted a complete overhaul last year, proposing private investment accounts for younger workers. The idea died after Democrats attacked the program as a hidden effort to cut future benefits. Perlmutter lodged a similar attack Saturday, arguing that the Republican plan would “threaten senior citizens who worked hard, played by the rules and simply seek to live their golden years with some financial stability and security.” Instead of looking out for taxpayers’ interests, Republicans “are sending billions of dollars to special interests in giveaways that taxpayers are paying for,” he said. … Perlmutter, 53, has made Social Security a key issue in his race because his opponent, O’Donnell, wrote a paper in 1995 that advocated “slaying” the benefits program.

Mr. O’Donnell is a lot like George W. Bush. During the 2004 campaign, we did not hear a peep about Bush’s desire to undermine the Social Security system, but as soon as he was inaugurated for his second term – it was full steam ahead. As we come up on the 2006 elections, Republicans are ducking this issue leaving it to Democrats like Perlmutter to bring it up.

When Republicans talk about bankruptcy, there are deliberately confusing the issue. While the Social Security Trust Fund is accumulating assets, the General Fund is on a bankruptcy path – due to tax cuts for the wealthy and pork barrel spending for the special interests who donate to GOP campaigns. President Bush does have a plan to alleviate the General Fund fiasco – which is to cut your Social Security benefits by more than he reduces your payroll contributions.

The claim is that privatization will make you better off as you can get a better return on stocks than you can on government bonds. Maybe the expected return to stocks is higher than the risk-free rate, but that is only the compensation for bearing risk. We have noted how conservative economists like Robert Barro and Gary Becker dismiss the Cato free lunch claim.

President Bush’s latest is that we take Federal bonds out of the Social Security Trust Fund and give them to you so that you can earn a risk-free higher return on the Federal bonds in your portfolio. The return you’d get now is about five percent, which is the return the Trust Fund would get. So tell me – how five percent is greater than five percent?