For many Americans, a proposal to tamper with Social Security is about as inviting as a come-on in a public rest room. Almost alone among government programs, the Social Security administration has a clean reputation, having accomplished its goal of providing for older citizens with no history of special interests looting the pot, or friends of congressmen getting extra large checks out of it. So far.
Social Security’s stellar reputation almost justifies the original whopping white lie that Franklin Delano Roosevelt told about the system when he set it up: that it is a separate fund. Many Americans seem to think that there’s an ingot in Fort Knox with their name on it, waiting for their retirement. Luckily for them, with gold at its lowest ever price, this isn’t so.
The government borrows the money and spends it on all the usual pork barrel stuff, just as if it were tax revenues. In return it leaves IOUs, promising to pay up when you grab your walker to shuffle toward the great beyond. However, the polite fiction of a national pensioners’ piggy bank has stopped Congress from looting the fund totally, which is one of the reasons why Social Security has such low overhead and high regard from its customers.
But that has done little to deter Josi Piqera. The suave Chilean is the epicenter of the actuarial earthquake which will make your your Social Security funds disappear into a gaping crevasse of broker commissions and management fees. The head of the Social Security reform project of the Cato Institute, the right-wing think tank, he is also the self-appointed head of the International Pension Reform Society. This month he was awarded a medal by the International Insurance Society for his efforts at privatizing the world’s pension schemes.
Piqera, the former Minister of Labor for General Augusto Pinochet, was dropping big names with heavy thuds as he immodestly recounted all the world leaders with whom he had discussed his crusade to privatize Social Security in the United States. (Pinochet’s was one of the few big names he didn’t drop.) Here in the United States he is optimistic: He has had dinner with George W. Bush, he finds Sens. Bob Kerrey and Daniel Patrick Moynihan in favor of partial privatization and the White House invited him to chat. Now, he is trying to seduce the average American voter.
One thing is for sure: A specter is haunting the presidential race — and its name is Social Security privatization. All the GOP likelies espouse it in some form, and President Clinton triangulated it into his own proposals. The president’s own proposal is fairly low key — but it is a foot in the door for the private-pension-plan salespeople, who would soon be looting the ruins of the Social Security system if it were adopted.
Many of this year’s presidential hopefuls will be getting big campaign checks from the finance industry. There may well be a mismatch between candidates’ statements at the fund-raisers and what they care to say in public about Social Security privatization, however, because tampering with the old folks’ retirement money has never proven to be a winning political strategy. But since check writers usually trump voters in the final analysis, don’t be too surprised when the stealth attack on your retirement patrimony begins.
Piqera will be in the front lines when it does. But when he touts the Chilean miracle, what he neglects to describe is the way Pinochet’s bloody military coup provided the conditions for the much-hailed Chilean pension privatization. Piqera had left Harvard to return to Pinochet’s Chile to join the so-called “Chicago Boys” — University of Chicago trained free-marketeers — in their economic experiment. “I would have preferred to work under a democratic government, but we cannot choose our historic times,” he said of his decision to work for the indicted torturer and murderer.
Under Pinochet and Piqera, the country’s workers were given a choice between entrusting their future to a government that shot them if they protested, or taking the hint and going private. Significantly, the two occupational groups allowed to keep their government-financed pension schemes were the Chilean military and security forces.
In the U.S., his public speeches play upon Generation X angst. Piqera declares that the current system is “extremely unfair to your younger generation.” What he does not explain is that if he has his way, they will be paying twice: First, they will have to pay to support the present retirees, while themselves giving up any hope that the next generation will pay them. Then they have to devote the same resources to build up their own “fully-funded” pensions. But Piqera is hoping the U.S. will use its newfound budget surplus to cushion the transition to privatization.
Economists who are attached to the real world know that the surplus is not simply free money. It could be used to backfill a tax cut. Most Western countries might think it could go for a health-care program, since most nations have a far better subsidized system than does the United States. The least sensible use of it would be to divert it towards an already highly inflated bull market that at some point has to reconnect heavily with gravity.
American Social Security recipients, present and future, have so far not proved receptive to Piqera’s worldwide crusade. In Latin America, which Piqera holds up as a paragon of privatization, people have serious historical reasons to distrust their governments. Too many Latin American countries have been run by dictators like Pinochet, and countless other leaders have looted their national treasuries to pay pensions to their supporters and cheat their opponents.
Piqera is desperate to get an industrialized country to buy into his scheme, and so are his backers. He is currently selling hard in Britain, where Margaret Thatcher paid big cash incentives to persuade employees to opt out of company and government supplementary pension schemes. He brushes aside the little detail that the British pension sellers are now having to repay billions of dollars, because in their eagerness to earn the commissions, many of the scams — sorry, schemes — that they sold left the bearers worse off than if they’d stayed with their original plans.
Nor does he mention New Zealand, a country where almost everything has been privatized, but where voters last year overwhelmingly rejected a Piqera-inspired proposal.
The British experience gets to the root of the pressure to privatize. The
finance industry looks at the trillions of dollars in the government system
and sees countless commissions foregone, penny stocks unscammed and
innumerable dot.com IPOs undersold. It sees a torrent of cash that could
maintain a raging-bull equities market for the foreseeable future if it
could be diverted its way. Which is why these unlikely paladins of the
pensioner are deeply concerned that the Social Security system will run
into severe financial problems in 40 years.
When financiers who usually have difficulty seeing past the next quarter’s
earnings release start worrying about your long-term future, only those who
believe in Santa Claus think that they have the public welfare at heart.
Piqera’s backers, from State Street Bank to Salomon Bros. and Prudential,
are not people who you normally see scouring the streets with alms for the
indigent. To overcome public skepticism, they resort to scare tactics,
incessantly talking about the impending collapse of the Social Security
But the privatizers’ predictions about Social Security’s “bankruptcy”
presume zero population growth and sluggish economic growth. They then
compare the results with the rosiest estimates of stock-market growth,
based on recent boom years, and assume this will continue indefinitely. To
the extent there are concerns about Social Security’s long-term viability,
there are some simple fixes, like lifting the present $72,000 earnings cap
on contributions, so that some of the fastest growing and most inflated
incomes pay a bigger share. Funny how the doomsday reformers never mention
that fact, even though that’s the reform that voters back in opinion polls.
In pursuit of sending shivers down the spines of aging baby boomers, they
home in on FDR’s white lie. They draw a distinction between Social
Security, which they choose to describe as a “pay-as-you-go system,” and
“fully funded” privatized pension portfolios with — for example — State
Street. And they say, with some accuracy, that the Social Security system
depends on people working now paying the pensions of current retirees. Your
payroll taxes are paying the pensions of your parents and grandparents.
But in real terms, the difference between the existing system and a
privatized one is negligible on that score. By the time you come to retire,
it will be the hard work of your offspring making corporate dividends or
paying taxes to fund the interest on T-bonds, that will keep you tripping
the light fantastic on your Teflon hip joints. In neither case do you get
some mythical stash of gold.
So Piqera’s prescription ignores reality: If you want a fully funded
pension, then you need to go survivalist and make for the hills with a few
container loads of your favorite hooch and canned goods. If you stay part
of society, then you will share its economic vicissitudes — including, if
you have a private pension portfolio, a growling bear market, a slump or a