Historians sometimes play the counterfactual game of wondering what would have happened if a major event had turned out differently. We thought about this recently as we read the manufactured panic about Social Security’s looming financial health and the wistful reverie about what might have been had the donor class gotten its way in 2005.
What if Congress had dismantled Social Security when George W. Bush proposed doing it in 2005—would working people be better off? The answer is no, and read on to see why.
The Social Security trustees reported this month that the dual trust funds (for old-age benefits and disability payments) will run out in 2034, with the retirement portion exhausted by 2032. At that point, if Congress does nothing, benefits automatically adjust to match the steadily declining revenue from the payroll tax on current workers.
That would mean a 22% benefit adjustment overnight, with further alignments as fewer workers are paying taxes to support more baby boom retirees. Sounds manageable on paper—and the donor class counts on that read—because the predictable fix has been sitting on the table for two decades: lift the payroll-tax cap on its highest earners. The donor class refuses.
Sounds grim, and it is, because Wall Street has spent the last twenty years selling the country on the idea that the only fix is privatization, in which Wall Street collects the fees and workers bear the risk.
Congress is likely to do something to prevent this, and it should: lift the cap, modestly raise contribution rates, and protect benefits for the people who paid in. Grimmer still is what the donor class actually wants, and has wanted since 2005: a privatized system in which Wall Street manages the money and working families eat the next crash.
But what if Congress had passed President Bush’s proposal to let workers gamble $1,000 from their payroll taxes in private investment accounts? In 2011 workers would have begun bearing the full risk of the next market downturn, with no guaranteed benefit and no safety net for the unlucky.
If a worker had invested $83 per month in an S&P 500 index fund and reinvested dividends, the account would have grown to some $55,000 by now—on paper, provided the worker held through every downturn, paid the Wall Street fees along the way, and never needed the money for an emergency, with no guaranteed floor and no inflation protection.
That 2011 start date was a nod to the political reality that voters didn’t want their retirement gambled on the stock market. If it had been politically possible to start offering investment accounts in 2005, rather than waiting until 2011, such an account would be worth at least $105,000 today—entirely at the mercy of the market, for those who held on through every downturn and never touched the money.
And that money would continue to grow as a worker’s personal property—to be lost in the next crash, spent down on a long illness, or left to whichever heir the worker chose. Social Security, by contrast, is a guarantee: it pays no matter what the market does, no matter how long the worker lives, and it pays survivors and the disabled.
If you were 22 years old in 2011, you are spared the risk of more than $800,000 that you could have gambled away under the Bush plan by the time you retire. That number assumes a retirement age of 65, a starting contribution rate of $83 per month, actual market returns since 2011, and the S&P 500’s historical average 10% annual return into the future—plus a worker who never loses the job, never gets sick, never has a child to put through school, never panic-sells in a crash, and never pays a dime in fees to the Wall Street middlemen who would manage the account.
Workers would be subsidizing in their personal accounts the wealth extraction now occurring from artificial intelligence and biotechnology, and they would be losing, when the market turns, from the wealth destruction those same forces periodically cause. The wealthy and well-connected would, of course, always be fine. Stock-market wealth would be wagered more broadly—to those who could afford to participate, lived long enough to claim it, and never needed the money for an emergency.
Wisely, the privatization failed in Congress.
This means payroll taxes have gone to pay current benefits for older generations—exactly as the program was designed to do—from a system that is guaranteed to exist for the rest of their lives. The funding gap is the predictable result of the donor class spending two decades refusing to lift the payroll-tax cap that exempts its highest earners.
Think about that 2005 victory the next time Wall Street and its politicians tell you the only way to fix Social Security is to hand the program to them—and remember that the program’s “crisis” was manufactured by the same people now offering to fix it.
