Social Security: Private Savings

DATE February 17, 2005 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Interview: Michael Tanner discusses why he supports President
Bush's plan to overhaul the Social Security program
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

President Bush has made it a priority in his second term to overhaul the
Social Security system, which he says will soon be bankrupt. He's proposing a
system in which workers under the age of 55 would have the option of placing
up to a third of their Social Security taxes into personal accounts that would
be invested in stocks and bonds. The remainder of the money would go into the
system to help pay traditional benefit checks. This is a very controversial
proposal. Today we'll hear from people on both sides of the issue. Later,
we'll talk with economist and New York Times columnist Paul Krugman, who is
against the president's proposal.

First, we hear from Michael Tanner, who's for it. He directs the Project on
Social Security Choice at the libertarian think-tank the Cato Institute. This
is the project that Andrew Biggs was affiliated with. Biggs is now the
associate commissioner for retirement policy at the Social Security
Administration, and he's been accompanying the president on some of his
travels to promote the Social Security plan. My guest, Michael Tanner, has
been with the Cato Institute since 1993.

Why do you think Social Security needs to be changed?

Mr. MICHAEL TANNER (Cato Institute): Well, we have to understand that, first
of all, Social Security if facing a serious financial problem. In less than
15 years, Social Security will begin to run a deficit; that is, it will begin
to spend more money on benefits than it's taking in through taxes. Now most
people understand that when you have more money going out the door than you
have coming in, that usually indicates a problem.

Now, of course, here in Washington we have the theory that says that you can
then go back to the Social Security Trust Fund and draw on the assets in that
trust fund until about 2042, after which Social Security would only be able to
pay about 75 cents out of every dollar that's promised in benefits. But in
reality, as groups as disparate as the Clinton administration, the
Congressional Budget Office, the Congressional Research Service and the Social
Security Administration itself have all made clear, the Social Security Trust
Fund contains no real assets. It simply contains a promise against future tax
revenues or a promise that someday in the future the government will tax
someone in order to continue to pay benefits. Overall Social Security is
facing unfunded liabilities of about 11.9 trillion--that's trillion with a
T--dollars. On top of that, we have the opportunity to create a new and a
better Social Security system, one that gives workers ownership and control
over their money, something they don't have under the current Social Security
system.

GROSS: Would you describe the basics of how President Bush's system would
work?

Mr. TANNER: Well, the president has proposed that, beginning around 2009,
workers under age 55 would be able to take about a third of their payroll tax,
about 4 percent of payroll, and would be able to save that in a private
account; that that money would be invested in real assets, like annuities,
stocks, bonds and so forth, and that that would supplement the traditional
Social Security benefits that they get.

GROSS: So that would be 4 percent out of a total of 12 1/2 percent that you
could invest?

Mr. TANNER: That's right. It would start capped at $1,000, so that people
earning less than $25,000 a year would be able to invest the full 4 percent,
and wealthier people would invest a smaller amount. But that cap would
gradually be raised until everybody was investing about one-third of their
payroll taxes. Now I should also add that this is entirely voluntary.
Workers would be free to remain in the current Social Security system if they
wished. This would only be an option to invest.

GROSS: Now the way I understand it, it's not as if when you retire, you
actually get a lump sum of all the money that you've invested. I think you
use that money to buy an annuity. Could you explain how that would work?

Mr. TANNER: Well, at retirement, you would have to buy an annuity equal to
the poverty level. Any money in your account that you don't need to buy that
annuity, anything over and above that level, you could take as a lump sum or
you could draw it down slowly over time. And if you died early, you'd be able
to leave that to your heirs. In fact, one of the advantages of individual
accounts is that they do create inheritable wealth, unlike the current Social
Security system. But by having that guaranteed level of benefit, that floor
annuity, we can assure that no senior's going to end up below the poverty
level.

GROSS: Should we explain what an annuity is, or shall I say should you
explain what an annuity is?

Mr. TANNER: An annuity is--under an annuity, you turn the principal of your
account over to an insurance company, and in return they provide you with a
guaranteed income stream. So let's say you've accumulated $250,000 in your
account. If you give them $100,000 of that, they then promise that they will
make payments equal to the poverty level for as long as you live.

GROSS: What happens to somebody who has invested in stocks that didn't do
well and they end up losing money over time instead of gaining money? What
happens to them?

Mr. TANNER: Well, there are several safeguards built into the president's
plan. First of all, the investment choices are going to be very limited to a
few broadly diversified, very safe investment choices similar to the Federal
Thrift Savings Program that every federal worker is participating in.

Second, the default option for these investments--if you make no decisions at
all, if you don't understand anything about investments, don't want to worry
about it--your money would go into what's called a life cycle fund. What this
means is that when you're young, you would be invested more in stocks, and as
you aged, they would gradually change over to bonds and other fixed-income
assets, so that just before retirement, you're very much protected against the
fluctuations of the market.

And, finally, we should realize that we're not talking about short-term
investments, where you have to worry whether the market goes up this year or
down next year or even for three, four or five years. We're talking about
people investing for 30 and 40 years. And unless the US economy is going to
do far worse in the future than we've ever seen it do in our history, we can
expect the market to perform well over 30- and 40-year periods.

GROSS: Now critics of the plan say that, on the one hand, the personal
accounts, the private investments, stand the chance of making you more money
than you'd get through basic Social Security payments. On the other hand,
they say you're doing this by taking a risk.

Mr. TANNER: Well, no investment is risk-free, and the current Social Security
system is not risk-free. Under the current Social Security system, your
benefits are determined entirely politically. You have no legal right to
benefits under the current system. And we know that the current system cannot
pay the level of benefits that are promised, so there will inevitably be
reductions in benefits. Market investment, on the other hand, when you have a
long investment horizon and you have broadly diversified investments, is
remarkably safe. But the ultimate answer is if you don't trust the markets,
if you prefer the individual system, then you can remain in the current Social
Security system. This is a voluntary aspect of this. This is a choice. You
can choose private investment, or you can choose to remain in the current
system.

GROSS: Now the way I understand it--and correct me if I'm wrong--that the
benefits under Social Security will be cut back over time; that the
understanding is since through these personal accounts you theoretically will
be making more money, the government will be giving you less. So does that
mean if you stay with basic Social Security as opposed to going into the
personal accounts, that your benefits would be less in the future than they
would have been had the system not been reformed?

Mr. TANNER: Under the traditional Social Security, payments will likely be
less than what has been promised. But that's what's going to happen anyway.
Under current law if we do nothing, Social Security benefits would ultimately
have to be reduced by about 27 percent. That's simply because Social Security
does not have enough money to pay those benefits.

GROSS: If the plan is put into effect, what happens to the people who are on
the cusp of the old plan and the new plan, in other words, people in their
early 50s or up to age 54? And they'd no longer be on the old plan, but at
the same time there wouldn't be any time for them to save on the new plan.

Mr. TANNER: Well, they're not likely to see much change in their traditional
Social Security benefits. Any change in benefits that's being discussed would
be phased in very slowly over time, would largely affect very young workers,
people in their 30s or early 40s, for example. On the other hand, they would
have the option of going into individual accounts. Someone in their 50s would
still have 10, 15 years with which to invest and a chance to accumulate money,
but that's not required. If they want to remain in the traditional system,
they will always have that option.

GROSS: What is the difference between how money is passed on and inherited in
the current Social Security system and in the proposed Social Security system?

Mr. TANNER: Under the current Social Security system, benefits are not
inheritable. You have survivors benefits, but they're only good for children
that are under the age of 18. So if you have a single mother working two
jobs, paying 12 1/2 percent of her income in Social Security taxes and her
children are 20 and 21 and she's 64 and she dies, none of the money that she's
paid into the Social Security system can be passed on to her children. It's
simply gone, lost.

Under a system of individual accounts, however, that money would be part of
her estate. And she could pass all of that money on to her kids that they
could use to go to college or start a small business. It's one of the biggest
advantages of moving to an individual account system.

GROSS: But once you've used your Social Security money to buy an annuity, the
principal of that annuity can't be passed on to your family.

Mr. TANNER: Well, first of all, about one out of four workers will die before
they reach retirement age, and the money would be fully inheritable for those
workers. Second, you're only required to buy an annuity up to the poverty
level.

GROSS: But for workers who are on the lower end of the wage scale, they're
probably not going to be getting anything higher than the poverty level. So
what do they stand to gain here or what do they stand to pass on, you know, as
an inheritance?

Mr. TANNER: Those lower-wage workers are the most likely to die prior to
retirement, so in those cases, again, they would have the chance to pass on
the bulk of their savings to their heirs.

GROSS: So you're counting on workers benefiting 'cause they're gonna die
before they retire?

Mr. TANNER: Well, I don't know that I'm counting on them dying before they
retire. I'm saying if they did, they would be better off than they are under
the current system, and we know about one out of every four workers does.

GROSS: Now it will cost the government a lot of money to fund this program
because younger people would theoretically be investing a lot of their money
in private accounts, in personal accounts. And yet older people would still
need to be paid their Social Security benefits without being able to draw on
the money that young people would have been putting in had the system not been
reformed. So the government has to basically fund a lot of those benefits
during a long transitional period. And the estimates I've read is that it
would cost trillions of dollars. Since the government is already many
trillions in debt, if we add more trillions for Social Security, are we taking
a risk in terms of the financial security of our country?

Mr. TANNER: Well, we're not adding any new debt to the system. What we're
actually doing is taking debt that exists and is off the books, putting it on
the books and then moving it forward in time. So we're paying a little bit
now, but we're saving money down the road. The people who have benefits
growing in the individual accounts are people the government will not have to
pay traditional Social Security benefits when it comes time for their
retirement. Government saves money on that end by expending a little money on
the up-front end.

In many ways, it's like the credit cards you just ran up over the holidays.
You could, of course, just make the minimum benefit payment on them for the
rest of your life, but it'd be much more prudent if you paid them all off
today, even if that meant that you had to dig a little bit deeper and find a
little extra money with which to do that today. That, in essence, is what
we're asking Congress to do. They are going to have to find some additional
money, about $650 billion over the first 10 years of the Bush proposal, but
that would save money in the long run.

GROSS: But if I follow your thinking, by paying out now, we're going deeper
into debt. And we're already very deep into debt as a nation, and we're
paying more and more interest on that debt. So how does that help, and how do
we know that we'll have the money to pay back that debt?

Mr. TANNER: Well, the question is: How do we know we'll have the money to
pay the benefits when they come due now, since we don't have that money? I
would much rather be doing Social Security reform in an era of budget
surpluses, but the fact that it's harder to do now doesn't make it any less
necessary. We're running $450 billion budget deficits right now. But just to
give you an example, in the year 2027, Social Security will have to redeem
$200 billion worth of bonds in order to continue to pay the benefits that are
promised. Well, where are they going to find that $200 billion if we're
running $450 billion budget deficits? It doesn't get any easier if we wait.

GROSS: My guest is Michael Tanner of the libertarian think tank the Cato
Institute. He'll be back after a break. In the second half of the show we'll
hear from New York Times columnist Paul Krugman, who opposes the president's
Social Security plan. This is FRESH AIR.

(Soundbite of music)

GROSS: We're talking about the president's plan to overhaul the Social
Security system. My guest Michael Tanner supports that plan. He directs the
Cato Institute's Project on Social Security Choice.

If the system is revised and you chose to go with having a personal account
and putting some of your Social Security money into a personal account, which
would basically mean the money would be invested, what would that process of
investing be like?

Mr. TANNER: It would very much resemble the current Federal Thrift Savings
Program that every federal worker is participating in. Right now your mailman
or the GS-2 secretary down the street are investing privately through the
Thrift Savings Program. These are funds that are administered by private
money managers. And the Social Security Administration estimates that the
cost of administering these accounts would be somewhere around 3/10ths of 1
percent of the assets that are managed in these accounts. So it would be a
very tiny administrative fee and, really, far lower than I think a lot of the
critics of the accounts have been claiming.

GROSS: You've written about how you think African-Americans would really
benefit from the proposed revisions to Social Security. How?

Mr. TANNER: Well, we know that at every age, in every income level,
African-Americans have a shorter life expectancy than do whites. And we also
know that how much you get over a lifetime in Social Security benefits depends
on how long you live. If you live to be a hundred, you get a lot of Social
Security checks. Drop dead at 66 and it's not such a good deal. The fact is
that if you take a black man and a white man and they take the same job, go to
work on the same day, get the same salary, retire on the same day,
unfortunately, the white man will end up getting more in Social Security
benefits than the black. We think that that's very unfair. We also know that
about one out of every three black men pays into the Social Security system
and then dies before they collect Social Security benefits.

Jeffrey Liebman from the Kennedy School of Government at Harvard, a former
Clinton administration official, estimates that over a lifetime Social
Security actually transfers about $21,000 from the average black man to the
average white man. We think that's unfair and would be largely corrected
through a system of individual accounts.

GROSS: Have you looked at other countries that have tried plans that are
similar to the one the president is proposing, such as England or Chile?

Mr. TANNER: Yes. I mean, some 20 nations from Latin America to Eastern
Europe to Hong Kong have moved to a system of individual accounts at least in
some degree. Some countries have done quite well--Chile, for example. Other
countries, such as Britain, have not designed their systems as well and have
had more problem.

GROSS: So you think the problem with the British system is that it wasn't
designed as well? Do you think ours would be designed better? Is the Bush
proposal better?

Mr. TANNER: Well, I think the British system was unique. It was built
largely around an occupational pension scheme that doesn't exist in the United
States. It was absurdly complicated in a way that left it difficult to
understand for many workers, and that ultimately opened the door to a certain
amount of fraud and abuse that took place there. And it ran very high
administrative fees, largely because the British capital markets were not
particularly sophisticated when the system was brought in, as well as the
complexity. So I don't think it has a great deal of relevance to the US
system.

GROSS: Stephen Moore, who is the founder of the Club for Growth, which helps
fund conservative candidates, and is a libertarian himself, has described
Social Security as the soft underbelly of the welfare state. Do you agree
with that?

Mr. TANNER: Well, I think that Social Security is the largest connection that
most people have with the government. And in many ways, it does undermine the
American system of self-reliance. For example, you know, Warren Buffett and
Bill Gates are going to get Social Security checks. There's something to me
somehow obscene about people who are billionaires collecting money from the
government. Do they really need a $2,000 check every month from the federal
government?

I think what we really need to do is if we want to have a welfare system that
protects seniors against ever falling into poverty in their old age, we should
have one. And we should fund it from general revenues and make a
determination as a society that that's what we want to do. But we really
don't need a system that pulls every American into a government-run retirement
program and makes us all ultimately dependent on politicians.

GROSS: What's your reaction to leaders of the Christian right who have said
that they won't back the president's Social Security plan unless he commits to
making a constitutional amendment banning gay marriage a priority?

Mr. TANNER: Well, I would hope that we can get Social Security reform through
without the aid of bigots.

GROSS: So you disagree with them on that as a priority, and you don't think
it should be connected with Social Security?

Mr. TANNER: I don't see where there's any connection whatsoever between
making a new and better Social Security system and denying some Americans
their rights.

GROSS: Who do you think will be the winners and losers if the president's
system is put into effect? And I realize you might say there won't be any
losers, but I thought I'd ask.

Mr. TANNER: Well, I think the big winners will be middle- and low-income
workers because today they don't get a chance to get in on savings and
investment. You know, we're a country in which about half of Americans have
some form of investment savings for their retirement. They have 401(k)s and
they have IRAs. But if you're a low-income worker, after you pay your food,
your rent, your medical care, you don't really have an opportunity to get in
on this type of investment and build real wealth, to build a nest egg that's
inheritable for your children and grandchildren. You don't get that chance.
Under the president's plan, for the first time in their lives, many of these
people would have that chance to have real wealth. So I think they're the
biggest winners out of this.

The losers are going to be the politicians in Washington because they're no
longer going to have as much control over people's lives. They're not going
to have this little pot of money that they can dip into to help hide their
spending. And they're not going to be able to reward people at election time
by saying they're raising Social Security benefits or that they're saving
Social Security yet again. So I think they're the big losers.

GROSS: Michael Tanner, thank you very much for talking with us.

Mr. TANNER: It's been my pleasure.

GROSS: Michael Tanner directs the Cato Institute's Project on Social Security
Choice. We'll hear an argument against the president's Social Security plan
in the second half of the show. I'm Terry Gross, and this is FRESH AIR.

(Announcements)

(Soundbite of music)

GROSS: Coming up, economist and New York Times columnist Paul Krugman. He
says privatizing Social Security will be risky for retirees and won't help
strengthen the system's finances. He's accused President Bush of
crisismongering.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Interview: Paul Krugman discusses President Bush's Social Security
plan
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

In the first half of the show, we heard from Michael Tanner of the Cato
Institute. He supports the president's plan to overhaul the Social Security
system. My guest Paul Krugman opposes the plan. Krugman is a columnist for
The New York Times and a professor of economics and international affairs at
Princeton University. The president is proposing a system in which workers
under the age of 55 would have the option of placing up to a third of their
Social Security taxes into personal accounts that would be invested in stocks
and bonds. The reminder of the money would go into the system to help pay
traditional benefit checks.

Paul Krugman, you've very critical of the president's Social Security plan and
you've said it's a plan to actually dismantle Social Security. What do you
mean by that?

Professor PAUL KRUGMAN (Columnist, The New York Times; Princeton University):
Social Security as it stands is a social insurance program. It gives people a
guaranteed income after they retire which replaces typically about 35 percent
of their earnings when they were working and so it's a basic pillar of
stability. It's not intended to be your main source of income for retirement,
although it ends up being that for many people, but it's a basic thing that
you can count on even if everything else goes wrong.

If the Bush administration's plan goes through--and we don't have all of the
details of that plan, but if it goes through, by the time people now entering
the work force retire, that function will be basically gone. The amount of
money that you'll be guaranteed to get even if everything else goes wrong will
be a very small fraction of what you were earning during your working
lifetime. So in effect, we will have gotten rid of Social Security as we know
it. It will be a--you know, it'll still be social; that is, it'll be a
program run by the government. But there won't be very much security in it.

So I would call that dismantling. It might still be called under the same
name, but in terms of what it actually does, in terms of actually providing a
floor beneath living standards of retired Americans, it will be gone.

GROSS: Well, the idea of being able to invest some of your Social Security
money, up to about one-third of the Social Security taxes that you pay--to
invest that into some kind of, you know, stocks or bonds and have the
opportunity to make more money than you'd be getting through traditional
Social Security is very appealing. What's your reaction to that selling point
of the program?

Prof. KRUGMAN: A lot of that selling point is based upon a delusion about how
Social Security actually works. It's not the case that the Social Security
system is taking your money and investing it and investing it badly and you
could do better. The reason why the rates of return on Social Security don't
look that high is that Social Security is a--it really is a social insurance
system in which each generation is paying taxes that for the most part support
the previous generation and in turn counts on the next generation after that
to support it.

So when people say, `Well, I could get a better return if I could invest that
money myself,' I mean, my answer to that is, `Yeah, and my wife and I would
have more money if we stole all of my mother-in-law's money and let her
starve,' meaning when you say, `Let's divert the money into private accounts
and people can get a higher return,' you're ignoring the obligation to take
care of today's retirees and people close to retirement who've been paying
into the system all their lives.

It's a fundamental misconception about what Social Security is and what the
opportunities are, and, in fact, what we know about the Bush administration's
plan is that you won't actually be free to invest your money. What you'll be
able to do is borrow part of your private account because your benefits from
Social Security will be cut if you divert money into a private account as if
you were borrowing the money at basically a market interest rate. So it's not
the good deal it's made out to be.

GROSS: Your concern is that the way you do the calculations, if you choose
the option of taking about a third of your Social Security taxes and investing
it in a personal account, that it would actually be difficult to make any more
than what Social Security offers.

Prof. KRUGMAN: Well, what we understand from the hints that the
administration has dropped about its plan is that if you took your private
account and invested it in government bonds, you would end up exactly where
you started, that your traditional benefits would be cut by an amount that
would completely offset the earnings on your bonds.

GROSS: Would you explain your understanding of how that works?

Prof. KRUGMAN: Yeah. What they do is they calculate an offset. It's as if
they lent you the money. They say, `Look, you're putting this money into the
private account. We're going to calculate that as if it were a loan at an
interest rate which matches the interest rate that the government pays on its
own debt, and then we're going to cut the benefit payments so as to on
average, given your life expectancy, mean that we save on benefit payments the
value of this loan.'

So the way it works out as far as we can make it out is that if you think of a
typical worker diverting about a third of his or her benefits that by the time
he or she retires, that would worker would be able to buy an annuity on
retirement that would yield about $10,000 a year, but it turns out that your
benefit payments from Social Security will also be cut by $10,000 a year. So
you'll end up exactly where you started.

GROSS: Do you think there's any risk that you would make less through a
personal account than you would through Social Security? Like, how do you
calculate the risk benefit?

Prof. KRUGMAN: Well, of course, there is. There is--first of all, you don't
get ahead unless you invest in stocks, and stocks do sometimes go down. On
average, stocks yield more than bonds but not always. And so you could end up
behind if you invest in stocks. So that's one big concern. So there will be
probably a fair number of people who end up with less than they would have
gotten under traditional benefits.

GROSS: Michael Tanner pointed out on our show that if changes aren't made,
it's going to be hard to rely on Social Security because they won't be able to
pay out the payments that they've promised; you cannot get what was promised
to you in the long run with the system as it is now.

Prof. KRUGMAN: Well, two crucial points there. The first is the private
accounts have nothing to do with any of that. The administration has now
admitted private accounts do nothing to help Social Security's finances. They
have this--they're being sold as part of a package, but the actual plan to
improve the long-run financial stability of Social Security is based on future
benefit cuts that have nothing to do with the private accounts. So this is a
case of false salesmanship. Privatization, whatever else it does, does
nothing to help the finances of the system.

The other thing to say is let's put the long-run problems of Social Security
in perspective. The best estimate I think that we have is from the
Congressional Budget Office, which says that in 2052 the system will finally
exhaust its trust fund. So there is a long-run problem.

GROSS: I thought that's 2042.

Prof. KRUGMAN: That's the Social Security Administration, which has very
pessimistic assumptions. So it's 2042 according to the Social Security
Administration. It's 2052 according to the Congressional Budget Office. Take
whichever one you like. OK. Let's use the pessimistic one, Social Security
Administration. As of 2042, the system no longer has the trust fund, but it's
still taking in revenue. It's taking in revenue enough to pay 73 percent of
promised benefits. So there is a problem. It's a little bit--it's somewhat
short of money. But look, the rest of the US government--the US government
outside the Social Security system right now is taking in only 68 cents for
every dollar of spending. So when we talk about Social Security's going to be
in trouble and won't be able to pay promised benefits, we're saying that 40
years from now Social Security will be in a financial position that is almost
as bad as that of the US government as a whole outside Social Security today.
That's a pretty modest problem to talk about. The idea that this is some
desperate problem that's going to mean that nothing will be there to pay
benefits is just wrong.

GROSS: Is it a solvable problem, do you think?

Prof. KRUGMAN: Oh, sure. Look, making Social Security solvent for the next
75 years costs--well, according to varying estimates, according to the Social
Security Administration, it would take about 0.7 percent of GDP in additional
revenue, 0.7 percent of the total value of production in the US. According to
the Congressional Budget Office, it's lower than that, 0.4 percent. The Bush
tax cuts are about 2 percent of GDP all the way through. So any way you look
at it, the financial difficulty of Social Security is a third or a fifth of
the amount that's been handed out in the form of tax cuts over the last four
years. It's bizarre to think of that as an unsolvable problem that requires
that we dismantle the system as we know it while saying, `Oh, but, you know,
we can't reconsider those tax cuts.'

GROSS: Now getting back to the risk-benefit analysis of investing retirement
money.

Prof. KRUGMAN: Yeah.

GROSS: Talk more about how you would calculate that.

Prof. KRUGMAN: Well, I would start by saying that the likely return on stocks
is a couple of percentage points higher than the rate at which you have to
borrow for this investment. So the--you get probably for starters on average
a somewhat better return, but you're not going to put all of your money in
stocks. So, you know, they're going to be, in fact, forced, we think, to
shift increasingly towards bonds as you get older. So your actual rate of
return on your private account is probably going to be something like 4
percent vs. 3 percent on the 3 percent interest rate after inflation at which
you have to mortgage your future benefit payments to get this plan.

And then the last thing is fees, the costs of managing your investment
account. Now we have experience with other countries on how these things
work, and it turns out that the mutual funds that people invest their money
with impose quite sizable costs. It turns out that in Britain, which has a
privatized retirement system which is going badly, the fees are more than 1
percent of the value of the investment each year. So slice 1 percent off
whatever your return is. In Chile, it's about the same. The average stock
fund in the United States has an expense ratio of around 1 1/2 percent.

So you have to think of fees as being a major further thing dragging it down.
What you're left with is a situation in which these private accounts, maybe
when all is said and done, on average will do a little bit better than Social
Security traditional benefits, but not reliably, so that large numbers of
people will find themselves just having bad luck over the particular, you
know, lifetime of their investments. And so a lot of people will end up worse
off than they would under the traditional system.

GROSS: My guest is economist and New York Times columnist Paul Krugman.
He'll be back after a break. Earlier in the show, we heard from Michael
Tanner of the Cato Institute. He supports the president's Social Security
plans.

This is FRESH AIR.

(Soundbite of music)

GROSS: My guest is Paul Krugman. He's a columnist for The New York Times and
a professor of economics and international affairs at Princeton University.
He opposes the president's Social Security plan.

You described the Bush plan as dismantling the system as we know it, but for
people in the plan, you know, this plan would mean you would still have the
option of regular Social Security. You don't have to have a personal account.
You don't have to invest your money and take a risk. You can just stay in the
traditional way and nothing would be different for you.

Prof. KRUGMAN: Well, we have to find out how this actually works, and, you
know, we do not have any official plan from the Bush administration. Here's
what we know. We know that the plan that was devised by the president's
commission on Social Security reform back in 2001 that is widely expected to
be the model for the Bush plan contained a heavy subsidy for switching to
private accounts. Now we haven't heard whether it works that way in this
plan, but certainly plan two, the plan that everybody's citing, did contain a
heavy subsidy. You really were strongly encouraged with cash to switch to
private accounts.

The other thing to say is that we also believe that the Bush plan will very
sharply cut benefits for untraditional accounts, untraditional Social Security
compared to what they would be under current law. As best as we can make out,
by 2055 or so the Bush plan would leave benefits about 45 percent what they
would be under current law which--take notice--the actual problem of--even if
we provide no additional money for Social Security, you'd have to cut benefits
by 25 or 27 percent after the trust fund runs out. The benefit cuts under the
traditional plan that the Bush administration is talking about are much deeper
than that. So we're actually talking about something which is really trying
to undermine the traditional benefits and say, `Look, if you don't switch over
to this private account, you're really not going to get very much.'

GROSS: One of the differences between the Bush system and the current system
is that if you die before you retire, some of the money that you have paid
into Social Security can be passed on to your children. Would you explain how
that works and tell us what your opinion of it is.

Prof. KRUGMAN: Well, I think the idea as best we--again, we don't have a
plan. It's the most amazing thing. We have this enormous selling campaign
but no specific plan, but we believe that the private account will be treated
as if it was a piece of property. So if you die at the age of 61, it's an
inheritable thing like an estate. Yeah, that's a good thing, although, you
know, traditional Social Security includes survivors benefits. I mean, the
official name for the program is Old Age, Survivors, and Disability Insurance,
OASDI. And if you work through examples of typical families, it often turns
out that they would get a lot more if the family's major breadwinner dies
young under the current system than they would with a private account,
particularly if he dies, let's say--or she--in his or her 30s. At that point,
survivors benefits are a quite substantial benefit to the family while the
amount of money in a private account would be quite small at that point.

GROSS: Another argument made in favor of President Bush's plan is that it's
actually a favorable program for African-American men who statistically die
younger than their white male counterparts.

Prof. KRUGMAN: OK. Everyone who has actually worked with real data on life
histories as opposed to just making this argument without actually checking it
against the actual numbers has found out that there's nothing to it. Yes,
African-American men have a low life expectancy. A lot of that--not all of
it, but a lot of it is because of high death rates when they're young, which
doesn't affect the trade-off on the plan at all. You know, it's a result of
high infant mortality, high deaths in their teens and 20s, doesn't affect
Social Security at all.

Black men do have a shorter life expectancy when they retire than white men,
but they also tend to receive a better deal, because they typically have lower
incomes. And the Social Security system is progressive. That is, the lower
your income, the better the ratio of benefits to the amount that you paid in.
So that works against the short life expectancy.

Oh, and I should say also, survivor benefits are a very big thing for
African-Americans, because many of them die before reaching retirement. And
it turns out the survivor benefits are a very big favorable thing for them in
that case.

The last thing to say is: Look, anything that we're talking about, all of
these potential benefits, are 40 or 50 years in the future. Are we really
just going to take it as a given that the low life expectancy of black men is
a fact of nature, that nothing we can do about it in the next half century?
That's really a pretty cynical, pretty defeatist attitude towards what really
is a national scandal.

GROSS: The government would have to borrow money to pay for the transition
from the current Social Security system to the Bush plan if the Bush plan was
put into effect. What is the estimates you've heard about what that amount of
money would be, and what impact do you think that would have on the American
economy?

Prof. KRUGMAN: You know, there actually isn't a lot of controversy over the
estimates, although there is a smoke screen around it. The first decade of the
privatization plan's operation would cost about a trillion dollars in
additional borrowing. The second decade would cost another 3 1/2 trillion.
And it actually goes on after that. But let's just focus on the 4 1/2
trillion during the first 20 years. It's a lot of money. It would increase
the amount of debt that the US government is carrying by a very substantial
amount.

Now what the advocates of this say is, `Well, but you're going to achieve
savings in the long run, so it's not going to matter.' I don't think that
financial markets, I don't think that the bond market is going to pay very
much attention to that argument, because the debt is real, it's solid. It's a
legal obligation of the US government. The savings are contingent on what
whoever is running America in 2055 decides to do. Do they really go through
with the benefit cuts? Do they really make people repay the amount they, in
effect, borrowed for their private account through benefit cuts?

So it's real solid debt vs., you know, hypothetical future savings. All the
evidence we've seen from other countries that have tried to do this says that
the debt can be a real problem. In particular, the worst financial crisis of
recent decades, the financial crisis in Argentina, was significantly fueled by
the debt that Argentina ran up in an attempt to privatize its retirement
system, pretty much along the lines that the Bush administration is
suggesting.

GROSS: Do you think that the added debt of the Social Security program,
funding the transition, which would be required under the Bush plan, would
affect the willingness of other countries to either loan us money or invest in
our bonds?

Prof. KRUGMAN: Yes, I think it would. I mean, we already have a situation
where the US has numbers on budget deficit, on trade deficit, on foreign debt,
that if we were--if our country had a different name, if we were named
Argentina or Indonesia, we would already have a run on the US dollar and a run
on US bonds by foreign investors who would be saying, `My God, how can they
possibly, you know, deal with those levels of red ink?'

Now we get a lot of benefit of the doubt, because we're a First-World country,
because we're America, because people say, `Look, you know, this is not a
banana republic. They will do what is necessary to eventually honor all of
those debts.' But the higher the debt level gets and the longer we go on with
plans that are--you know, basically don't pay for themselves, where the
administration just says, `Trust us, something wonderful will happen but 40
years from now,' the closer you get to the point where you really do have the
panic.

So can I say with certainty that the extra $4 1/2 trillion of borrowing that
we would do for privatization would be the straw that broke the camel's back
on confidence? And the answer is no, we don't know what will do it, but it is
a lot of additional borrowing in the foreign economy and a government that are
already looking pretty wobbly.

GROSS: My guest is economist and New York Times columnist Paul Krugman.
He'll be back after a break. Earlier in the show, we heard from Michael Tanner
of the Cato Institute. He supports the president's Social Security plan.
This is FRESH AIR.

(Soundbite of music)

GROSS: My guest is Paul Krugman. He's a columnist for The New York Times and
a professor of economics and international affairs at Princeton University.
He opposes the president's Social Security plan.

People on both sides of the Social Security issue agree that eventually, the
trust fund will run dry in 2042 or 2052 or somewhere thereabouts. What
suggestions would you make for fixing the system? If the system isn't totally
revamped as the President Bush plan proposes, what system would you propose
for making sure that the system remains solvent and that everybody can get the
benefits that they've been promised?

Prof. KRUGMAN: Let me say that there is, by no means, universal agreement that
the trust fund's going to run out. Even the Social Security Administration,
that 2042 date is what's called the intermediate projection. They also have
what they call the low-cost projection which actually has the system remaining
fully solvent for the next 75 years and on into the indefinite future. And if
you actually look at the track record of those projections over the last 15
years or so, the low-cost projection has been much more accurate than the
intermediate projection, so it actually looks quite possible that Social
Security is good for the indefinite future. It's not that hard to come up
with a story about economic growth, etc., that makes Social Security good
without any changes.

Still, a precautionary move would be to do something. And I think what we
need is some revamping of the benefits, particularly too many people are
taking early retirement--and the incentives are a little bit wrong--and some
more revenue. And we can talk about ways of doing that. I think it's not an
urgent thing. We can analyze that a bit. I kind of like the idea of raising
the cap for taxable wages, not to cover all of wages, but somewhat higher.
The AARP is proposing raising it from the current level, which is in the high
80s, to 140,000. We could talk about whether that's the right plan.

GROSS: So would that mean, like, if you earn $200,000 a year, you're only
paying Social Security tax on the first, like, nearly $90,000 you make...

Prof. KRUGMAN: That's right.

GROSS: ...and the rest of the money isn't taxed? So you're proposing taxing
more of...

Prof. KRUGMAN: That's right.

GROSS: ...people's income who make more than $90,000?

Prof. KRUGMAN: That's right. So people earning 70,000 or 60,000 would not
see any tax increase, but we would be raising some additional money by
increasing taxes on people with somewhat higher income.

And again, the thing to say is that, really, what you need is a modest
infusion of money to keep this thing going pretty much as it is for three or
four generations, and I don't think it makes sense to really try and plan
beyond that.

GROSS: So who do you think would be the winners and losers under the Bush
Social Security plan?

Prof. KRUGMAN: Well, the winners probably would be the investment management
industry. Now they say they're not going to allow a lot of mutual funds to
compete for people's funds. I don't believe it. I think that if
they--however the plan looks in its first incarnation, within six weeks after
passage, if it's ever passed, The Wall Street Journal will be agitating for,
`Let's offer people choice.' And the investment industry is giving a lot of
money to try and promote this plan. They're not doing that out of
philosophical agreement with the president. So I think the big winners would
be companies that would be basically selling people mutual funds, then would
be collecting fees off the management of those funds. The stock market would
probably get some kick in the short run, 'cause people would be putting money
into stocks.

Beyond that, I think workers would end up, on the whole, losing, because
they'd be trading a secure retirement system for one that was highly unstable
and would leave a lot of them worse off. The US government would probably end
up bailing out people whose private accounts went bad. Whatever we say now,
that's what will end up happening, 'cause you always have to remember, you
know, 50 years from now is when the rubber really meets the road on all of
that, and people over 65 will be a larger share of the electorate in 2055 than
they are today. So the government will probably end up bailing out, so it's
going to be a bad thing for the US budget.

I think if you really ask who wants this, who really, really wants this, the
answer is it's conservative ideologues who just don't like the idea that we
have a large government social insurance system, and they see Social Security
as a target, something they can bring down. And so really, it's about
ideology. I think the vast majority of Americans would end up feeling worse
off as a result of privatization.

GROSS: Paul Krugman, thank you for talking with us.

Prof. KRUGMAN: Thank you.

GROSS: Paul Krugman is a columnist for The New York Times and a professor of
economics and international affairs at Princeton University. In the first
half of the show, we heard from Michael Tanner of the Cato Institute. He
supports the president's proposal to overhaul the Social Security system.

(Soundbite of music)

(Credits)

GROSS: I'm Terry Gross.
Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.