Privatization doesn’t add up

Changing the calculation

Here is how going from a wage index to an inflation index is a benefit cut

By diverting your money into risky investment accounts, the Social Security Administration would immediately have less Social Security funds to pay out. In the short term, it makes the finances worse.

Economist Peter Orzag, a Social Security expert who served in the Clinton administration, calculated that the privatization program would cost more than $2 trillion over the first 10 years, and trillions more later. That’s money the government would have to borrow.

Many in Congress and senior administration officials admit that private accounts do nothing to address the long-term financing challenges facing Social Security.

So how does the administration plan to make up the difference? The Wall Street Journal reported that the Bush administration favors changing the way initial benefits are calculated for retirees, linking them to the growth in prices rather than the much higher increase in wages. This change would result in huge benefit cuts for all future retirees.

The result, according to Business Week magazine, is that today’s 20-year-olds would see their promised benefit cut nearly in half. Under the current system, a worker with average earnings who retired in 2075 would get $2,032; under the change proposed by the administration, that same worker would receive $1,099.

That’s a benefit cut no matter how you slice it.