The Forest for the Trees

On September 20, Factcheck.org posted an item claiming that Barack Obama lied when claiming that current retirees would have lost their savings had they been dependent on private retirement accounts invested in the stock market, which are a feature of John McCain's Social Security plan. The Factcheck.org charge is accurate in terms of current retirees, but misleading in terms of the long-term implications of McCain’s plan, which would, in fact, result in the unraveling of the Social Security system.

1. Factcheck.org asserts that Obama misled Floridians in saying that McCain would put their Social Security benefits on the stock market.
2. McCain’s plan is based on the original Bush plan, which would only have changed the Social Security benefits of retirees born on or after 1950. Both plans would put part of the Social Security tax of those born in 1950 or later into an individual fund sort of like a 401k, which could then be invested in the stock market as part of a mutual fund managed by some unspecified Wall Street investment firm.
3. In terms of current retirees, then, Obama’s statement was misleading.
4. However, the consequences of the McCain plan for those of us born on or after 1950 are another story altogether:

• Due to the ciphoning off of part of the Social Security tax of individuals 58 years old or younger into individual accounts, financing of Social Security would be undermined.
• Traditional Social Security benefits for those still in the plan would thus decrease compared to what’s currently available.
• Relatively affluent retirees would thus leave the traditional program, and younger workers with the means would opt for individual accounts, further draining financial contributions from the Social Security system.
• The result in the medium term would be a bifurcated system of social insurance with affluent retirees and workers opting out of the Social Security system and poorer retirees remaining in the traditional system, which would be increasingly unable to support their needs.
• In the long run, the traditional system would prove untenable.

Here’s an analysis of the likely outcomes of the various proposals floated in Congress as part of the 2005 Bush plan, which McCain supported.

And here are the likely economic consequences.

Dean Baker comments on McCain’s plan to privatize Social Security.

Here’s a post by hilzoy on McCain’s Social Security plan.

Here’s a Reuters article on how the numbers in McCain’s economic proposals don’t add up. The quote by Brian Riedl of the Heritage Foundation carries implications for the logic of privatization in the context of the economic cross-pressures inherent in the McCain proposals.

In theory, the individual accounts would supplement traditional benefits. But that assumes a perpetually rising stock market. Oops...

In this Wall Street Journal article, McCain emphasizes his support for the Bush plan, including individual retirement accounts.

Here are his campaign’s position statements on Social Security.

Given the likely consequences of McCain’s plan, it’s easy to see why he claims that it doesn’t amount to privatization.

Here's more on those claims.

Another post outlining McCain’s history of support for Social Security privatization.

Ezra Klein outlines the implications of McCain’s denunciation of Wall Street and his promotion of Social Security privatization.

I suppose the most charitable interpretation of McCain’s comments is that by ‘privatization’, he means complete replacement of Social Security by private accounts. In this interpretation of his denials, McCain is speaking the truth in that his intention is to carve out a portion of the Social Security tax pie for use in individual accounts, while leaving the remainder in the traditional Social Security plan. (That, of course, would have to ignore his own comments in support of Bush’s plan in which he specifically supported privatization.) However, this interpretation only holds true if one ignores the long-term consequences of McCain’s plan.

In the short term, McCain’s plan does not represent a complete replacement of Social Security with individual accounts. By weakening the financing of traditional Social Security, however, McCain’s plan has the net effect of strengthening the argument, further along the line, for the privatization alternative by decreasing the current system’s viability.

Given McCain’s previously unambiguous support for privatization and the probable long-term effects of his current plan, is it really unfair to assume that complete privatization in the long run is McCain’s true intent? Or should we just assume that, as with so many other things economic, McCain simply doesn’t understand the implications of his own plan?

At any rate, it should be clear from the above that, aside from the issues already discussed, factcheck.org would render far more accurate analyses were it to bring a broader scope to its considerations of the truth or falsehood of a given statement. In this case, they have succeeded in simultaneously illuminating and obscuring.