The Magazine


Sep 14, 1998, Vol. 4, No. 01 • By DAVID FRUM
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WE CAN'T READ THEIR MINDS, of course, but the hoary defenders of the Social Security status quo would have had to be superhuman not to cheer as the stock market slid through the last week of August and then crashed on the 31st. For years they have endured the complaints of young taxpayers that Social Security is a cheat: While private retirement accounts have sometimes grown at annual rates of 30 to 40 percent during the nineties, Social Security will pay out zero percent returns to today's thirty-somethings and sub-zero percent to today's twenty-some-things. So for rear-guard defenders of Social Security, a good old-fashioned Wall Street panic must have seemed the answer to a prayer: A cataclysmic collapse of their 401k plans will teach these greedy youngsters that there are worse things than the slow and steady evaporation of one's Social Security contributions.

Alas for the mossbacks, the Dow quickly stabilized at 15 percent or so below its peak, leaving almost all of the fantastic gains of the mid-'90s bull market intact. But sooner or later the mossbacks will have their day. Like all bull markets, the great bull market of the 1990s will end, either in a terrific crash or simply by petering out. Advocates of Social Security privatization had better factor that into their plans.

It's true that the end of the bull will make no difference to the economic case for privatization. Whatever happens on Wall Street, the plight of Social Security is unchanged: Around 2010, the federal government will no longer be able to afford the current level of benefits at the current level of taxation. But the end of the bull may very well weaken the political case for privatization. In 1997, it was obvious why it would be better to put 12 percent of your pay into the market than into the palsied hands of the Social Security Administration. In 1999, it may be less obvious.

Over the past decade, advocates of privatization have acted on the belief that time is on their side. Every year, high schools and colleges graduate a fresh class of Social Security losers, and funeral homes bury another cohort of Social Security winners. Why struggle and toil now for reform when in a decade or two it will be politically riskless? Privatizers have tended to believe too that Social Security reform ought to wait for the election of a Republican president.

The August '98 stock-market collapse should prompt recognition that there are indeed risks in delay. Political opportunities are rare and fleeting things, and when they vanish they do not always reappear. For privatizers, the mid-'90s have been just such an opportunity. The planets are aligned: The stock market is booming (dramatizing the superiority of private markets over government insurance), the budget is in surplus (which means that there is cash on hand to pay the costs of the transition from a pay-as-you-go pension system to a fully funded system), and the Democratic party is in one of its business-oriented moments. Who knows how long those conditions will last?

Yes, it's true that the political clamor for doing something about Social Security will grow louder as the crisis nears. But it's also true that the nearer the crisis grows, the more costly and painful that "something" will have to be. Worse, the nearer the crisis grows, the less time there will be for the money that will be put into the market to compound. The first baby-boomer retirement is now only 13 years away.