Business Week on Social Security: "No problem. Be happy!"

November 24, 1998

One would think that hard-nosed journalists at a business magazine would know better than to say that "privatization [of Social Security] doesn't work without faster growth, and with faster growth, it isn't needed." But in separate articles, the editors of Business Week, and associate economics editor Peter Coy, make just such a claim (and worse) in the latest issue (dated November 30, 1998). Following are observations from Cato Institute director of health and welfare studies Michael Tanner:

"Business Week and associate economics editor Peter Coy are wrong on so many points, it's hard to know where to begin. The editors did get one thing right: government investment of Social Security revenues is a 'bad plan,' and government ownership of stock in major corporations 'is a nightmare.' But Coy doesn't even concede that much; for him, government investment is 'far easier to swallow than individual private accounts.'

"Both articles argue that there is no Social Security crisis ('no need to panic . . . no imminent danger . . . modest long-term problem') and, therefore, no need to privatize the system. Economic growth or some measure of tinkering, they say, will be enough to keep it afloat. And why do they want to keep it afloat? 'It represents a shared commitment of society . . . If it's not social, it's not security.' (Coy)

"In truth, Business Week throws its weight behind the current Social Security system for ideological reasons, because it is indefensible on any other grounds. They deliberately sidestep the most important point, one easily understood by their readers: from a financial standpoint, the current system is the least desirable place for anyone to put their retirement money.

"Social Security's most significant crisis is not insolvency. (Push taxes high enough, or cut benefits drastically enough, and it'll be solvent.) It is the fact that it provides an appallingly bad return on investment-something Business Week readers would never stand for. Indeed, most young workers will get a negative rate of return, receiving less in benefits than they paid in taxes. Moreover, Social Security's poor rate of return and flawed benefit structure particularly disadvantages women, the poor, and minorities. Simply keeping Social Security solvent will do nothing to rectify this unfairness.

"When Business Week tries to keep your attention focused on the relationship between economic growth rates and keeping the leaky ship of Social Security afloat, they're hoping you won't focus on something considerably more important: absent a tax hike, funding for the current Social Security system can never grow any faster than annual growth in personal income. Historically, that comes to about 2 percent a year. Benefits from a privatized system, on the other hand, grow as a function of the return on capital, historically (S&P 500, mean annual ROI, 1926-1997) about 8 percent.

"Would you voluntarily choose to earn little or nothing on your retirement savings, when you could be getting 8 percent? Neither would I. But the editors of Business Week seem to think it's a good idea, leading one to wonder whether the other advice they offer on their pages each week makes any sense either.

"Only transforming Social Security into a system based on saving and investment will enable American workers to receive a fair return on their dollar. Only giving workers ownership of their retirement benefits will free them from the insecurity of being dependent on the whims of politicians. Only a system of individually owned, privately invested accounts will allow low and middle income workers to accumulate real wealth. A publication whose raison d'etre is business and financial matters ought to understand that."

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