Jan/Feb 2002 - VOLUME 23 - NUMBER 1 & 2
An Interview with Dean Baker
Dean Baker is co-director of the Washington, D.C.-based Center for Economic and Policy Research. With Mark Weisbrot, he is co-author of Social Security: The Phony Crisis. Other work includes Getting Prices Right: The Battle Over the Consumer Price Index (M.E. Sharpe Press, 1997), which was selected for the 1998 Choice Outstanding Academic Book List, and Globalization and Progressive Economic Policy (Cambridge University Press, 1998), edited with Jerry Epstein and Bob Pollin, and ìThe Scorecard on Globalization: Twenty Years of Diminished Progress,î which examines performance of countries on indicators of health and education outcomes during the era of globalization, co-authored with Mark Weisbrot. Baker received his Ph.D. in economics from the University of Michigan.
|If you have a system administered by the financial industry, the amount of money that theyíre going to pull off in commissions and fees comes dollar for dollar out of peopleís retirement.||
Multinational Monitor: What impact has Social Security had on poverty
in the United States?
As a result of Social Security, the poverty rates among the elderly have
been reduced to basically the same as the rest of the adult population
about 10 percent. So there has been a huge reduction of poverty
among the elderly.
In addition to being a retirement program, Social Security is also an
insurance program for workers that are disabled or who die young. It has
had a huge impact on the survivors and family members of disabled workers
or the families of those that die at an early age.
Social Security is far and away the countrys most important anti-poverty
MM: What would it mean to privatize Social Security?
The main distinction is that youd be reliant on what you get from
those individual accounts. You wouldnt have a guaranteed benefit,
or at least the same guaranteed benefit that you have today. It would
depend on how well your investments do, or how well theyve done
at the point that you retire.
MM: Whats wrong with the argument that says that if people
can do better on their own, they should be able to invest on their own?
Second, Social Security is supposed to be a core retirement fund. Privatization
would drastically reduce peoples retirement security.
We have a really big crisis of pension coverage in this country, with
only half the population even having access to pensions at their workplace,
and many of those are very much inadequate. Its great for people
to have money that they can put into the market or invest in different
ways. We need to extend pension coverage.
But Social Security is supposed to be the core income thats there
when you retire, no matter what happens. Thats what you know you
would have to retire on. Privatization would erode that guarantee, leaving
people with a much smaller guaranteed benefit or, in extreme cases, none
at all. Under privatization proposals, if you invested your Social Security
savings and lost them, you would be out of luck.
The third part of the story and it illustrates how you can say
utter nonsense in Washington and still be taken seriously is the
proposition that you can get much higher returns on the stock market than
you can get on government bonds, which is what Social Security currently
puts the money into. This whole debate is premised on a really big lie
that you can get much higher returns in the stock market than you
can on government bonds. Given both the slow profit growth currently being
projected by the Social Security trustees, and the very high current valuations
of the stock market, its literally not possible.
MM: Obviously a big part of the story told by the people pushing
privatization is that the system is facing collapse. What is your assessment
of that claim?
After 2038, if we did absolutely nothing, the system could still pay
roughly three-quarters of promised benefits a larger benefit, adjusting
for inflation, than what current retirees receive. Not that that would
be acceptable or that we would want to cut benefits a quarter from what
was promised. But the point is that the idea that theres not going
to be anything there is groundless.
Another way to think about this is that the sort of shortfall that were
projecting 36 years in the future is roughly comparable to the sort of
shortfall the system faced in the 1980s. What that means is, if the trustees
projections turn out to be accurate, and we see really slow growth
much slower growth than the nation has ever seen, that is what the projections
assume then 30 years from now we might be looking at the same sort
of tax increases that we saw in the 1980s, if we want to maintain the
MM: What about the sentiment that there will be too many old people
per working member of the population in the near future to keep the system
The other point that people have to realize is that the economy does
get more productive through time. In the projections, the trustees assume
a very slow rate of productivity growth a much slower rate than
what weve seen historically in the period since World War II. If
productivity increases at the rate that it did in the 1990s as a whole,
we could go well into the decade of the 2040s, maybe as long as 2050 without
any change in the program whatsoever.
MM: Who are the parties most aggressively advocating privatization?
Secondly, you have the financial industry, which realizes that they stand
to make a fortune if they can get their hands on that money. The fees
and commissions charged by the financial industry are about 1.5 percent
of the amount of money in 401(k)s or similar accounts. If they could chip
off a chunk of Social Security so that after 10 or 15 years theyve
built somewhere on the order of one and a half or two trillion dollars
in individual, private accounts, that comes to as much as $30 billion
a year in commissions.
The third part of the story is that professionals, higher-paid workers
who dont get a high rate of return on their money in Social Security.
A lot of these people have 401(k)s or money in the stock market, and they
watched the market go up 20 percent a year in the late 1990s. A lot of
them thought this would continue indefinitely. Many thought that if they
could get their hands on the money taken out through Social Security taxes
and invest it in the stock market, they would really be rich.
One of the factors that have turned this around in the last two years
has been the partial collapse of the stock market bubble. People now realize
that the market doesnt go up 20 percent a year; the market can go
down as well as up. I think thats brought a much greater appreciation
of the value of Social Security as a guaranteed benefit that you dont
have to worry about.
MM: Do you see the collapse of the Nasdaq or the implosion of Enron
as putting an end to the privatization proposals?
Those events have certainly taken a lot of wind out of the sails. People
with PhDs in economics and other advanced degrees, staffers for
members of Congress and people who write newspaper articles on Social
Security really believed absurd things about the stock market. They really
believed that they could get 20 percent per year returns. Now that theyve
been kicked in the face a bit, they realize that the market does go both
ways. Theres much less enthusiasm. It has definitely pushed privatization
off the agenda for the moment.
No ones going to bring privatization up as an issue that they think
will get them elected to Congress. My guess is that we wont hear
about it again until at least the end of the first term of the Bush presidency.
Whether it comes back after that obviously will depend a lot on the outcome
of the 2004 election.
MM: The Democrats now charge that the Republicans are going to
drain Social Security. What do you say about that?
The Democrats are learning from their focus groups that if they can scare
people about Social Security, then theyll vote for them. But the
down side is if things go the other way, youve put this program
on the chopping block when theres no reason for it to be on the
MM: What has been the experience with privatization of social security
in other countries?
Britain is a good example for the United States. There they had insurers
that used very deceptive tactics to sell policies that they couldnt
back up. It turned out that you had all these people who invested in good
faith with these insurance companies who couldnt honor their promises,
so the government ended up backing it up. It cost the government billions
You find problems everywhere they have privatized programs like Social
Security. In the best cases, you have a lot of money that could have gone
into peoples retirement that instead went into paying fees and commissions
on these accounts. In many cases, you have instances of fraud where money
was literally stolen from peoples pockets.
MM: To what extent has the World Bank been advocating privatization?
I mentioned Kazakhstan before. It should have been easy to see that this is not a country where it was even feasible to have a well-working system of private accounts. Even if you liked the idea, you should have been able to say it doesnt make sense for Kazakhstan. There are no real established capital markets there. There is no institutional structure to support such a system. It should have been easy for them to see this isnt going to work. But they insisted on going ahead with it. It just didnt make any sense.
|But Social Security is supposed to be the core income thatís there when you retire, no matter what happens. Under privatization proposals, if you invested your Social Security savings and lost them, you would be out of luck.|
|The fees and commissions charged by the financial industry are about 1.5 percent of the amount of money in 401(k)s or similar accounts. If they could chip off a chunk of Social Security so that after 10 or 15 years theyíve built somewhere on the order of one and a half or two trillion dollars in individual, private accounts, that comes to as much as $30 billion a year in commissions.|
|In the best cases [of social security privatization around the world], you have a lot of money that could have gone into peopleís retirement that instead went into paying fees and commissions on these accounts. In many cases, you have instances of fraud where money was literally stolen from peopleís pockets.|