The 11 September terrorist attack has changed the scenario for US pension reform, but it is not yet clear in which direction. Critics of social security privatisation say the stock market downturn shows how risky the proposal is. Supporters of the Bush administration’s original plan (in which private personal accounts play a central role) stress that, precisely because of the economic recession and of the declining federal surplus, it’s important to push for a radical reform of the current system. In the meantime the president’s Commission to Strengthen Social Security has started to discuss a range of possible measures, including benefit cuts.
“These are times of total uncertainty,” comments Gary Jenkins, US pension expert and manager with CitiStreet, the joint venture between Citibank and State Street Global Advisors (SSGA). “The social security reform has always been a ‘third rail’ issue – meaning that if you touch it you will die. It’s even harder now, after 11 September. Because the projected federal surplus is getting thinner and thinner, there is also more strain on short-term actions, like diverting the social security surplus to pay down other government debts.”
In fact, even before 11 September, when the recession was already looming large, Lawrence Lindsay, the White House’s top economic adviser, admitted during an interview that: “There is no mattress out there” and that there is no guarantee that the social security “lock box” is really untouchable.
That’s one more reason for giving back the ownership and control of their retirement money to workers, according to the libertarian Cato Institute, one of the more prominent American think-tanks in favour of privatisation. “These rights are not dependent on how the market performs,” say the institute’s researchers. However, they are sure that “the market will eventually come back” and they mention the findings of “Common objections to a market-based private security system: a response”, a paper written in 1997 by William Shipman and Melissa Hieger, two top executives with SSGA. One point, among others, is that US financial markets have weathered catastrophic events before. Besides, social security privatisation is not about short-term market fluctuations, but long-term investment. And, historically, long-term investments in stocks have yielded average annual returns of nearly 8% and there is no reason to believe that this trend will not continue. According to Shipman’s work, the market would have to crash very far indeed to make a worker worse off with a personal private account, compared with the current social security system.
Anyway, the Cato researchers add that the social security privatisation does not mean investing only in stocks. Last but not least, the economic fallout from 11 September hurts the current social security system too: “Rising unemployment rate and declining tax revenue will worsen social security’s already severe financial problems,” conclude the Cato researchers. That’s probably why the Bush administration is rethinking its strategy about the pension reform. “Today there are other priorities,” observes Jenkins, “and the pension reform, like other important issues in the Bush campaign, including education, is likely to be put off.”
Not only that, but according to people familiar with Bush’s commission, the focus is no longer just on private accounts, the centerpiece of the president’s principles for reforming the system. The commission has started to move toward the idea of offering multiple options for change and for making the system solvent. For example, it is debating a range of possible benefit cuts, first of all the elimination of “wage-indexing”.
This increases retirees’ initial benefits to account for overall wage increases in the US economy. Critics of this system point out that wage-indexing assumes that a retiree is as productive as he was while still working, which is not true; and they propose that benefits are indexed to overall price increases, which tend to be lower than wage gains.
Opponents of privatising social security offer other suggestions that usually include not just benefit cuts, but also tax increases and/or government investing.Both the AARP and the National Committee to Preserve Social Security and Medicare, for example, propose to allow the government to invest in the financial markets a portion of the Social Security Trust Fund, to supplement payroll taxes with general revenue and to increase the maximum wage base subject to payroll taxes.
“With a Democratic majority at the Senate, President Bush will need some flexibility in options for reforming the pension system,” comment Jenkins.

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