The New Republic
October 23, 2000
Does Bush Understand His Social Security Plan?
By John Geanakoplos
Social Security is the third rail of American politics. So why hasn't George W. Bush been harmed for proposing to
transform it into a system of private accounts? Probably because his plan relies on simple and seemingly
compelling logic. Today, retirees get a measly 2 percent rate of return (in the form of Social Security benefits) on
the money they paid into the system (via payroll taxes). Since even ultrasafe bonds offer much better returns,
Bush says, people would be better off investing their money themselves. In an era of dizzying stock market
heights, this argument has the virtue of being timely. Unfortunately, it does not have the virtue of being true.
Under Social Security, the money you put into the system during your working years doesn't actually sit there
collecting interest, waiting for you to claim your checks at age 65. Most of it goes back out as benefits for today's
retirees. This is why Social Security is called a "pay-as-you-go" system:
Today's workers pay for today's retirees; when today's workers retire tomorrow, tomorrow's workers will pay for
their benefits; and so on.
It's an imperfect design. In an ideal world, each generation would pay for its own benefits. In other words, each
worker would pay into the system, have his or her money accumulate interest (either as part of one giant trust
fund or in individual accounts), and then take it back out upon retirement. Indeed, when FDR created Social
Security in the 19305, he envisaged a system more or less along those lines.
But there was a problem. It was the Great Depression; many elderly people literally faced starvation. They had
made virtually no Social Security contributions, but Roosevelt felt they needed relief. So Congress decided to pay
the destitute elderly of the '305 and early '40s with the contributions of contemporary workers, with the
understanding that those workers would get their retirement benefits from the next generation of workers, and so
on. As a result of this decision, the first generation of Social Security recipients got a windfall-receiving full
benefits after paying little into the system.
Of course, once Congress started paying out full benefits, it couldn't stop. The elderly of the 19505, '60s, and '70s