Why the $4.7 Trillion Pyramid
Won’t be Enough to Save Wall Street

By Michael Hudson

They wanted something for nothing. I gave them nothing for something. —J.R. “Yellow Kid”

Well, Social Security, formerly the “third rail” of American politics, has now been trod upon, in rather dramatic fashion, by George W. Bush. Given that the maneuver is both stupid and unnecessary, one must ask why. After all, the program’s alleged deficiencies, if there are any, will not manifest themselves until at least 2018. This is not quite the same as worrying about the sun’s eventual collapse into a black hole, but for most politicians a problem that lies thirteen years in the future is nearly the same thing. Clearly all is not what it seems.

Bush himself offers two reasons for the present boldness. The first—that Social Security is “in crisis” is easily dismissed. Government actuaries, backed by economists from across the political spectrum, insist there is no funding problem. The Social Security Administration will take in more money than it pays out for the next thirteen years; it has built up a reserve of $1.8 trillion in interest-bearing Treasury bonds for the years after that; and any later shortfall can be covered easily by even a partial rollback of the recent tax cuts for the rich.

Bush’s second argument sounds more promising. If the American people will simply follow his plan, he says, they too will become rich.

(Bush’s opponents note, a possible third reason, which is that he is hoping to roll back the New Deal in favor of smaller government. It may be true that Bush dislikes the New Deal, but it is hard to envision his proposed replacement as a small-government alternative. A federally mandated transfer of funds whether it is from taxpayer pockets to Treasury bills, as with Social Security, or from taxpayer pockets to the stock market, as under Bush’s proposed changes is still a federally mandated transfer of funds.)

The way the system works now, the government withholds 12.4 percent of your paycheck, up to $90,000 in annual income. In return, it promises to provide you a monthly payment—a pension—from the time you turn sixty-two until the time you die. As of this writing, the administration’s alternative remains somewhat nebulous, but what is clear in all of the variations presented thus far is that you will be able to put some of your paycheck into the stock market. Bush calls these stock purchases “personal savings accounts.”

Vice President Dick Cheney described the benefits of these personal savings accounts in January. His example was a young woman who put away $1,000 every year for forty years. The Social Security Administration currently puts her money into Treasury bills, which at present return about 2 percent, so in forty years that investment would have returned about $61,000. Not too bad. “But if she invested the money in the stock market,” Cheney said, “earning even its lowest historical rate of return, she would earn more than double that amount— $160,000. If the individual earned the average historical stock market rate of return, she would have more than $225,000—or nearly four times the amount to be expected from Social Security.”

That’s a lot of math. Cheney’s main point is that an upbeat assessment of the stock market—about 7.5 percent annually over forty years, by his reckoning—would easily exceed the 2 percent offered by Treasury bills.

There is no arguing that $225,000 is more than $61,000. On the other hand, it’s not as if you get a lump sum from the Social Security Administration when you retire. The woman Cheney cited could end up taking in much more than $61,000 if she lives long enough. (The average annual payment to retirees today is about $11,000.) Or she could die on her sixty-second birthday. Like any other investment—or any other form of insurance, for that matter—Social Security is somewhat of a gamble. But then so is the stock market. By Cheney’s estimation, however, today’s stock market is a much better bet. “Over time,” he concluded, “the securities markets are the best, safest way to build substantial personal savings.”

That is the argument, anyway. The stock market is the main chance in America, and Bush wants to let all of us in on the action.

The one sure mark of a con, though, is the promise of free money. In fact, the only way the stock market is going to grow is if we the people put a lot more of our money into it. What Bush seeks to manufacture is a boom—or, more accurately, a bubble—bankrolled by the last safe pile of cash in America today. His plan is a Ponzi scheme, and in that scheme it is Social Security that is being played for the last sucker.

Michael Hudson is Distinguished Professor of Economics at the University of Missouri, Kansas City, and the author of many books on international and domestic finance, including Super Imperialism: The Origin and Fundamentals of U.S. World Dominance.

—Harpers, April 2005