NYTimes.com > Opinion

The Iceberg ComethBy PAUL KRUGMAN
(also available on pkarchive.org)

Published: January 11, 2005

Last week someone leaked a memo written by Peter Wehner, an
aide to Karl Rove, about how to sell Social Security
privatization. The public, says Mr. Wehner, must be
convinced that "the current system is heading for an
iceberg." 

It's the standard Bush administration tactic: invent a fake
crisis to bully people into doing what you want. "For the
first time in six decades," the memo says, "the Social
Security battle is one we can win." One thing I haven't
seen pointed out, however, is the extent to which the White
House expects the public and the media to believe two
contradictory things. 

The administration expects us to believe that drastic
change is needed, and needed right away, because of the
looming cost of paying for the baby boomers' retirement. 

The administration expects us not to notice, however, that
the supposed solution would do nothing to reduce that cost.
Even with the most favorable assumptions, the benefits of
privatization wouldn't kick in until most of the baby
boomers were long gone. For the next 45 years,
privatization would cost much more money than it saved. 

Advocates of privatization almost always pretend that all
we have to do is borrow a bit of money up front, and then
the system will become self-sustaining. The Wehner memo
talks of borrowing $1 trillion to $2 trillion "to cover
transition costs." Similar numbers have been widely
reported in the news media. 

But that's just the borrowing over the next decade.
Privatization would cost an additional $3 trillion in its
second decade, $5 trillion in the decade after that and
another $5 trillion in the decade after that. By the time
privatization started to save money, if it ever did, the
federal government would have run up around $15 trillion in
extra debt. 

These numbers are based on a Congressional Budget Office
analysis of Plan 2, which was devised by a special
presidential commission in 2001 and is widely expected to
be the basis for President Bush's plan. 

Under Plan 2, payroll taxes would be diverted into private
accounts while future benefits would be cut. In the short
run, this would worsen the budget deficit. In the long run,
if all went well, cutting benefit payments would reduce the
deficit. 

All wouldn't go well; I'll explain why in another column.
But suppose that everything went according to plan. Even in
that unlikely case, privatization wouldn't even begin to
reduce the budget deficit until 2050. This is supposed to
be the answer to an imminent crisis? 

While we waited 45 years for something good to happen,
there would be a real risk of a crisis - not in Social
Security, but in the budget as a whole. And privatization
would increase that risk. 

We already have a large budget deficit, the result of
President Bush's insistence on cutting taxes while waging a
war. And it will get worse: a rise in spending on
entitlements - mainly because of Medicare, but with a
smaller contribution from Medicaid and, in a minor
supporting role, Social Security - looks set to sharply
increase the deficit after 2010. 

Add borrowing for privatization to the mix, and the budget
deficit might well exceed 8 percent of G.D.P. at some time
during the next decade. That's a deficit that would make
Carlos Menem's Argentina look like a model of
responsibility. It would be sure to cause a collapse of
investor confidence, sending the dollar through the floor,
interest rates through the roof and the economy into a
tailspin. 

And when investors started fleeing because they believed
that America had turned into a banana republic, they
wouldn't be reassured by claims that someday, in the
distant future, privatization would do great things for the
budget. Just ask the Argentines: their version of Social
Security privatization was also supposed to save money in
the long run, but all it did was move forward the date of
their crisis. 

A responsible administration would reverse course on tax
cuts and the botched 2003 Medicare drug bill, both of which
pose much greater threats to the government's solvency than
the modest financial shortfall of the Social Security
system. But Mr. Bush has declared his tax cuts inviolable,
and he says that his drug bill will actually save money.
(The Medicare trustees say it will cost $8 trillion.) 

There's an iceberg in front of us, all right. And Mr. Bush
wants us to steam right into it, full speed ahead. 

E-mail: krugman@nytimes.com