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Dow 8,000

Jacob S. Hacker is Professor of Political Science and Co-Director of the Center for Health, Economic, and Family Security at U.C. Berkeley. He is also a Fellow at the New America Foundation in Washington D.C.  His most recent books are Health At Risk: America's Ailing Health System--And How to Heal It, and The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream.

Back during President Bush's ill-fated campaign to partially privatize Social Security, I had the opportunity to debate James Glassman (of Dow 36,000 infamy, and a fervent advocate of the "ownership society") on public radio. Glassman kept coming back to the same snarky line: opponents of privatization were ignorant of basic financial realities. Sure a handful of (presumably stupid) people might lose money in the stock market, he said, but over the long term the returns of stocks were so spectacular that essentially everyone would be better off if they had an individual account in the stock market instead of Social Security.

So much for that argument. As we have seen in the last few weeks, stocks really are risky. (My former colleague at Yale, Bob Shiller, proved this during the Social Security debate when he published a devastating paper on the likelihood that most people would be losers under Bush's plan.) The argument for Social Security privatization was always built on a shaky intellectual edifice: assume away the transition costs, forget about the risk-protection and redistribution inherent in Social Security, and keep repeating "rate of return, rate of return" until blue in the face--as if stocks provided higher rates of return out of the goodness of the market's heart, rather than due to the greater risks that stock holders took on. Yet otherwise sensible people somehow found this logic compelling enough to repeat it as if it were credible. Bush's proposal went down in flames because it violated basic political realities, not because it was shown to be logically inconsistent.

But let's be clear: It was logically inconsistent. Higher potential returns mean higher risk. And today the virtues of having a secure foundation of retirement savings look so compelling that it's hard to understand how anybody could have thought privatizing Social Security (rather than, say, encouraging private retirement savings as a complement to Social Security) was a good idea. Yet John McCain apparently believes that it is still a good idea, so it's high time for critics of privatization to proudly say, "I told you so!"

More than that, they should be pressing McCain to answer some simple questions: If you really want to privatize Social Security, how would you protect people against the risks of stock market reversals? And how would you ensure that people had protections against all the other risks that Social Security insures against: the risk of living longer than expected, the risk of unexpected inflation, the risk of disability that's covered by Social Security disability insurance, the risk of dying young that's covered by Social Secuirty survivors insurance, and (looking at risk more broadly) the risk of having low lifetime earnings and not having access to a workplace retirement plan?

They should also take glee in an unnoted irony. Back when I was debating Glassman,  many of my fellow critics of privatization pointed out that the government could achieve higher returns on Social Security surpluses with less risk by having the federal government invest passively in the equity of private firms. Privatizers, of course, cried "socialism" and dismissed the idea out of hand. Now that a Republican administration is preparing to invest in private equities, can we get an apology?