JUAN GONZALEZ: We turn now to the domestic portion of the president’s State of the Union address. He devoted a large portion of that to his push to restructure Social Security. The address kicked off a five-state campaign-style tour to advocate the privatization of the system. The plan faces nearly unanimous opposition from congressional Democrats, few of whom stood up or applauded during the Social Security portion of the speech. In his address, the president argued that the retirement system was headed towards bankruptcy.

GEORGE W. BUSH: For younger workers, the Social Security system has serious problems that will grow worse with time. Social Security was created decades ago for a very different era. In those days, people did not live as long. Benefits were much lower than they are today. A half century ago, about 16 workers paid into the system for each person drawing benefits. Our society has changed in ways that the founders of Social Security could not have foreseen. In today’s world, people are living longer and therefore, drawing benefits longer. Those benefits are scheduled to rise dramatically over the next few decades. Instead of 16 workers paying in for every beneficiary, right now it’s only about three workers. Over the next few decades, that number will fall to just two workers per beneficiary. With each passing year, fewer workers are paying ever higher benefits to an ever larger number of retirees. So, here’s the result — 13 years from now, in 2018, Social Security will be paying out more than it takes in. And every year afterwards will bring a shortfall, bigger than the year before. For example, in the year 2027, the government will somehow have to come up with an extra $200 billion to keep the system afloat, and by 2033, the annual shortfall would be more than $300 billion. By the year 2042, the entire system would be exhausted, and bankrupt. [Boos] If steps are not taken to avert that outcome — the only solutions would be dramatically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs.

AMY GOODMAN: President Bush in his inaugural address on Wednesday night. We’re joined on the telephone by Paul Krugman, New York Times columnist, professor of economics at Princeton University. His latest book is a textbook — a college textbook called, Microeconomics. He also wrote The Great Unraveling: Losing Our Way in the New Century. And we’re joined by Eric Engen, a resident scholar at the American Enterprise Institute. Paul Krugman, let’s begin with you, your response to President Bush’s saying that Social Security is going bankrupt?

PAUL KRUGMAN: Well, you heard the booing, and that was well justified. I mean, in — even if you believe those fairly pessimistic estimates, in the year that the trust fund is exhausted, which is what he is referring to, Social Security will be taking in about 75 cents for every dollar of expenses. If that’s bankrupt, then the US federal government is bankrupt right today. If you look at the federal government outside Social Security, right now, it’s taking in only 68 cents of revenue per dollar of expenses. This is a wild exaggeration to call it bankrupt. But really important thing is that nothing in what the president said last night would do anything to address that issue. The most interesting stuff that we heard was actually not in the speech, but what a senior administration official told reporters, in a background briefing, we got a little bit more of the — you know, a little bit be another step in the striptease, about what the Bush plan would involve. It is pretty clear that it involves nothing. We’ll go into this in the course of discussion. There’s nothing that would do anything to help the finances of Social Security. So, you know, the complete disconnect between what he is warning about, and what he wants to do.

JUAN GONZALEZ: Eric Engen, your response on this whole issue of is it appropriate to call this a possible bankruptcy of the Social Security system?

ERIC ENGEN: Well, I think, you know, if — when you start talking about bankrupt, you get into semantics and what one person means by bankrupt and another. I think that the main issue is what the state of the system, and I think there the president described it correctly. He basically just reiterated what is in the annual Social Security trustee’s report, and that is in 2018, the outflow of benefit payments starts to exceed taxes. The system would then have to start counting on the funds that are in the trust fund, and ultimately, it’s 2042. Now, these numbers, you know, vary from year to year to a certain extent. But generally, that’s the state of the system. Now, the issue is that in 2018 although the trust fund provides budget authority for Social Security, what would have to happen at that point is for the general budget in order to make those payments is that in the general part of the government’s budget, they would have to either raise taxes or reduce spending or borrow from the public in order to meet those payments. As the Congressional Budget Office has said, the trust fund represents budget authority for Social Security, but it doesn’t represent real economic resources. So, this issue of whether we should or should not reform Social Security is one that’s interesting, because back in the Clinton administration, their Social Security advisory council headed by Ned Gramlich at the Federal Reserve Board, they came to the conclusion that look, the system ultimately needs to be reformed, and it’s better do it early rather than later. Much of the latter part of the Clinton administration, they were weighing these topics of reforming Social Security. Many economists have noted that the demographic pressures of the retirement of the baby boom will put the Social Security system ultimately on a path that’s not sustainable, and that it’s better and more responsible to start working towards reform early when changes can be gradual rather than waiting right at the point where the system has to face either 25% benefit cuts in that year, or increases in taxes.

AMY GOODMAN: Paul Krugman, your response?

PAUL KRUGMAN: Yeah. I think that, you know, this has become the final — the last defense of the other arguments fall apart, which is, oh, Clinton wanted it, too. There’s an enormous difference between what the situation that was envisaged in the later years of the Clinton administration and where we are now. The situation that we thought we had was Social Security was building up a trust fund and it was entirely real because it was being used to help the federal government as a whole pay down debt. And so, that was — you couldn’t say that the surplus wasn’t actually contributing to the future ability to pay bills. You were actually paying down debt. That was actually helping. But because we were running on overall budget surplus, it looked likely, people actually believed five years ago that we were going to run out of debt to pay down. So, during the Clinton years, people talked about, well, what else can Social Security invest in. How should we organize that investment? There were various discussions about how it should be handled, whether it should be simply considered part of the trust fund, whether we should have another system of accounting. None of that applies now. The situation right now is that we have — Social Security itself is being run on a relatively responsible basis. Social Security system is running a surplus now. I mean, if you say all the stuff about 16 workers per retiree. We have three workers per retiree and we’re running a surplus. We will have an eventual transition to two. So, Social Security itself has mild long-run financial shortfall, maybe. But the big problem is for the rest of the federal government is running an enormous deficit that we have blown the surplus that we had at the end of the 1990’s. And that is the problem. The issue is not oh, how are we going to deal with the fact that Social Security is going to actually start wanting to collect interest on its bonds in 2018 or 2020 says the CBO, but it’s the fact that we have plunged the rest of the federal government into deep deficit. And that, not Social Security, is the reason to be worried about the budget picture.

JUAN GONZALEZ: I’d like to ask both of you. Back in the early 1980’s, Senator Moynihan worked with Republicans for some reforms of Social Security at that time. That ended up creating the enormous surpluses that still exist today. Doesn’t the — Bush’s assessment of this assume that nothing happens between now and 2018 or 2042, then this scenario will occur, but if some reforms, for instance, an increase in Social Security taxes or some minor reforms were begun now, wouldn’t that have an effect on this doomsday scenario of 2042? I’d like to begin first with Eric Engen.

ERIC ENGEN: Yeah, certainly, in the sense that that is the main point right now. It was the main point of the Clinton administration’s discussion about Social Security of Alan Greenspan’s long discussion of it ever since he was the head of the reform commission in 1983, and the current discussion is that the system needs a change to be long-term sustainable. Okay, that’s what the best estimates show. Certainly, if any change is made whether it’s on the benefit or the tax side, whether it’s reducing the projected growth and benefits or raising taxes, that’s going to then change the outlook.

PAUL KRUGMAN: But can just weigh in?

JUAN GONZALEZ: I’d like to clarify with Mr. Engen. When you say some changes would be made. What I was referring to was reforms in the existing system. Isn’t the president’s proposal a revamping and philosophical change in the actual system?

ERIC ENGEN: Not completely. I mean, it’s certainly — it’s being portrayed as complete privatization of Social Security. Well, that’s not true. I mean, what it is first of all, he said in terms of the current retirees and those near retirement, it wouldn’t change at all. The second thing is that people would have the choice of either staying in just the tradition am system, or voluntarily if they wanted to add in a personal account to the system. Okay, these accounts would not be large. I mean, we’re talking about 4% of wages up to $1,000. So, still the bulk of the payroll tax that people pay would go towards their traditional system. So, you would have the people that, say, did not opt into personal accounts, they would still be in the traditional part of the system. Those that did, would still have a Social Security benefit that would come from the traditional part of the system, plus the personal account.

AMY GOODMAN: Paul Krugman, what’s wrong with that?

PAUL KRUGMAN: First of all, let’s just talk about what it would take to maintain the system as essentially as it is, with no major changes. Congressional Budget Office numbers, which I think are the most plausible, say that for another 75 years, to secure it as-is, we would need about 0.4% of GDP, which turns out to be equivalent of $45 billion per year, right now. That’s about a tenth of our current budget deficit. It’s about one-fifth of the revenue sacrificed because the Bush tax cuts. Just bear in mind, securing Social Security on a financial basis is a really fairly small problem. It’s not something that would require massive overhaul. Now, the thing about — again, we don’t — we still don’t have any specifics about how the traditional plans will be affected under the Bush — whatever the plan is. But for what we have looked at, the plan two from the Bush commission on Social Security a few years ago, which still looks like, you know, we’re — a guess about what it might look like, it creeps up on you, but if you look half a century ahead, the replacement rate — the fraction of people’s income during their earning lifetimes that gets replaced by Social Security benefits after retirement would be cut in half from what it is now. So, you may say, well, it’s just a — first of all, it’s 4% of pay role, that’s a third of the Social Security tax. If we look at plausible descriptions of what the eventual plan might look like, it looks like essentially, you’ll get rid of half of the system in the long run. So, if you want to say this is just a small thing, it’s not. This is a fundamental revamping of the system. And above all, I think that we just need to keep coming back to the point that as far as we can tell, the private accounts business has nothing whatsoever to do with closing the financial shortfall of Social Security. It just — they’re going to create an atmosphere of crisis about that long term shortfall and the aging population. The key part of the plan has nothing to do with that. It’s just about something else. It’s about transforming the system. And then, there’s something else slipped in through the backdoor, maybe, to deal with the financial thing. It’s a complete bait and switch in terms of the policy.

AMY GOODMAN: We’re talking to Paul Krugman of The New York Times, has a new college textbook out called Microeconomics, and we’re joined by Eric Engen of the American Enterprise Institute. We’ll break and be back and find out who actually profits from the changing of Social Security.

[break]

AMY GOODMAN: Our guests are Eric Engen of the American Enterprise Institute and Paul Krugman, columnist for the New York Times, professor of economics at Princeton University. The question of who profits. Paul Krugman, what exactly happens and who pays for this?

PAUL KRUGMAN: We don’t know what exactly happens. In spite of all of this, we still don’t know. But it looks as if — I mean, the description right now is that it’s going to have very little to do with actually investing your own money. That what’s actually going to happen is that the Social Security Administration is going to invest on your behalf in a mixture of stocks and bonds, and sort of end of story. The big question that everyone wants it to know is really, how are these accounts, if they exist, going to be managed. We didn’t hear anything about that, except that Mr. Bush did insist that it was going to be run like the thrift savings plan which is for federal employees, which is something in which it is basically the government managing your money. And I basically don’t believe that. I basically believe they might start it that way, but within a very short time, there would be strong pressure to open this up so that investment — mutual funds could compete for people’s business, in which case there’s a lot of money for mutual funds involved. But so far, we have no information on what will actually happen.

JUAN GONZALEZ: Eric Engen, your sense of that. I remember the Wall Street Journal front page article a couple of days after the election which was attempting to say which industries are expecting to benefit from the second Bush term, and high among them were the Wall Street brokerage houses and mutual funds that expected to make large amounts of money on the privatization aspect of the President’s plan.

ERIC ENGEN: I think that it’s clear that the administration would model personal accounts along the lines of the thrift savings plan, which is a 401(k) type of plan for federal employees as Professor Krugman said. That’s a system that’s been in place now since the early 1980s, so we have about 20 years of experience in that. It is run at a very low cost in terms administrative costs. They’re way, way, way below any of the average rates of costs to the investors, as compared to mutual funds. And that would be the type of model clearly for a personal account component of Social Security. It would not be government investment in the sense that people would have a limited number of options. When the thrift savings plan was first opened, there were three options: a stock index fund, a corporate bond index fund and a treasury fund that has since been expanded by two additional funds, one an international stock fund and another small cap fund. These are all index funds, so they’re not like Internet or gold funds or anything such as that. They’re broadly diversified. And one thing they’re adding that would also be in this is what’s called life cycle funds, which are a mix of stocks and bonds that who would change over the person’s lifetime so that they would initially when younger be more invested in stocks relative to bonds but then the mix would change to a more conservative portfolio as they went forward.

PAUL KRUGMAN: Can I —

AMY GOODMAN: Yes, Paul Krugman.

PAUL KRUGMAN: The investment industry has explicitly said, for example the head of the Securities Industry Association has said they don’t view this as a big windfall because the government would make the financial providers bid on these at low-cost. So essentially, it would not be a big profit center, just as the investment providers for the thrift savings plan are not reaping huge profits from that plan.

AMY GOODMAN: I want to interrupt for a second to bring in Harry Reid, the Senate minority leader who responded to the inauguration address right afterwards.

HARRY REID: Let me share with you why I believe the president’s plan is so dangerous. There’s a lot we can do to improve America’s retirement security, but it’s wrong to replace the guaranteed benefit that Americans have earned with a guaranteed benefit cut of up to 40%. Make no mistake, that’s exactly what President Bush is proposing. The Bush plan would take the already record-high $4.3 trillion debt and put us another $2 trillion in the red. That’s an immoral burden to place on the backs of the next generation. But maybe most of all, the Bush plan isn’t really Social Security reform. It’s more like Social Security roulette. Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings, but that doesn’t mean taking Social Security’s guarantee and gambling with it. That’s coming from a Senator who represents Las Vegas.

AMY GOODMAN: Senate minority leader, Harry Reid, responding to the inaugural address. Paul Krugman, what about the $1 trillion to $2 trillion they’re talking about. What is this cost for?

PAUL KRUGMAN: No. It’s actually much more than that. We’re a actually talking about — what’s happening here is payroll tax revenue being diverted into private accounts, and because that’s revenue that’s no longer there, it’s — the federal government is going to have to borrow to make up the difference. And what looks like — as best we can make out is it’s a trillion dollars in the first decade, another $3.5 trillion in the second decade, and continuing onwards. Again, I don’t think anyone’s plotted out this one directly, but the plans we have all looked at suggest that the budget deficit will be higher than it otherwise would be until about 2050. Then maybe there would be some positive stuff, but we’re really talk about borrowing trillions and trillions of dollars to replace the monies that being diverted into private accounts, and the only way this comes out as a possible benefit is if those private accounts do sufficiently well on the stocks that make up part of the investment to offset the borrowing costs. So, if you distill the whole thing down to the essence, it’s the U.S. government borrowing to buy stocks, but shifting the risk. This is the really important thing: shifting the risk onto retirees. It’s not — there would be — we could have — it would be bad enough if the federal government were just going to borrow to buy stocks as a way of doing something, but what it’s actually doing is borrowing on your behalf, you the retiree, telling you, “Well, you know, you might want to put some of this in stocks,” and then saying, “Well, if it does badly, well, that’s your problem.”

JUAN GONZALEZ: Your response, Eric Engen.

ERIC ENGEN: Well, I think, first, what the transition costs, as they’re called, represent is a movement of what is currently unfunded liability that is — of Social Security that is not on the government’s books on to the government’s books. If the government took account of not just Social Security, but its entire budget the way a private corporation would in terms of having the unfunded liabilities actually on their books, there would be no extra cost to it. It’s just moving it from a — what is now an unfunded liability to an explicit liability. Now, it would make that debt explicit, but to match it, there would be an inequal amount in the private account. So, in terms of its overall effect, it would be a wash in that sense. I think that the bottom line here, and I think that the most important thing that came out of senator Reid’s comments was a criticism of the Bush proposal to reform Social Security. That’s fine. That’s part of the debate, but we still have haven’t heard any alternatives from the Democratic side to put on the table.

AMY GOODMAN: Paul Krugman, alternatives? Let’s get the alternative.

PAUL KRUGMAN: Let me just come back. Here we have a plan that does nothing — nothing to address the short term — to address the financial shortfall. We have a system that probably has a finance this shortfall. It’s not large. Here we have a plan that does nothing to address that, but adds risk. The complaint is, well, what’s the Democrats’ alternative? That doesn’t seem to be a fair test to impose. I think that the natural alternative is, well, you know, let’s find ways to stave a little bit of money and put a little bit of money in, but we aren’t hearing any of that from the President. So, why is that up to the Democrats?

ERIC ENGEN: Plan two of the commission report — it is a full plan that does achieve solvency.

PAUL KRUGMAN: If you want to go with plan two and have an actual discussion of plan two, I think that the Democrats would be delighted.

ERIC ENGEN: I think it would move further along. As far as the State of the Union address, this provided more details on any particular proposal than I think any President had. Usually State of the Union is not where all of the full details of anything are put out. He did lay on the table a number of potential options that he said are there in terms of restraining benefit growth.

AMY GOODMAN: I wanted to interrupt for a second.

ERIC ENGEN: He does not want to raise taxes.

AMY GOODMAN: I want to interrupt for a second. I know Paul Krugman has to leave. A quick question. In addition to Social Security, Bush called for making tax cuts permanent, deregulation of the tax reform, cutting the deficit in half by 2009. Your quick response?

PAUL KRUGMAN: And manna from heaven and free lunches for everyone. There’s no way you can make the tax cuts permanent and also do a major reduction in the deficit. So, this is — he’s demanding — it’s like the mythical story of the legislators who demanded that all wheels have circumferences three times their diameter. Sorry, the arithmetic doesn’t work. It’s amazing stuff. It’s basically a belief that he can say a lot of stuff that just doesn’t add up, and that he won’t be called on it.

AMY GOODMAN: On that note, I want to thank you very much for being with us. Paul Krugman of the New York Times, Eric Engen of the American Enterprise Institute.