THE ARGUMENTS for replacing Social Security with a system of private investment accounts have always struck me as morally dubious. For one thing, I've long suspected many conservatives resent Social Security simply because it came from the New Deal; I also know that privatization's popularity has a lot to do with lobbying by investment firms that stand to make billions from the scheme.

Nevertheless, recently, privatization advocates have trotted out an argument so breathtakingly cynical that it surprises even me. And, while it's unlikely the final decision about what to do with Social Security would turn on this particular contention, it is worth dissecting because it is emblematic of the intellectual chicanery that dominates -- and may well win -- the debate.

In black and white

The argument in question was the subject of a front-page news analysis a week ago in the Washington Times. But its real genesis was a Heritage Foundation report.

As the Times helpfully explained, "Americans get less back from Social Security than if they had privately invested their payroll taxes, Heritage says. But, because minorities tend to die earlier, their 'rate of return' is particularly grim." The obvious implication: Social Security takes from the have-nots (in this case, minorities) and gives to the haves (in this case, whites). And to think FDR's critics called him a class traitor.

There is, in fact, a sliver of truth here: On the whole, blacks and Hispanics will suffer a penalty because of their comparatively short average life spans. This is because, after you retire, Social Security pays you a fixed sum every month.

The longer you live, the more money you will receive and the better your "investment" in the system seems. Remember, you finance Social Security through payroll taxes -- so people who make equal incomes over the course of a working lifetime will have invested equal amounts in the system by the time they retire.

Of course, this concern for the comparative well-being of downtrodden racial groups sounds just a bit artificial coming from the House Speaker Newt Gingrich and Sen. Rick Santorum, R-Pa., both of whom figure prominently in the Times story. After all, isn't this precisely the kind of race-conscious thinking that Republicans so detest in every other facet of life?

Another odd thing about the sudden attention to comparative life-expectancy rates is that it comes just as Republicans are lobbying feverishly to kill a census plan that would increase the official count of blacks and minorities in the U.S. population. Apparently, Republicans want blacks and Hispanics to live long and fruitful lives -- as long as there aren't too many of them in swing districts.

But I digress. This is about the merits, not the motives, of the

new Republican argument. And it's on the merits that the argument fails. While Social Security may redistribute some money from minorities to whites, that redistribution pales in comparison to the transfer of wealth from rich to poor.

Today, low-income workers get more than three times the return on their investment than well-off workers get because Social Security pays a minimum fixed benefit to everybody, no matter how little they've paid into the system. This is the whole point of social insurance -- to provide everybody with a baseline income in retirement. All low-income workers benefit from Social Security; since blacks and Hispanics are disproportionately poor they benefit disproportionately.

To be sure, the Heritage research does make another important point: namely, that blacks and Hispanics would make even more money from a system of private investment accounts than they do from the existing program.

It's a valid argument, if true, and it's based on the fact that, on average, private securities yield much higher returns than government bonds, which is how the Social Security system currently invests its money. But notice the key phrase here: on average. That average takes into account both the lucky few who will hit stock-market pay dirt and the less lucky many who will just get by.

Less affluent investors tend to fall into the latter category. This is because you have to put money into risky investments to make a lot of money in the stock market. People with very little money are understandably reluctant to take such risks since retiring just after a market crash could substantially deplete one's account.

Risky business

So they instead sink their funds into the safest, least lucrative investments, whose yields are more similar to the current Social Security return -- particularly once you take away the money that has to be spent on fees to investment managers. (Yes, a few low-income people might make riskier investments. But, since they'd inevitably have little stock-market experience, they'd be vulnerable to scams and likely to fritter their money away on bad investments.)

Still, given that we really need to do something about the long-term deficit in the Social Security trust fund, isn't there a way to capture the stock market's higher yields without penalizing less affluent earners or exposing them to market risk? Absolutely. The government could gradually invest a portion of the trust fund in passive stock funds pegged to reliable indices like the Standard & Poors 500, while leaving the benefit structure relatively untouched.

Privatization advocates insist that this is a horrible idea: They say it would give the government too much control over the economy, and the temptation for political tinkering would be immense. But this is a red herring. The government wouldn't be trading very often, thus blunting the economic impact of its holdings. And it would be easy to prohibit manipulation of the market for political reasons.

All you would have to do is assign responsibility for the investments to a quasi-independent body, then carefully limit how it can make investment decisions.

Indeed, only two intellectually honest arguments come to mind for why the government-investment model is inferior to the private-investment model: It'd still be a big, collective government program; and there'd be no massive windfall for Wall Street investment houses. But, of course, that would imply the rationale for privatization is ideology or greed. And the last thing I want to do is to question anybody's motives.

Jonathan Cohn is executive editor of the New Republic, in which this article first appeared.

Pub Date: 6/29/98