Economy

Portman’s Newest Social Security Scheme: Privatize The System, Then Bail Out The Bad Investors

Earlier this month, former Bush administration budget director Rob Portman, who is running on the Republican ticket for Ohio’s open Senate seat, denied that he favored privatizing Social Security, despite his long record of statements in support of doing just that. “I mean, this is what Einstein talked about, the magic, the greatest force in the universe, the power of compounding interest. That’s what we’re talking about here,” Portman said of private Social Security accounts.

But now Portman has added a new quirk to his privatization plan, in a pretty clear attempt to calm the nerves of those who rightfully worry about their Social Security being subject to the whims of the markets:

During the debate and in the “spin room” with reporters afterward, Portman insisted he has pledged not to cut benefits for retirees. Instead, he said he supports allowing young people to take a small portion of their Social Security taxes to set up personal accounts to invest as they see fit. But he insisted if they lost money, the government would step in to make them whole again.

This idea is simply absurd. In addition to the substantial costs associated with a traditional privatization scheme — which would force the government into trillions of new borrowing — Portman would add the cost of bailing out the accounts of those investors who lost money.

Obviously, this sets up a huge moral hazard problem. If investors know full well that the government is going to “make them whole again,” no matter what they do, then the incentive is to make risky investments and hope for a big payoff. After all, why not take the risk if the government has guaranteed that you can’t lose money? “If the government guaranteed to bail you out in case of losses, then investors would make riskier investments and the number of people who need bailing out would rise,” wrote Matthew Yglesias in reaction to Rep. Mike Pence (R-IN) promoting a similar idea.

Of course, there’s a simple way to avoid creating this sort of cockamamie scheme and the assorted problems that come along with it: don’t privatize Social Security. But Portman has been in thrall to this idea for so long, he seems willing to say and do whatever it takes to make it look like a responsible plan.