Don't "subprime" Social Security

During the push to privatize Social Security, the idea's foes were accused of not trusting the American people to manage their own money. The naysayers prevailed, and aren't we glad.

How interesting that the buildup to the mortgage meltdown employed many of the same sales tactics as the Social Security privatization scheme. Resentment, fear, flattery and hype — plus scant details on fees and other costs — all went into the pitch.

When a former Fed official called for rules to tame the subprime-mortgage business, the peddlers howled. This was an attack on low-income people, particularly those of color, they said. Without lax lending practices, fewer minorities would have enjoyed the blessings of homeownership.

It turns out that many never really "owned" much if any of their homes — they just held a lot of expensive debt that let them put their names on a deed. People losing their houses may find themselves poorer than before they started.

Many blacks and Hispanics with solid credit were steered into subprime loans when they could have qualified for far-less-expensive prime mortgages. The administration did little to stop that practice. But when the subject was Social Security privatization, studies were waved showing that under the current setup, blacks tended to collect less benefits than did whites. The reason was that blacks died at younger ages.

The housing bubble-blowers stoked fears that people who didn't borrow heavily to buy today would only face higher home prices tomorrow. In truth, mortgage mania had itself inflated house prices. Those who waited and rented are now enjoying a buyers' market.

Likewise, fears were fanned that Social Security would soon turn belly up and today's young people would never collect. Speaking in West Virginia in April 2005, Bush warned, "There is no 'trust fund,' just IOUs."

Yes, there is a trust fund, and the IOUs are invested in Treasury securities backed by "the full faith and credit of the United States." Interestingly, Bush later said that people who want low-risk investments in their private accounts could choose, of all things, Treasury securities, which he noted, are "backed by the full faith and credit of the United States."

Every scheme relies on a no-lose proposition. For example, stocks always produce good returns over the long term. Historically, that has been true. But many ordinary people don't get "long term." If the folks now approaching retirement saw their private Social Security accounts suddenly lose 10 percent of their value — as have many conservative stock portfolios — we'd be hearing demands for a Social Security bailout on top of a mortgage bailout.

Even sophisticates buy into the myth of ever-rising prices — witness all the prime borrowers who are also in trouble. We read of Don Doyle, a computer engineer with a six-figure income and, at one time, a sterling credit rating. He holds a $740,000 mortgage, which is more than his California home is currently worth.

Like many subprime borrowers, Doyle took out an adjustable-rate mortgage with a low teaser rate that has since ballooned to require giant monthly payments. And like his troubled subprime brethren, he assumed that his home's value would continue to grow, letting him borrow more money or sell the house at a profit.

As a taxpayer, I'm relieved that Americans who don't read their sales contracts and assume that prices can't fall didn't have an opportunity to hand their Social Security money over to Wall Street. This should be the deal: The workers may invest, spend or gamble their money as they please — but not before something gets taken out of their paychecks for a boring but reliable Social Security benefit that they can't mess with.

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com