Gingrich’s Latest Social Security Scheme: Privatize the Program, Then Bail Out Bad Investors

2012 GOP presidential hopeful Newt Gingrich today released his latest big idea: a return to Bush-style Social Security privatization. Gingrich has been quite vocal in his support for privatized Social Security accounts, but today marked the first time that he laid out specifics as to how he would gut one of the most successful programs in American history.

First, Gingrich explains that he would let workers opt into private accounts, just like Bush’s suggested system. Gingrich points to two models that inspired him to suggest this approach: privatized retirement accounts in both Chile and Galveston, Texas. He added the caveat that, should private accounts fail to deliver the same return as minimum Social Security benefits, the government would step in and make investors whole again:

The government guarantees that all workers with personal accounts will receive at least as much in retirement as they would under the current Social Security system. If someone with a personal account retires with benefits lower than those offered by the current system, the Treasury will send them a check to make up the difference. Thus, there is a legal government obligation that in a worst case scenario a retiree will be able to enjoy benefits at least as good as they would under th e traditional Social Security system.

Watch him explain the idea at a campaign event today:

As we pointed out when Sen. Rob Portman (R-OH) suggested a similar idea, promising to make investors whole again sets up a huge moral hazard problem. If investors know full well that the government is going to provide them with a minimum benefit, 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? Investors have every incentive to bet big in the hopes of a large payout, because if they go bust, the government will bail them out.

Add to this the fact that the privatized systems in Chile and Galveston aren’t as wonderful as Gingrich makes out. In fact, while they work quite well for the wealthy, middle- and lower-income participants wind up worse off. Regarding the Galveston system, Eric Kingson, a professor of social work at Syracuse University, explained that “for most people, it’s somewhere between ‘very bad’ and ‘not very good.’ ” Chile’s system, meanwhile, has “left millions without savings for their retirement.” According to estimates by Chile’s undersecretary for pensions, “in 2007, only 60 percent of Chilean workers had some kind of pension coverage, down from 86 percent in the 1970s.”

Gingrich’s plan would also cause the deficit to explode, as money meant for Social Security would have to be diverted into the creation and administration of private accounts. Social Security kept 14 million seniors out of poverty last year, but Gingrich would enact a scheme to privatize the system, while hoisting the costs of failure onto the federal government.