Several GOP candidates for president are talking up the idea of Social Security Privatization. They believe the plan appeals to two demographic groups: those who want what they believe is coming to them, and those who despise the darn tax and figure they’ll never see a dime.

To please both groups, the advocates of privatization have been doing a samba around the truth. Let’s cut the campaign rhetoric and the D.C. policy blather, and be blunt about what is really going on.

First, this is not real privatization. No plan touted by the candidates for president, or their kept think tanks, permits people to keep their own money. Draconian mandates mar every existing plan.

Even under the most “market-oriented” plans, the government will force you and your employer to save a certain percentage of your money. That means you can’t use that money on your children’s education or home improvements, or put it in an IRA of your choice. From a personal financial standpoint, then, the money grabbed from you for your “personal account” is indistinguishable from a tax.

Moreover, you won’t be able to spend the interest or dividends earned from your “personal account.” By mandate, it is rolled back into your account whether you want it to be or not.

As a final insult, nothing can be withdrawn from the “personal account,” even at a penalty, before a set retirement age. Even if you have a personal crisis, the money cannot be touched; neither can it be used as collateral and borrowed against.

If you can’t choose not to contribute, you can’t benefit from its earnings, and you can’t withdraw the money before the government lets you, in what sense, then, is this account personal at all? The answer is obvious: it is not. The money is not yours any more than the liabilities the government owes under the present system are yours.

For this reason, these plans cannot be called privatization. They constitute a re-founding of the original Society Security idea that got us into this fix to begin with. The underlying assumption is that bureaucrats, not individuals, know what is best for you. The result is the type of forced savings that would have made Mussolini and FDR proud.

Second, the government will still have a stake in the system. When examining privatization proposals, this reality emerges from the footnotes. Most call for the government to guarantee a certain level of return on investments. This is the logical result of the inability of people to escape the system.

If government is going to mandate that you save, it naturally believes it has some responsibility to make sure you don’t lose money. One writer has gone so far as to urge a federal mandate to make us all buy life insurance in conjunction with privatization!

The economic consequences of such investment guarantees are enormous. They set up a moral hazard that causes people to undertake a greater degree of risk than they otherwise would. For example, if government guarantees a 3 percent annual return on your “personal account,” there is never a reason to invest to bonds or securities that earn that rate or lower. Far from it, people have every incentive to invest at a higher risk, knowing full well that they cannot lose their shirt.

But this creates further problems that the government itself will step in and try to solve. To prevent people from investing their forced savings in high-flying penny stocks whose losses will trigger federal guarantees, there will be restrictions on the kinds of stocks that can and cannot be purchased (just as there are in other countries that have adopted these forced savings plans).

The privatizers often boast that their “personal account” system has none of the failings of Clinton’s disastrous idea of having the government itself buy stocks with Social Security taxes. In reality, the same problem exists in both plans: so long as the government mandates the collection of the tax, and prevents you from withdrawing it when you need it, it has a stake in what happens to the money.

Third, the huge transition to private accounts must be funded with tax dollars. Here again, this is a reality that can be only discovered through a careful reading of the footnotes to position papers advocating Social Security privatization. But if you think about it, there is no other way around the problem of the transition except through new taxes or a massive tax diversion.

Here’s why.

Under the present system, the existing stream of revenue provided by hapless people paying into the system is used to fund the lucky people who are receiving from the system. If the revenue stream is somehow diverted into a new policy gimmick like “privatization,” an accounting hole suddenly appears. Where does the money come from to fund existing beneficiaries?

One answer is taxes. Several years ago, privatizers were openly advocating an increase in the payroll tax to fund the transition. Don’t worry, they told us, the tax will be repealed: in 70 years! Keep in mind that this is the distance between the ratification of the Constitution and the Civil War, between the Civil War and the Great Depression, between the 1929 stock market crash and today.

Privatization advocates thought they had a way around this problem when, because of an accounting fiction, the program began to show surpluses. In fact, this only creates more perversities. Instead of giving the money back to taxpayers, privatization enthusiasts began to echo the Clinton line that the surpluses ought to be used to “save the system.” Thus, these privatizers contributed to the political resistance against tax cuts, as Paul Gigot wisely pointed out in the Wall Street Journal.

Fourth, every privatization proposal reinforces the current program’s existing economic dislocations. The major one is this: the program diminishes rather than increases private savings. If the federal welfare state — privatized or not — is going to provide for your retirement, individuals do not need to do so themselves.

Social Security is contrary to the original American ideal of free markets, individual choice, and financial independence from the state. FDR did an evil thing by hooking everyone into Leviathan from cradle to grave. The only reform worth pursuing is one that dismantles the whole corrupting system, and at last allows people to keep what they earn and spend it how they wish.

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