Social
Security Privatization
Plan
Report
to HELADA meeting, Karen
Lee
17 January, 2005 (revised for this page, 17 February)
Introduction
Private Account Proposal
How Social Security Works
Actuarial Projections
Results of the Bush Plan
Privatization Failures
Fees VS Rate of Return
Poverty Among the Elderly
Other Arguments Against Privatization
Media Blitz
INTRODUCTION
The
Great Depression and the 1929 stock market crash prompted Franklin D.
Roosevelt to lay the groundwork for the Social Security program to
alleviate the poverty of senior citizens at the time.
In
the last 70 years, millions of Americans have received Social Security
benefits. Currently 32
million elderly, disabled, widows and orphans and other dependent children
receive a basic income from the fund.
Conservative
opposition to Social Security is not new, but has been raised again by the
the
Bush administration. Its initial ‘private accounts’ proposal sought to
scrap a retirement system that, according to Princeton University
economist Paul Krugman and many other critics, works, and can be made
financially sound for generations to come with modest reforms.
Instead,
said Krugman in the NYTimes, 30/12/04, “It wants to buy into failure,
emulating systems that, when tried elsewhere, have neither saved money nor
protected the elderly from poverty.”
Details
of the proposal, expected to be introduced as a bill by April, are
shifting in the face of mounting opposition.
THE
BROAD STROKES ORIGINALLY HINTED AT INCLUDE:
1.
Retain current benefits for today's retirees and for those who are nearing
retirement,
covering at least those between 60 and 65, possibly those as young as 55.
2.
Then, reduce benefits. They may use inflation rates instead of workers'
wages to calculate Social Security benefits. The approach, known as
"price indexing, could cut benefits significantly for Social Security
recipients. (4/1/05 CNN) Because wages tend to rise considerably faster
than inflation, the new formula would stunt the growth of benefits, slowly
at first but more quickly by the middle of the century (5/1/05 Washington
Post). Social Security
benefits currently equal 42 percent of the earnings of an average worker
retiring at 65. Under the new formula, that benefit would fall to 20
percent of pre-retirement earnings.
3.
Divert a portion of payroll deductions – perhaps as much as 2 percentage
points of the current 6.2% withheld, which employees could then invest in
private (or personal) accounts.
4.
Somehow make
up the difference between these reduced pay-ins and benefits still paid
out. This is what the administration has been calling ‘transition
cost’.
Bush
has not specified how he plans to finance the transition cost –
estimated at $1 to $2 trillion over the next 10 years -- but three
possibilities are: immense government borrowing, huge cuts
in other programs or higher taxes. Borrowing (sale of US treasury
bonds) to finance the Iraq war effort is already ballooning the deficit.
And even without a specific plan for Social Security, the 2005 budget
includes massive cuts in social programs.
In
a further effort to boost taxpayer support for privatization, White House
budget chief Joshua Bolten was quoted in a 15 Jan, 2005 AP story entitled
‘Social Security Tax Hike Feared’, that a 50% hike in payroll
withholding might be necessary to ‘save’ the system as it currently
stands. Bolten’s figures were derived from a projection that calculated
the shortfall ‘to infinity’ as opposed to the 75-year time frame
normally used.
Note
that opposition economists predict a more modest withholding hike might
make the difference, something in the range of, say, 3.6%.
Lets
look at the plan in a little more detail.
Social
Security is an INSURANCE plan, with risks shared by all, and a modest basic income
promised to all for life, upon retirement.
Employees
pay into the system in payroll taxes. The money is invested in US Treasury
bonds which earn interest. That’s the Social Security Trust, out of
which payments are made to retirees, disabled workers and survivors of
covered employees.
Social
Security has a budget independent of the rest of the U.S. government. That
budget is currently running a surplus, thanks to an increase in the
payroll tax two decades ago under Reagan. As a result, Social Security has
a large and growing trust fund.
A
larger group of retirees is now beginning to receive pensions. Many of us,
the ‘baby boomers’ born just after the 2nd World War, fall
into this group. Our birth rate (from
1940-1969) was
about 2.9 per couple. But, we haven’t been so prolific. We’ve
reproduced at a rate closer to ZPG (2.1 from 1970 to 2000). Our fewer
children and grandchildren will be paying into the system while we’re
living longer and taking a bigger chunk out.
Bush
supporters use this social phenomenon to predict a ‘crisis’. They say
that by mid-century, the fund will only be able to pay 70% of benefits.
Critics
of privatisation argue that the mid-century shortfall will be temporary.
As we baby boomers begin dying out, the new generation of retirees will be
smaller. And in the long term, the system will go back into surplus.
WHAT
DO THE EXPERTS PROJECT?
Social
Security actuaries project that in 2018, Social Security’s trust fund
will hold $5.3 trillion in assets, in the form of U.S. Treasury bonds.
Starting in that year, Social Security payroll tax collections will
not be sufficient to cover the cost of all Social Security benefits, so
the Social Security system will start to use a portion of the interest
the trust fund earns on its bonds – not the ‘principal’ – to cover
the remaining benefit costs.
The
rest of the interest the bonds earn will be reinvested in the trust fund.
The actuaries project that as a result of these interest earnings, the
trust fund’s assets will increase by another $1 trillion in the decade
after 2018 and reach $6.6 trillion by 2028.
Treasury
bonds, by the way, are considered one of the world’s most secure
investments, with $4.3 trillion in Treasury debt now held by investors,
large and small, throughout the world. The United States has never in its
history defaulted on its bonds. Of course, bond interest, as on any other
loan, is paid by the borrower, the US general fund.
The
Social Security Trustees, a group that includes the Treasury Secretary and
other Cabinet officials, project that the trust fund will be able to pay full
benefits until 2042. At that point, the trust fund will be exhausted -
that is, all of its bonds will have been redeemed.
The Congressional Budget Office projects that date as 2052. So,
somewhere in mid century.
When
the trust fund is exhausted, the Social Security system will not be
‘bankrupt’. It will
continue to collect both payroll taxes and the income taxes levied on a
portion of Social Security benefits.
With these revenues, it will be able to pay about 70 percent of
benefits according to the Social Security Trustees (or about 80 percent of
benefits according to CBO).
At
this point, if nothing at all is done today to adjust the system, a loan
from the general fund would be necessary to make up the shortfall in
benefits – a temporary ‘fix’ – until the baby boomers pass on.
What
could be done, instead of dismantling the system, is to raise the
percentage of payroll withholding, or raise the cap on taxable income just
slightly or consider a flexible system of partial benefits combined with
continuing work. (The EU is already piloting this last idea.)
WHAT
THE BUSH PROPOSAL WOULD MEAN
IF,
as the Bush administration claims, Social Security faces a crisis in 2018,
then converting part of Social Security to individual accounts would
accelerate that crisis.
According
to the Social Security actuaries, the major individual account plan
proposed by the President’s Social Security Commission (which is
reported to be the principal plan the President is considering) would
advance the date at which Social Security’s benefit costs exceed its
non-interest income from 2018 to 2006.
In
other words, under that plan, Social Security would have to rely on
interest from the trust fund to pay benefits starting next year.
According
to the actuaries, that plan would increase the federal debt by $10
trillion by 2030, an amount equal to 28 percent of GDP, substantially
increasing the volume of Treasury bonds that the government has to repay.
That
federal debt is something to watch. In a U.S. Newswire report in February
2004 Robert Weiner, former chief of staff of the House Aging Committee
under Claude Pepper (D-FLA), 1975-1980, asserted that what many political
leaders want to do is to use solvent Social Security money to reduce the
overall federal deficit.
The
long-term cost of the Bush tax cuts, for instance, is five times the
estimate of Social Security's deficit over the next 75 years.
Simply
put, the administration has run up the biggest deficit in US history,
plans to ask for more billions to bale out of the mess in Iraq, AND take
the money from the Social Security Trust WHILE selling the move to voters
as their chance to participate in the ‘ownership society’, EVEN though
employees have been paying in extra since 1983, thinking that would cover
their retirement.
That’s
a bit like OWNING a battered 1980 Honda CVC while still paying for the
Mercedes 450 SL you thought you were buying.
WHERE
BUSH-TYPE PLANS HAVE BEEN TRIED
Where
retirement plans have been privatised in the past -- Krugman pointed to
the UK and Chile -- the governments have now been forced to step in with
subsidies to prevent widespread poverty among retirees.
In
Chile's system, management fees are around 20%, which Krugman says is
typical for privatised systems. In Britain, privatised since the days of
Margaret Thatcher, alarm over the large fees charged by some investment
companies led government regulators to impose a "charge cap."
Even so, fees continue to take a large bite out of British retirement
savings.
Compare
this to the current US system where more than 99 percent of Social
Security's revenues go toward benefits, and less than 1 percent for
overhead. By the way, the British commissioners point to one system
that has ‘solvency to die for’. Where is it? In the US.
ADMINISTRATION
FEES VS RATE OF RETURN
In
privatised systems, administration fees cut sharply into the returns
individuals can expect on their accounts.
A
reasonable prediction for the real rate of return on personal accounts in
the U.S. is 4 percent or less. With British-level management fees, net
returns to workers would be reduced by more than a quarter. Add in deep
cuts in benefits and a big increase in risk, and we're looking at a
"reform" that hurts everyone except the investment industry. (Krugman)
Advocates
insist that a privatised U.S. system can keep expenses much lower. True if
investments are restricted to low-overhead index funds - that is, if
government officials, not individuals, make the investment decisions. But
if that's how the system works, the claims that workers will have control
over their own money are false advertising. (Krugman)
And
if there are rules restricting workers to low-expense investments,
investment industry lobbyists will try to get those rules overturned. The
administration is already talking about ‘increasing the range of
investments’ in the near future.
In
Chile, more than 20 years after the system was created, the government is
still pouring in money. Why? Because, as a Federal Reserve study puts it,
the Chilean government must "provide subsidies for workers failing to
accumulate enough capital to provide a minimum pension." In other
words, privatisation would have condemned many retirees to dire poverty,
and the government stepped back in to save them.
The
same thing is beginning to happen in Britain.
What
we can expect from the Bush plan is for benefits in the future to be
drastically reduced, possibly as low as 20% of retirement wage, as
compared to the current 42%. The difference, theoretically to be made up
by private accounts, is risky, as investors saw in the ‘90s.
And,
as the New York Times pointed out in an editorial last September, higher
interest rates caused by huge deficits, along with reductions in
government services and/or higher taxes, would mean that retirees would
get less than if Social Security had been reformed in a more sensible way.
OTHER
ARGUMENTS AGAINST PRIVATIZATION
The
Times went on to note some other arguments against privatisation.
1.
It invites overexposure to the stock market. Many people already
rely heavily on investment through 401(k)s. Also, employers increasingly
strive for outsized stock market returns to make up for inadequate
contributions to their plans. As columnist Helen Thomas pointed out,
‘The dot-com implosion changed the retirement plans of millions of
Americans. More recently, it would be well to “think Enron”.’
2.
People without pensions or enough income to save money in
retirement plans generally do not belong in the stock market at all. Stock
investing makes sense only after you have accumulated an emergency cash
reserve, are adequately insured and have paid off consumer debt.
3.
People are living longer. Unless the government mandates that
people convert their personal accounts into private annuities, retirees
are in danger of outliving their money, leaving them to survive on the
meagre government benefit. (that 20% of wage)
4.
They would lose the inflation protection built into government
benefits, which is important the longer you live. Those most at risk of
impoverishment are old women, who live three years longer than men on
average and are far less likely to have private pensions.
5.
And the broad social argument: We all lose if our fellow citizens
come up short. By taking the financial risk out of growing old, Social
Security has had remarkable results for society at large. Poverty among
the elderly is now 10 percent, down from 30 percent in 1960. Like any
sound insurance system, Social Security works by broadly pooling risks. It
protects everyone because it includes everyone. Personal accounts move
Social Security away from a comprehensive system to one in which it's
every man for himself.
Several
critics have also pointed out that young people who don’t want to pay
for older retirees through the system, will be paying for them one way or
the other when they’re called upon to support aged parents who can’t
pay their own way.
MEDIA
BLITZ
Privatization
of Social Security is looming as one of the first major campaigns of the
new Bush administration. We expect the government to make a major media
push, and this push is to be funded primarily by potential beneficiaries
of the change, including:
§
Club for Growth, a Republican group that hopes to spend $15 million
on a media campaign backing the White House.
§
Cato Institute, a libertarian think tank that is preparing to
distribute 25,000 Social Security guides to help community leaders shape
public opinion for Bush
§
National Association of Manufacturers
§
Alliance for Worker Retirement Security, a lobby group representing
Wall Street and the manufacturing industry, which operates out of the NAM
headquarters.
§
Progress for America, an independent conservative group, has set
aside about $9 million for this and other White House domestic priorities
in the new year.
The
media blitz will use many of the buzz words we’ve heard in the past:
crisis, bankrupt, high administration costs, individual choice and those
perenniel favourites, the notion that the bureaucracy is always
‘bloated’ and that the private sector is always ‘lean and
efficient’.
For
the record, groups opposed to the privatisation plan include the
Democratic Party, AFL-CIO, the National Assn. for the Advancement of
Colored People, the National Organization of Women, and the AARP which
adamantly opposes replacing any part of Social Security with individual
accounts. AARP supports incentives for people to establish personal
retirement accounts in addition to Social Security, but not as a
substitute.
We
can lend our support to their efforts.