Don't Blow Away Social Security

[Charlie Hoyt <obrerista@rocketmail.com>]

Don't Blow Away Social Security

    [This material is from the Labor Party Press issue
    from March, 1999.  The website it appears in is
    http://www.labornet.org/lpa/  		              ]

There is no Social Security crisis. But if Democrats and Republicans get
their way and privatize the system, there will be.

"It's weird," says economist Dean Baker of the Preamble Center,
who has been studying and writing about Social Security reform.
"We're all looking at the same numbers, and what the numbers say
- even the pessimistic ones - is that we could take absolutely no
action on Social Security for the next 34 years, and the program
would continue to pay out all its benefits." And yet, politicians
of both parties are all aflutter about the need to radically reform
Social Security right away.

The picture they paint does sound grim: Mostly because people are living
longer, today's workforce is supporting a greater and greater number of
Social Security recipients. And the trend will probably continue. In 1995,
there were nearly five people under 65 for every one person over
retirement age. But by 2030, the ratio will be more like three workers for
every retiree. And since Social Security is actually a pay-as-you-go
system - current workers pay for current retirees - that spells trouble.
(See "Social Security Basics") For the time being, we can supplement
the shortfall by drawing from the extra pot of money the Social Security
system has amassed (the Social Security Trust Fund). But then, in 2034,
according to some projections, that fund will be depleted, and Social
Security money will have to come from active workers alone. And, under
the current formula, they would only be able to cover about 75 percent of
the benefits retirees had been promised from Social Security.

President Clinton and members of Congress say "saving" Social Security
is at the top of their agenda (after impeachment, of course). Many recipes
have been written for rescuing Social Security. The most extreme plans
involve privatization. Some people want the Social Security payroll
withholding to go into our own "personal security account" that we can
invest ourselves. Less radical plans would allow the Social Security Trust
Fund to be invested in the stock market, where it would supposedly get a
higher return than where it is invested now, in U.S. Treasury bonds.

President Clinton favors a combination of both ideas: He wants to invest
part of the Social Security Fund (eventually up to 15 percent of it) in the
stock market. He also proposes setting up voluntary new private accounts
for middle- and low- income Americans - but outside the Social
Security system.

At a time when the stock market is in the stratosphere, record numbers of
Americans are investing, and the airwaves are full of experts advising the
general public on how to get the best return, the idea of turning Social
Security into a personal Wall Street investment portfolio is appealing to a
lot of people. 

But not everybody's sold on the idea. To begin with, many people
question whether there even will be a Social Security shortfall. They argue
that the Social Security hullabaloo is all based on some very gloomy
economic projections made by Social Security trustees. In their reports,
the trustees assume that over the next 75 years, the U.S. economy will
grow at less than half the rate it has grown for the past 75 years.
According to a report by the New York-based Century Foundation, an
increase in annual economic growth of just .15 percentage points over the
next 35 years would raise output by as much as the combined increase in
the cost of both Social Security and Medicare. Meaning: Workers of the
future may have no trouble supporting the growing ranks of the retired.

And yet, our politicians have managed to convince a majority of
Americans that there really is a crisis at hand. Polls of younger Americans
show that many believe they can expect little or no money from Social
Security when they retire (unless, perhaps, the system is radically
changed). 

So who started this rush for a "solution" to the Social Security "crisis"?
Follow the money. Wall Street could stand to gain $240 billion in fees
within the first 12 years of a privatized system, according to economist
Christian Weller. That, he points out, is enough to give 20,000 fund
managers an annual salary of $1 million each. No wonder the financial
industry has spent millions of dollars of late to promote the idea of Social
Security privatization. 

Economist Dean Baker believes there's a deeper motive behind the
privatization push: "I think much of this is being driven by people who are
just plain anti-government," he says. "And Social Security is the
government's flagship social program." 

It may be, says Baker, that some minor adjustments will need to be made
to allow the Social Security system to continue in good health. (See
"What We Should Do.") But privatizing the system and investing Social
Security money in the stock market is not the way to go. In fact, he
believes, it would take the "security" out of Social Security. Most of us
would see our retirement incomes dramatically reduced.What's Wrong with
  Privatizing Social Security?

  1. The stock market is volatile. 

  The stock market goes up and up. And sometimes it goes down and
  down. Even without an economic catastrophe, the stock market's
  volatility would make our retirement income entirely unpredictable.
  Dean Baker has noted that if the economy grows as slowly as the
  Social Security trustees are predicting, then the prognosis for the
  stock market isn't too rosy either. Social Security barely covers
  seniors' expenses as it is now. 

  Former Congressional Budget Office director Robert Reischauer has
  pointed out that if we had private Social Security accounts back in
  1969, a person retiring in that year would have had a 60 percent
  larger payout upon retirement than someone retiring seven years
  later, after the market dipped. John Mueller, a former economic
  advisor to the House Republicans, makes a similar observation:
  Since 1900, he notes, there have been three 20-year periods in
  which returns on the stock market fell to about zero. In between
  were periods of positive returns. "This meant that some people
  earned a negative real return from investing in the stock market,
  while others received a real pretax return as high as 10 percent." For
  retirees, it would be the luck of the draw.

  Under our current system, the government bears the risk of
  economic downturn, and we're all promised a constant monthly
  amount of retirement income. Under a privatized system, we each
  individually bear the risk. Even the cleverest investor will likely lose
  money in a major financial downturn. And not all of us are so clever
  - or can afford to spend our time playing amateur Wall Street
  trader.

  2. Shifting to a privatized system would require a hugely
  expensive period of transition.

  Say we begin establishing private Social Security accounts for all of
  us Americans who are currently working and under 65. Who will
  generate funds to cover the current retirees? You and me.
  Essentially, the next several generations of Americans would have to
  pay twice - once into our own fund, and again to sustain current
  retirees. According to one estimate, full-scale privatization of Social
  Security would require about $6.5 trillion in additional taxes over the
  next seventy-two years. The Employee Benefits Research Institute
  estimates that transition costs could amount to something like 5
  percent of the nation's Gross Domestic Product for the next 40
  years. By instituting privatization, we'd be starting a Social Security
  crisis, not ending one.

  3. Maintaining private accounts will be costly.

  Many of us tend to think that any federal program must be incredibly
  inefficient and bureaucratic. A Roper poll asked Americans to
  estimate the administrative costs of Social Security as a percentage
  of benefits. They guessed, on average, 50 percent. The real answer
  is one percent. Only one percent of the money that goes into Social
  Security is spent on administration. By comparison, the
  administrative costs for private insurance are about 13 percent of
  annual benefit amounts.

  The main reason Social Security administration is so cheap is that the
  whole fund is invested in one place, the U.S. Treasury. Imagine
  instead the administrative cost of managing millions of separate
  accounts invested in a myriad of stocks and bonds. Much of the
  money would go to Wall Street investment houses - which is why
  they like the privatization idea so much.

  In Chile, which privatized its retirement system in 1981, people pay
  between 10 and 20 percent of their annual retirement contribution
  just to maintain their account. The stock market would have to
  perform spectacularly to make up for that kind of expense. 

  What's Wrong with
  Investing the Social
  Security Fund in Stocks?

  Clinton and others are advocating that part of the Social Security
  system's extra money be invested in the stock market instead of the
  Treasury, hoping that it would collect more interest there. Because
  the money would still stay in one big lump, the administrative costs
  wouldn't stack up the way they would if everyone had their own
  account. 

  But again, the stock market is volatile. There's no guarantee that the
  gamble would pay off. 

  Dean Baker and others also worry that investing the Social Security
  Fund in the stock market just opens the door to further privatization.
  "I think it plays into the hands of people who want individual
  accounts," he says. "It logically leads people to believe that there's a
  fortune to be made in the stock market. And if there's a fortune to
  be made, well then, let me get access to that as an individual. But in
  fact, there isn't a fortune to be made, because they've overestimated
  the returns."

  As it happens, financial institutions hate this aspect of Clinton's plan.
  If dollars are going to be invested in the stock market, they want to
  get a cut. But that won't happen if the government does the investing
  in one big lump. Financial types have also complained about the
  "danger" of having the government controlling such a big chunk of
  change on Wall St. 

  Because so much of the Social Security reform debate is being
  driven by Wall Street, Baker believes this plan isn't going anywhere.
  And he's glad.

  What's Wrong with
  Raising the Retirement Age
  & Other "Popular Ideas"?

  There are many other proposals afloat for "saving" Social Security.
  There's Clinton's idea of setting up voluntary "Universal Savings
  Accounts" outside the Social Security system. Workers could
  contribute through payroll deduction and the government would
  match their contribution. Workers could then invest this pot of
  money in the stock market. What's ironic about this plan is that it
  does nothing to address the alleged crisis in the Social Security
  system. But it does address the deep desire of Wall Street brokers
  to get a massive new influx of commissions. And it would also ease
  the way for cutting back Social Security in the years to come. 

  Some people have proposed shoring up Social Security by cutting
  back or even eliminating rich people's access to Social Security. At
  a time when the rich are filthy rich, this does sound appetizing. But
  politically, it's probably poison. Because these days, any program
  that's perceived as a poor people's program is likely to end up on
  the chopping block - just like Medicaid and welfare.

  Some of our elected officials propose raising the eligibility age to get
  full Social Security benefits as a way of keeping money in the system.
  The retirement age is already slated to rise from 65 to 67 in the
  coming years, but they want to force us to work even longer.
  Proponents of this idea think it's only fair, since Americans are living
  longer than they used to. 

  Anyone who can make this argument has probably never worked in
  a hospital, a refinery, or on a railroad. No one should be forced to
  do this work at the age of 70! The average black man can't possibly
  like this idea, since in this country a black man born in 1950 was
  expected at birth to live only 59 years, on average: he'll never see a
  dime of Social Security money. Instead, we should be talking about
  lowering the retirement age to match that in other industrialized
  countries - and to reflect our growing productivity. (See "But
  Other Countries Do Better.")

  One plan by two leading Democrats, Sen. Daniel Patrick Moynihan
  of New York and Sen. Bob Kerrey of Nebraska, would both
  increase the retirement age to 68 and reduce Social Security's
  cost-of-living adjustment by a percentage point. Dean Baker points
  out that such a COLA cut would really add up for people who live
  into their 80s and 90s. By the time someone reaches 85, they would
  see their annual benefit reduced by 19 percent. That makes it hard to
  pay the rent.

  There are more equitable ways to bring more money into the Social
  Security system. The Labor Party and others advocate eliminating
  the cap on the payroll tax. But our main message is this: When it
  comes to Social Security, our most popular and efficient social
  program.... if it ain't broke, don't fix it.