Cutting Our Benefits

Bush begins second term by attacking Social Security

Dean Baker

Novem­ber 2 was just the begin­ning of the bad news. Two days after the elec­tion, before most of us had even recov­ered, Pres­i­dent Bush told the coun­try that he would use his polit­i­cal cap­i­tal” to pri­va­tize Social Security. 

This dec­la­ra­tion of war was smart strat­e­gy. Social Secu­ri­ty is by far the country’s most impor­tant and suc­cess­ful social pro­gram. Over the last sev­en decades it has pro­vid­ed a decent retire­ment to tens of mil­lions of work­ers and their spous­es. It also pro­vides dis­abil­i­ty and sur­vivor insur­ance to almost the entire work­ing pop­u­la­tion — near­ly 2 mil­lion chil­dren are cur­rent­ly receiv­ing sur­vivors’ ben­e­fits. For these rea­sons, Social Secu­ri­ty enjoys enor­mous pub­lic sup­port, reg­u­lar­ly get­ting approval rat­ings of close to 90 per­cent in pub­lic opin­ion surveys.

If Bush is going to pri­va­tize Social Secu­ri­ty, he must move hard and fast — as he has. And if we are going to save it, pro­gres­sive forces will have to mobi­lize quickly.

Fact vs. fear

The key to stop­ping this dri­ve for pri­va­ti­za­tion will be to edu­cate the pub­lic about the basic facts on Social Secu­ri­ty. For two decades, the right has been work­ing over­time to under­mine con­fi­dence in the pro­gram. Groups like the Con­cord Coali­tion have been telling the coun­try that Social Secu­ri­ty is a Ponzi scheme that will inevitably col­lapse once the baby boomers retire. 

The fear­mon­gers have been large­ly suc­cess­ful. Many work­ers, espe­cial­ly those under 40, are con­vinced that Social Secu­ri­ty will be bank­rupt before they see a dime in ben­e­fits. For these peo­ple, the promise of a pri­vate account sounds pret­ty good, since they don’t believe they will ever get any­thing from Social Secu­ri­ty anyhow.

Pro­gres­sives must use every means avail­able to tell peo­ple that they have been lied to about Social Secu­ri­ty. The pro­gram is unam­bigu­ous­ly healthy. The Social Secu­ri­ty trustees’ report (avail­able on the Social Secu­ri­ty Administration’s Web site) shows that the pro­gram can pay every pen­ny of ben­e­fits through the year 2042, with no changes whatsoever. 

Even after 2042, the trustees’ pro­jec­tions show that while the pro­gram won’t have enough to pay cur­rent­ly sched­uled ben­e­fits — which are approx­i­mate­ly 40 per­cent high­er than cur­rent ben­e­fits — it will still have enough mon­ey to pay ben­e­fits high­er than those that cur­rent retirees receive, even when indexed for infla­tion. The changes nec­es­sary to allow full sched­uled ben­e­fits to be paid through­out Social Security’s 75-year plan­ning peri­od are small­er than the changes to Social Secu­ri­ty — increased Social Secu­ri­ty tax­es and ben­e­fit cuts — that were made in each of the decades from the 50s through the 80s.

Last June, the non­par­ti­san Con­gres­sion­al Bud­get Office (CBO) made an inde­pen­dent assess­ment of Social Security’s finances and con­clud­ed that the pro­gram could pay all ben­e­fits even longer — until 2052 — with no changes what­so­ev­er. Accord­ing to the CBO, the changes need­ed to keep the pro­gram ful­ly fund­ed through its 75-year plan­ning peri­od are less than half as large as the Social Secu­ri­ty tax increas­es put in place in the 80s.

Just to be clear, nei­ther of these pro­jec­tions is based on a rosy sce­nario about the future. In fact, the Social Secu­ri­ty trustees assume that over the next 75 years the econ­o­my will expe­ri­ence the slow­est pace of pro­duc­tiv­i­ty growth in its his­to­ry — there’s no new econ­o­my” in this story. 

In short, the claims that Social Secu­ri­ty is in immi­nent dan­ger of bank­rupt­cy are just like the claims about Sad­dam Hussein’s weapons of mass destruc­tion — polit­i­cal­ly moti­vat­ed lies. 

One such claim that gets fre­quent­ly repeat­ed is that the Social Secu­ri­ty trust fund has been raid­ed,” spent,” or is just worth­less pieces of paper. In fact, the Social Secu­ri­ty trust fund holds almost $2 tril­lion of gov­ern­ment bonds. Under the law, the gov­ern­ment must repay these bonds to Social Secu­ri­ty from gen­er­al rev­enue — this means it will be repaid pri­mar­i­ly from pro­gres­sive per­son­al and cor­po­rate income tax­es, because work­ers have already paid for their Social Secu­ri­ty ben­e­fits. In oth­er words, the gov­ern­ment is oblig­at­ed to tax wealthy peo­ple like Don­ald Trump and Peter Peter­son (the founder of the Con­cord Coali­tion) to pay for the Social Secu­ri­ty ben­e­fits that the rest of us have already earned.

The Social Secu­ri­ty sys­tem lent mon­ey to the gov­ern­ment to buy these bonds. (This is by design — the trust fund was built up to help pay for the retire­ment of the baby boomers.) The fact that the gov­ern­ment spent the mon­ey is mean­ing­less — just as it is mean­ing­less if the gov­ern­ment spends the mon­ey it bor­rows by issu­ing any oth­er bond. The gov­ern­ment is still legal­ly oblig­at­ed to repay the bond. In short, the peo­ple who say there is no trust fund” are mis­lead­ing the pub­lic. There is a trust fund with $2 tril­lion (grow­ing at the rate of $200 bil­lion a year) unless we let Con­gress elim­i­nate it.

Pri­va­tized pipe dreams

Are pri­vate accounts a remedy?

The Bush pri­va­ti­za­tion plan pro­pos­es to cou­ple new­ly cre­at­ed pri­vate accounts with large cuts in cur­rent basic Social Secu­ri­ty ben­e­fits. Under this scheme each retiree will get ben­e­fits from both these sources.

First, it is impor­tant to real­ize that the pri­va­tiz­ers are mak­ing implau­si­ble claims about the poten­tial returns avail­able from invest­ing in the stock mar­ket. Remem­ber, these are exact­ly the same peo­ple who at the peak of the Inter­net bub­ble in 2000 promised that work­ers would get great returns from invest­ing their Social Secu­ri­ty mon­ey in the stock market.

No pri­va­tiz­er has yet been able to doc­u­ment in num­bers how the pri­va­tiz­ers will get their pro­ject­ed stock returns (show­ing annu­al div­i­dend pay­outs and cap­i­tal gains). When it comes to sim­ple arith­metic, involv­ing tril­lions of dol­lars of work­ers’ Social Secu­ri­ty mon­ey, the pri­va­tiz­ers flunk the test.

While pri­vate accounts won’t do much to increase returns, they will cer­tain­ly increase risk and add huge­ly to admin­is­tra­tive costs. A work­er who hap­pens to retire dur­ing a mar­ket slump will see much of their ben­e­fit dis­ap­pear. In coun­tries that already have pri­vate accounts, like Eng­land and Chile, the admin­is­tra­tive fees are between 15 and 20 per­cent of annu­al ben­e­fits. By com­par­i­son, the admin­is­tra­tive costs of Social Secu­ri­ty are less than 0.6 per­cent of annu­al ben­e­fits. In addi­tion, retirees who want to buy an annu­ity (an infla­tion-pro­tect­ed life-long annu­al pay­out, like that pro­vid­ed by Social Secu­ri­ty) will typ­i­cal­ly have to pay a fee of at least 10 per­cent of their pri­vate account to con­vert their account to an annuity.

The bot­tom line is that under Bush’s pro­pos­al, work­ers can expect to see con­sid­er­ably reduced ben­e­fits, since pri­vate accounts will not come close to mak­ing up for the accom­pa­ny­ing ben­e­fit cuts. Under the plan that would pro­vide the basis for Bush’s pri­va­ti­za­tion scheme, an aver­age 15-year-old today who retires in 2055 will lose more than 35 per­cent ($160,000) of his cur­rent­ly sched­uled ben­e­fit over the course of his retire­ment. He stands to gain back less than one-third of this $160,000 loss from a pri­vate account. 

Social Secu­ri­ty pri­va­ti­za­tion does not look good for most work­ers because they can expect large ben­e­fit cuts, but it is like­ly to be espe­cial­ly bad for those in low­er-income brack­ets. While Bush’s pri­va­ti­za­tion plan actu­al­ly pro­vides mod­est ben­e­fit increas­es for low-end work­ers, it also puts in place a struc­ture that will force the mid­dle class to depend less on the tra­di­tion­al­ly defined Social Secu­ri­ty ben­e­fits and more on pri­vate retire­ment accounts.

Bush’s plan grad­u­al­ly reduces the size of the tra­di­tion­al ben­e­fit received by mid­dle-class work­ers, while increas­ing the size of pri­vate accounts until final­ly the defined Social Secu­ri­ty ben­e­fit will become almost irrel­e­vant to any­one but the poor. Under the Bush plan, a child born today who earns an aver­age wage dur­ing his work­ing life­time would get a defined ben­e­fit equal to just 10 per­cent of his wage when he retires. As the mid­dle class depends less and less on Social Secu­ri­ty, the ben­e­fits pledged to the poor would enjoy about as much polit­i­cal sup­port as wel­fare does today. Now that would real­ly be a Mis­sion Accomplished”! 

The pri­va­ti­za­tion of Social Secu­ri­ty can be stopped. Bush may no longer have to wor­ry about reelec­tion, but mem­bers of Con­gress do. There can be no more impor­tant bat­tle. If Bush is stopped on Social Secu­ri­ty, then his polit­i­cal cap­i­tal will have been spent, and he will be the lamest of lame ducks. On the oth­er hand, if he wins … well, that’s not going to happen.

Dean Bak­er is co-direc­tor of the Cen­ter for Eco­nom­ic and Pol­i­cy Research and co-author of Social Secu­ri­ty: The Pho­ny Cri­sis (Uni­ver­si­ty of Chica­go Press, 2000).
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