President Bush to nation: Get ready for privatized Social Security
By DON McINTOSH, Associate Editor
“We will start on Social Security now,” announced President George W. Bush Nov. 4.
A day after Democrat John Kerry conceded defeat, Bush outlined plans for his second term. Social Security privatization is priority number one.
“I earned capital in the campaign, political capital, and now I intend to spend it,” Bush told reporters.
The Republican president and his backers assert that their 3 percent margin of victory means they have a mandate to move ahead with their agenda.
That came as a surprise to economist Dean Baker, co-director of the Center for Economic and Policy Research.
“I suddenly had all these reporters calling me saying President Bush is now talking about Social Security,” Baker said.
“Maybe I’m from the old school of politics, but I thought you got political capital when you ran on an issue and then you won. In this particular case, President Bush barely mentioned privatizing Social Security on the campaign.”
Tussle Over Terms
In fact, when Kerry warned, in an Oct. 17 campaign appearance, that Bush was planning a surprise second-term push to “privatize” Social Security, the Bush-Cheney campaign denied it, calling it “misleading senior scare tactics" that show that Kerry “will say anything to get elected.”
Bush-Cheney campaign chairman Marc Racicot called the idea of Bush privatizing Social Security “absolutely preposterous.”
The crux of the denial was semantics. “What the president is talking about,” former Montana governor Racicot told Fox News, “is allowing younger people, younger workers to own a portion of their Social Security and invest it and make decisions.”
In other words, critics say, “privatization.”
The proposal — to set up private accounts within Social Security — was originally termed “privatization” by its originator, the Cato Institute, a right-wing Washington, D.C., group that advocates smaller government and fewer regulations on business.
But in an era of corporate scandal, the word “privatization” didn’t poll well. Even Cato changed the name of its project from the “Project on Social Security Privatization” to the “Project on Social Security Choice,” and backers now refer to “voluntary personal retirement accounts” or some variation, and want very much for the news media to stop calling it “privatization.”
Details of Bush’s Plan
Whatever you call it, Bush’s plan would use Social Security taxes to buy stocks. The exact details aren’t yet spelled out, and no bill has yet been introduced in Congress.
On its Web site, the Bush-Cheney re-election campaign asserted that Social Security needs to be “fixed,” and to do that it proposed “voluntary personal retirement accounts” that would “use Social Security payroll taxes to build a nest egg for retirement.” The campaign promised no increases in the Social Security payroll tax and no changes in benefits for current retirees and “near retirees.” As to whether the plan would raise taxes or cut benefits for future retirees, it didn’t say. Its critics say it will have to.
The best guide to what the president will propose is probably the report of the President's Commission to Strengthen Social Security, formed and disbanded in 2001.
Backers frequently refer to the 16-member commission as “bi-partisan,” as if its work was a compromise between Democrat and Republican points of view. Regardless of party affiliation, only supporters of privatization were invited to serve. The commission, co-chaired by AOL/Time Warner CEO Richard Parsons, was tasked with developing proposals to “strengthen Social Security” without increasing Social Security taxes or reducing benefits “for retirees or near-retirees.” And the proposals would have to include “individually-controlled, voluntary personal retirement accounts.”
It came up with three alternatives, each allowing “younger” workers to divert part of their Social Security taxes into private accounts that would be invested in stocks and bonds. Each alternative contained some formula to cut traditional benefits in proportion to the amount of money diverted. One allowed workers to divert 2 percent of their income, one 4 percent, and one allowed them to increase their taxes an additional 1 percent of gross.
“The report was very dishonest,” says Shaun O’Brien, assistant director of public policy at the AFL-CIO. O’Brien, an expert on Social Security and pensions, says the Commission played down benefit cuts and glossed over the need to add more than $1 trillion from elsewhere in the federal budget to pay current obligations as money was diverted from the Social Security trust fund.
For backers of privatization, the Commission’s timing couldn’t have been worse.
“As the market continued to go down through the year 2000 and into 2001,” Baker recalls, “the enthusiasm for privatization dwindled.”
So the Commission buried its report, releasing it Dec. 21, 2001, at 5 p.m., the Friday before Christmas.
“It seemed to be the end of it,” Baker said. “It caused them a lot of embarrassment.”
But if, as some said, Social Security privatization was “dead on arrival” in 2001, now it’s undead, brought back to life by Bush’s re-election.
Will Bush be able to sell Americans on a plan to send their Social Security taxes to Wall Street, just four years after the second biggest stock market decline in modern U.S. history?
What’s At Stake?
The details of how Social Security is financed may be poorly understood by most Americans, but they have a lot at stake in the debate.
Social Security was founded, in the words of Democratic President Franklin Delano Roosevelt, to “give some measure of protection to the average citizen and his family … against poverty-stricken old age.” Nearly 70 years later, it’s still Americans’ number one source of income in retirement.
Without Social Security, most older Americans would live in poverty.
As of the end of 2003, an estimated 154 million people were paying into the system, and 47 million people were receiving benefits: 33 million retired workers and their dependents, 7 million survivors of deceased workers, and 8 million disabled workers and their families.
Nine out of 10 people over age 65 are currently receiving Social Security benefits, and two out of three beneficiaries get over half of their income from Social Security. For nearly one in five senior citizens, it’s the only source of income.
The Social Security system works on the “pay as you go” principle. Workers’ Social Security taxes aren’t stored away somewhere to pay their own future benefits. Rather, Social Security is a system of social insurance: The contributions of today’s workers finance the support of today’s beneficiaries. Currently, workers are paying more into the system than is being paid out in benefits. That surplus goes into the U.S. Treasury, and is used to finance the government’s other functions. To account for this borrowing of funds earmarked for Social Security, the Treasury issues special bonds that are credited to the Social Security Trust Fund.
The fact that the population is aging overall means that in the future, there will be fewer workers to support more retirees. In 2000, there were 4.3 workers for every retiree. By 2030, it’s projected there will be just 2.4 workers for every retiree.
Analysts on all sides agree that at some point this will begin to put stresses on the Social Security system, but they disagree about how soon changes are needed and what the changes should be.
Social Security trustees estimate that if no changes are made to the system, Social Security’s revenues will begin lagging behind its expenditures in 14 years — 2018. By then the trust fund will have reached $4 trillion. At that time, the U.S. Treasury will have to begin to make good on its trust fund promises by adding real money from elsewhere in the budget to pay for Social Security benefits. To do that, the government will have to cut spending, raise taxes, increase borrowing or some combination thereof.
And about 22 years after that — 2042 — the trust fund would be depleted, after which Social Security would have to cut benefits by 30 percent or come up with additional revenue, for example by increasing the Social Security tax by 40 percent.
“Insolvency”is nearly 40 years away.
In other words, says Rich Fiesta, political director of the Alliance for Retired Americans (ARA), “There IS no crisis.” ARA claims 3 million members, most of whom belong to affiliated union retiree chapters. “Among our members,” Fiesta said, “there is very great resistance to Social Security privatization.”
“You’ve had a massive campaign to convince people that Social Security is on the edge of bankruptcy,” Baker concurs. “That’s just flat-out not true.”
Most experts agree that modest changes sometime before 2042 would be sufficient to keep the system solvent for a much longer period of time. Social Security could either increase revenues, or decrease expenditures, or both. Revenues could come from increases in the Social Security tax, or transfers of government revenue from other sources, like the income tax. Expenditures could be decreased by raising the retirement age, changing the cost of living adjustment formula to slow increases in benefits, or some other cut in the benefits formula. The pain could be spread out over time.
Economists React Critically to the Commission
Some analysts, like the fiscally conservative Concord Coalition, argue that “solvency” of the Social Security system misses the point — regardless of the government’s accounting, greater numbers of retirees will mean a greater draw on the nation’s resources in a few years. To deal with that, the Concord Coalition advocates a shift away from a pay-as-you-go system and toward some kind of “pre-funded” system based on savings that would be productively invested to grow the economy so that the country is better able to afford future retiree benefits.
After studying the report of the President’s Commission to Strengthen Social Security, the Concord Coalition was critical. So were the AFL-CIO, the ARA, the Economic Policy Institute, the president of the American Economic Association, the Congressional Budget Office and 50 U.S. senators.
“The worst thing we could do is to allow the Wall Street crowd to divert money from the Social Security Trust Fund,” says ARA’s Fiesta.
That’s because any money diverted into private accounts would reduce the amount Social Security has to pay current and near-future claims.
The Congressional Budget Office estimated the amount diverted could equal $2 trillion. And it called into question whether the “assets” bought with the diverted funds would even make those retirees better off.
“The value of the assets, physical or financial, will depend upon the size of the economy. The value of a share of the average corporation will increase only if the economy grows. Put another way, the assets that retirees sell will be bought largely by their children, but the funds can come only from the children’s savings and only at a price that they can afford to pay.”
A report by Peter Diamond, president of the American Economic Association, concluded that the Commission’s proposals would “significantly worsen Social Security’s financial position, both in the short-term and permanently, by drawing funds from Social Security to subsidize those who elect the private accounts.”
Under these proposals, the report concludes, the rest of the American public would be required to subsidize those who elect to participate in the private accounts.
In 2002, 50 U.S. senators, including Oregon’s Ron Wyden, signed a letter strongly opposing the Commission’s recommendations, on the grounds that they would reduce the level of guaranteed Social Security benefits by as much as 45 percent.
[Oregon’s Republican Senator Gordon Smith won’t have an official position until legislation is introduced, said his spokesperson. Smith is a member of the Senate Finance committee, where such a bill would be debated, and he’s expected to become chair of the Special Committee on Aging, which would likely research any proposals and make a recommendation.]
Wall Street Guaranteed To Profit
One group, at least, would gain substantially from privatization. The financial services firms that would manage the private accounts would get a windfall of up to $940 billion over a 75-year period, according to a study released Sept. 22 by University of Chicago economist Austan Goolsbee.
“What I see is a proposal that leads to large cuts in Social Security, likely leads to large fees for the financial industry, but does nothing to advance comfortable retirement,” says Baker.
There has already been a shift in recent years from guaranteed benefit pensions to “401(k) style” pensions in which workers assume the investment risk. The Bush Administration is now proposing that Social Security make a similar shift.
Baker said America should be looking at ways to shore up the collapsing private pension system instead of going after the portion of the retirement system that’s working.
“The whole point of Social Security is that’s your core retirement income. This is what you KNOW will be there …. We want to make it possible for people to have additional savings. But we don’t want your core retirement income to be a gamble.”
“I think if people really understand the issue,” Baker said, “they would take the sure bet of Social Security rather than the crapshoot of the stock market.”
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