Social Security “Reform”:
George W. Bush’s Social Security privatization plan rests on three big lies.
The first is that the current system is in crisis and doomed to fail. The second is that gains in private retirement accounts will exceed traditional benefits from the program. And the last is that such accounts will become a cornerstone of an “ownership society” in which working people will steadily build wealth.
Each of these assertions can be easily exposed as nonsense -- and a smokescreen for drastic cuts in benefits and the dismantling of the entire system. But because the Democratic Party accepts much of the White House’s political framework, Bush has been handed an excellent opportunity to destroy the most successful social program in U.S. history.
Consider the “pre-rebuttal” to Bush’s State of the Union speech offered by House Minority Leader Nancy Pelosi. She put “fiscal responsibility” first as the criteria for what she called “changes” to Social Security. While Pelosi criticized Bush’s plans for privatization of Social Security and called for continued guaranteed benefits for current workers, she pointedly avoided saying that benefits shouldn’t be cut at all.
Nor did she defend Social Security for what it is -- a progressive transfer of wealth, using payroll taxes paid by the employed and their employers to support retirees and those unable to work. Instead, Pelosi resorted to Bush-speak -- calling the program “a proud, entrepreneurial achievement of the New Deal,” the expansion of social programs in the 1930s. The Democrats’ alternative -- whatever that is -- will be “based on America's core values and the entrepreneurial spirit that is the legacy of our party and of our country,” she said.
Thus, the battle for Social Security begins on Bush’s own turf. The Democrats not only accept the constraints of massive federal budget deficits enlarged by Bush’s tax cuts for the rich, but they try to defend Social Security as a way of creating tens of millions of mini-capitalists -- rather than a means of strengthening and extending a social safety net in a period of falling wages and rising inequality. It was the domestic policy equivalent of John Kerry’s statement that he would have voted for Bush’s war on Iraq even if he had known there were no weapons of mass destruction there.
The Democrats know full well that Bush’s description of the Social Security crisis is about as accurate as his account of Saddam Hussein’s yellowcake uranium. But calculations of political expediency -- and the lure of campaign contributions from Wall Street firms eager to get their hands on privatized accounts--means that the Democrats are prepared to play along with the White House.
After all, it was Bill Clinton who dismantled another key pillar of the New Deal -- the federal welfare system--and introduced talk of “fixing” Social Security, giving the privatizers a wide-open field.
Then, in his 2000 presidential campaign, Al Gore promised to use a “lockbox” to protect Social Security. In fact, Gore wanted to use the Social Security trust fund surplus to retire government debt, then sell new government bonds in the future to fund the system as needed.
This maneuver, described recently by economist Robert Kuttner as an “accounting gimmick,” only gave more ammunition to the crisis-mongers. “If the idea was to segregate Social Security surplus funds and invest them separately, that could have been done,” Kuttner wrote. “But that's not what Gore offered. Wall Street gets nervous about large government reserves being invested in securities.”
However, if that money can be funneled instead through what Bush calls “personal accounts,” Wall Street will skim hundreds of billions of dollars in fees -- and the federal government can ditch its obligation to guarantee a modest income for retirees. Bush’s Social Security scheme is a fraud -- but we can’t count on the Democrats to expose it.
Dismantling Bush’s big lies
WHILE THE full details of the Bush plan haven’t been disclosed, it’s already possible to expose his plan’s main claims.
Lie number 1:
THIS CLAIM was refuted in the 1999 book, Social Security: The Phony Crisis by Dean Baker and Mark Weisbrot. Yet the Washington-Wall Street propaganda machine has nevertheless managed to bury several key facts.
The Social Security trust fund won’t be “bust” in 2018, as Bush claims. Rather, that’s the year that the fund is set to begin paying out benefits from the fund’s surplus, rather than using the interest on Treasury bonds, as the government does today. Even if nothing were done to shore up the system, the trust fund surplus could pay full benefits until 2052, according to the latest Congressional Budget Office forecasts.
Another claim for the need for privatization is the fact that there will be only 2.1 workers for every retiree by 2030 -- down from 3.3 today. But as Baker and Weisbrot point out, the ratio was 8.6 workers to one retiree in 1955. Today’s far smaller ratio didn’t lead to an economic crisis because of the tremendous advances in productivity throughout the economy.
What’s more, those who predict a crisis for Social Security use pessimistic forecasts of economic growth that assume lower revenue from payroll taxes used to fund the system.
Even if the worst-case scenario proves accurate, the system could easily be put on strong footing by gradually increasing the payroll tax over several years -- or, as a more equitable alternative, by lifting the $87,900 cap on wages and salaries for such taxes. While the tax burden on a future generation of workers would be somewhat higher, this would only be a small part of advances in real wages that can be expected, based on historic averages in increases in productivity.
Bush, of course, refuses to countenance such a tax increase -- even though his plan to make his tax cuts of 2001 and 2003 permanent would cost $344 billion in 2027 and $377 billion in 2033, according to economist Jason Furman--sums far exceeding the predicted Social Security shortfall.
Lie number 2:
STARTING IN 2009, the Bush plan would allow those born in 1965 or later to divert up to 4 percent of their total wages from what they currently pay in payroll taxes. The initial limit would be $1,000, gradually increasing to the full 4 percent per year.
The incentive to do so, however, isn’t really the promise of making money on financial markets, but an opportunity to make up for Bush’s proposed cuts in benefits in the traditional program. Bush wants to calculate increases in future Social Security benefits based on inflation rather than increases in real wages--a change that would effectively reduce benefits and exclude retirees from future overall gains in the standard of living.
Upon retirement, those with private accounts would have to use the money to purchase an annuity payment to keep them above poverty, and either cash in or invest the leftover amount -- if there is any leftover, that is.
What’s more, the private accounts are to be modeled on a 401(k) retirement plan for federal employees, which limits the choice of investments to five or six funds--hardly the individual control touted by Bush. While the fees to manage such plans might be lower than in genuine individual accounts, they could still amount to 20 percent of retirement income for the average worker, according to an analysis by former investment banker Nomi Prins in the magazine Against the Current.
Finally, the government would have to borrow an estimated $4.5 trillion in the first two decades of privatization to pay for the “transition costs” to fund the private accounts--making the government deficit that supposedly justifies privatization far worse.
Lie number 3:
“IF YOU can move from a nation where 50 percent of Americans own stock to a nation where 75 percent to 80 percent own stock, you could change political attitudes and the political culture in a way that’s more conservative and more pro-Republican,” Stephen Moore, former president of the pro-privatization Club for Growth, told the Los Angeles Times.
In fact, “the bottom half of the population held just 1.4 percent of the stock in 2001, with an average portfolio of just over $3,000” noted economic writer Doug Henwood in a recent book. “And since only a minority of bottom-half households own any stock, the average is deceptively high.”
In any case, the wealthiest 10 percent own three-quarters of all stocks.
These statistics clarify the real effect of Social Security privatization and other plans for an “ownership society” -- an effort to get working people to identify their financial interests with those of the rich and powerful, while the government abandons the elderly to a harsh economic fate.
State of the Union by Mike Whitney
Other Articles by Lee Sustar