For Social Security, Stability or Volatility?
by Seth Sandronsky
www.dissidentvoice.org
January 16, 2005



 

I wonder what President Bush’s plan to change the Social Security system with private accounts for younger workers means for businesses nationwide?  Likely, the workers who patronize these firms will end up with less cash. Why add such risk to consumer income that helps to stabilize U.S. businesses and living standards?

Consider the private accounts.  They would be invested in bonds and stocks. The latter reflect a claim on the value of corporations’ underlying assets such as machinery and factories.

The relevance of stock prices to the performance of the “real” economy that grows and makes what folks use is of big significance.  Currently, the stock price to earnings (P/E) ratio is about 20 to 1, down from over 30 to 1 in 2000 when the market was peaking.  To get a feel for future stock returns, the historic average P/E ratio is 14.5 to 1.

The planned Social Security cuts of the Bush plan would be largest for our youngest workers, according to economist Dean Baker, co-director of the Center for Economic and Policy Research. Bush plans to freeze current Social Security benefits versus increasing them in step with the rate of real wages, projected to grow by 1.1 percent a year. Thus each year benefits would be flat as the cost of living rises, hardly a recipe for business growth.

The gap between benefits and the prices of goods and services would expand steadily. Stock market returns from private accounts are supposed to fix this situation. “The only projections of stock returns that are derived from the Social Security trustees’ profit growth projections and based on the current price to earnings ratios in the stock market show that stock returns will not come close to offsetting the proposed cuts in benefits.”

Further, taxes for shifting to private accounts are a projected $150 to $200 billion a year, Baker says.   Workers and the businesses they frequent would get no benefits for the costs of that shift.  But both groups would see an increase in the federal deficit that they have seen balloon since Bush became president.

Roughly every seventh person who lives in the U.S. receives a regular Social Security check. I was such a recipient, briefly.  As a young college student, Social Security put some modest cash in my pocket.

My father had retired from the RCA Corp. when I was 20.  I received a monthly check to help with college costs. Then, I cashed my check and paid for food, books and transport.

Crucially, the amount of my check remained the same. Market changes didn’t change my benefits. Social Security was and is stable that way.

Additionally, the Social Security trust fund has a big surplus. That surplus can meet the future retirement needs of baby boomers. This fund was designed to do that in 1983 for the purpose of providing them with regular, stable income after decades in the work force.

Currently, many American workers older than 55 who should be in such cruise control instead are living with income instability as a result of their volatile private pensions.  In fact, these women and men account for about 84 percent of the new job growth during the past four years partly because their 401(k) retirements have plunged. This is not good news for them or businesses.

Speaking of decreased income, buying an annuity with a privatized Social Security account would have costs. Private insurers would charge a set-up fee of 10 to 20 percent per annuitant, Baker says. In contrast, today’s Social Security recipients do not pay such costs for a lifetime flow of income.

Like millions of other American workers, my father drew a Social Security retirement pension that supplemented his employer’s defined-benefit pension.

Dad prospered this way for about 30 years. During that time, he regularly gave his business to many merchants, and enjoyed these golden years generally.

Significantly, defined-benefit pensions such as my father’s are becoming less common today because of the 1990s stock market boom that busted.  As a result, employers have fled the market that funded their employees’ defined-benefit pensions.  Consequently, they have become responsible for contribution-defined pensions such as 401(k) retirements.

Thus current retirees’ purchasing power is less stable than was my father’s. Crucially, retirees are the majority of the U.S. population who benefit from the stable Social Security system.  Yet in the words of Vice President Cheney, such income stability in retirement for future generations will come from the stock market.

Small entrepreneurs have been ignored in the current White House buzz about reforming Social Security.  Despite and because of this oversight, the continuing stability of Social Security should concern the independent business community. Its prosperity is in no small way reliant upon the U.S. public pension system that has never missed a payment to beneficiaries: retirees, survivors or those disabled and away from work.

Consumption spending is the driving force of the U.S. economy. Bush’s plan to have younger workers invest in the stock market to supplement their reduced Social Security benefits will adversely affect businesses. Though I know that they are experienced with the ups and downs of customers’ disposable spending, such a trend would be distributed unevenly.

Importantly, small shopkeepers are most at-risk from privatizing Social Security.  With less capital than bigger rivals, smaller businesses are more challenged to endure dips in consumers’ buying power.  Put another way, big companies can lose money and keep their doors open far longer than can mom-and-pop firms.

By definition, the stock market is volatile.  It expands and contracts, sometimes wildly.  Thus the American people need clarity about Social Security privatization to plan for the future.  “According to the Social Security trustees' report, the standard basis for Social Security projections, the program could pay all scheduled benefits for almost forty years with no changes whatsoever,” Baker adds.

Further, the non-partisan Congressional Budget Office states that Social Security is funded adequately for about five more decades from today.  Why tamper with a program that is so financially solvent? 

For more information about proposed changes to Social Security, visit:
www.cepr.net/publications/facts_social_security.htm.

Seth Sandronsky is a member of Peace Action and co-editor with Because People Matter, Sacramento’s progressive paper. He can be reached at: ssandron@hotmail.com. 

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