The Con of a ‘New’ Social Security Program
President Bill Clinton’s Albuquerque town meeting on “Social Security and the Market” this week is a backdrop for what could be one of the most audacious cons around. The play--worth literally hundreds of billions of dollars--is to turn part of Social Security into individual-risk accounts. That requires hoodwinking working Americans into accepting lower returns, higher costs and increased risks for the privilege of having Wall Street manage some of their retirement taxes.
The script is pretty basic: Scare people into thinking Social Security is going bankrupt. Ride the bull market in stocks to promise a painless rescue and potential wealth. Use Wall Street’s financial clout to buy in research groups, arm conservative ideologues and enlist politicians. Finally, convince a lame-duck Democratic president that privatization will secure his legacy as a progressive reformer.
To date, the scam has gone forward without a hitch. Polls show one-third of Americans think Social Security won’t be there when they retire. Think tanks drum out alarms. Conservative Republicans--never fans of Social Security--stand ready to strike. A gaggle of Democrats have signed up, including neoliberal Sen. Bob Kerrey of Nebraska, “blue dog” conservative Rep. Charles W. Stenholm of Texas, “new” Democrat Sen. John B. Breaux of Louisiana and even Sen. Daniel Patrick Moynihan of New York, presumed protector of the program.
Like all great cons, the sting involves selling a string of deceptions, in this case to convince people that privatization is needed to “save Social Security.”
Privatizers start by claiming that Social Security is going bust. But reports of its demise, as Mark Twain would say, have been greatly exaggerated. These days, Social Security brings in more money than it pays out, accounting for virtually all the supposed budget “surplus.”
But, privatizers warn, the retirement of the baby-boom generation will bankrupt the program. In reality, the shortfall Social Security projects--in 35 years--results more from the declining wages of the last decades than from retiring boomers living longer in the coming ones.
Even at the height of the boomer retirement, Social Security taxes will bring in about three-fourths of the needed revenues. This estimate is based on the pessimistic assumption that growth will average just 1.8% over the next 20 years--lower than in any comparable period in U.S. history--and decline more after that. If the economy simply grows in the next period as it has in the past 20 years, there is no shortfall.
Privatizers then offer a false answer to the inflated crisis. Privatization adds to the shortfall it claims to solve. The reason is simple. The taxes of today’s workers help pay for the retirement of their parents’ generation. If part of those taxes are diverted to fund private individual accounts, the projected Social Security shortfall gets bigger. In fact, it would be hard to invent a worse time to privatize--just as the retirement of the largest generation in history has to be financed.
Thus, every plan for private individual-risk accounts, whether partial or full, requires deeper benefit cuts, higher taxes or greater deficits than simply mending Social Security as it is. The glittering illusion of privatization--higher returns for workers--is a huckster’s fraud.
The very notion of “return on investment” is disingenuous. Social Security provides workers with lifetime insurance against sudden death or disability. More than 13 million Americans, disproportionately women and children, now receive disability or survivors benefits. Social Security also guarantees benefits protected against inflation that cannot be exhausted, no matter how long you live. Private accounts alone offer neither the insurance nor the guarantee.
The gaudy stock-market returns bandied about--5% to 7% after inflation--generally neglect to subtract management fees that could easily reach 30% of contributions. These charges also will cover multimillion-dollar Wall Street advertising and promotion campaigns to attract clients. Social Security manages its accounts for about 1% of contributions.
The true dupes of the big sting are younger workers, who are promised the chance to get rich. In fact, they get soaked by transition costs: paying for both the retirement of their parents’ generation and the financing of their own private accounts.
Recently, a commission of the Center for Strategic and International Studies, dominated by Wall Street executives, recommended moving about 20% of payroll taxes into private individual-risk accounts, and asked the Social Security Administration to estimate its projected returns. The actuaries revealed that workers would do better in the current system. The returns on private accounts could not make up for the costs of the transition. The commission buried the report.
To pay for the transition, privatization plans cut guaranteed benefits by 30% to 50%. Most mask their cuts through the cruelest tax of all: hiking the age for retirement to 70 or more.
For Washington’s chattering class, working until 70 or 72 may not seem like a lot to ask, but a majority of Americans now begin drawing benefits at age 62, and many struggle to get to early retirement. A nonpartisan General Accounting Office study recently warned that lifting the retirement age would force many blue-collar workers to work in pain from health problems likely to worsen with age.
Boasts about “average stock market return” also mask increased risk. As Rep. Charles B. Rangel (D-N.Y.), who represents both Harlem and Wall Street, put it, betting on the stock market is a lot like playing craps. Some will clean up, but some will be cleaned out. That’s partly why Treasury Secretary Robert E. Rubin, who made his fortune on Wall Street, is a skeptic about privatization.
For years, privatizers boasted of the remarkable returns enjoyed by Chile’s retirement system, which was privatized by the Pinochet dictatorship. But in recent years, stocks have fallen and returns have turned negative. Recently, the government warned workers to work longer since their pensions were declining in value. It isn’t by accident that the one pension program not privatized by the junta in Chile was for the military.
“Saving” Social Security does not require privatization. To protect against the possibility of a slow growth economy as the boomers retire, Social Security needs a new diet, not a radical heart transplant. Simply investing part of the Social Security trust fund in stocks and bonds could erase much of the potential shortfall. Sharing the returns and the risks of investment insures no one will retire in poverty due to bad advice or bad luck. It also eliminates the staggering costs of managing individual accounts. Making the Social Security tax fairer and flatter--raising the lid on amount of income subject to taxes--could make up the remainder of any shortfall.
But politics, profits and ideology impede sensible reform. Politicians oppose fairer taxes on the affluent who pay for their parties. Wall Street stands to lose billions if the money is invested collectively, rather than in individual accounts. Conservative ideologues faint at the thought of the trust fund investing in stocks.
Can privatizers convince Americans to replace Social Security with private accounts that cost more and provide lower benefits at higher risk?. The hucksters need a trusted figure to validate their claims. Clinton is key. For obvious reasons, most Americans trust Democrats far more than Republicans to reform Social Security. If the president embraced a privatization plan, people might buy it.
So privatizers offer the lame-duck president a Faustian bargain. If he embraces partial privatization, he can get bipartisan support--and a multimillion-dollar lobby--to make the plan part of his bridge to the next century. All he has to do is endorse the bright, shining lie.
Will the president who repealed guaranteed support for poor women and children now dismantle the compact with workers for retirement? The risks for his own legacy are great. The Social Security debate will not remain an echo chamber of well-funded privatizers reinforcing each others’ patter. Unions, women and civil-rights groups are beginning to realize the threat. That may not deter the Wall Street operators who have much to gain and nothing to lose. But it might prod the president to salvage Social Security rather than throw in with the plans to savage it.