Is the Bush administration's program for 'reform' a wolf in sheep's clothing?

By Don Kuehn

Only a few years ago, President George Bush called Social Security “the single most successful program in government history.” He was right then; he’s dead wrong today in his zeal to privatize and dismantle the program. His claim of a “crisis” is little more than a ruse to cut the benefits workers have earned through their Social Security payroll taxes.

The Social Security Trust Fund does face problems down the road, but, experts say, and most Americans believe, there is no crisis. According to a poll conducted by Peter D. Hart Research Associates for the AFL-CIO in January, the majority of voters support making modest changes to Social Security to preserve benefits for future retirees. Moreover, when people learn the details Bush is proposing, a majority believe his plan worsens the problem by diverting trillions of dollars from the trust fund.

It’s our money

Social Security is a retirement system workers have paid for through payroll taxes levied on them and their employers. This year, Social Security will provide monthly benefits to more than 47 million people, including 32.6 million retirees and their dependents, 7.6 million disabled workers and their families, and 6.8 million surviving spouses and children of workers who have died.

Social Security is important even for the 5 million state and local employees, and federal government employees hired before Dec. 31, 1983, who do not participate in the program. According to the Social Security Administration, 95 percent of state and local employees who are not covered become covered by Social Security through their spouses’ employment, because they are the dependents of covered workers or because they take a job in the private sector.

To survive comfortably in retirement, every American should have a combination of government benefits, personal investments and an employer-sponsored pension. But for two-thirds of the elderly, Social Security provides the majority of day-to-day income. And for 20 percent, it is their only source of income.

By setting up private investment accounts as part of Social Security, the president says he wants to create an “ownership society” of people who have a personal stake in their own retirement welfare. But we already have 401(k) and 403(b) plans, IRAs, Roth IRAs and myriad personal investment opportunities. What we don’t have much of anymore are lifetime defined-benefit, monthly pension plans that are relatively risk free, like the Social Security program the administration seeks to destroy.

“This is the most significant fight of the beginning of the 21st century,” says AFT president Edward J. McElroy. “It is about the future role of government. The clear choice is between a government that stands for individuals, for supporting a program financed by citizens’ own taxes to secure a good retirement, disability protection and survivor protections, or a government that stands aside and shifts the risk of financing retirement to the backs of its citizens.

“The president’s attacks on Social Security, as well as on Medicare, suggest he supports the latter view. The AFT strongly disagrees,” McElroy says, “and we will fight efforts to kill or cripple these essential government programs.”

The Bush plan:  Cut and lay waste to retirement

The president has not revealed all of the details of the plan he will try to push through Congress, but certain features are known. Based on recommendations made in 2001 by the President’s Commission to Strengthen Social Security, the White House is going with a reform model that would allow workers younger than 55 to divert up to 4 percent of their tax contribution into a private account that would be managed by an investment firm.

Guaranteed Social Security benefits would be cut in steps by an average of
26 percent to 45 percent depending on the participant’s age when he or she entered the program. This is the result of Bush’s real goal to change the formula on which initial benefits are calculated from a “wage-based” to an “inflation-based” model.

Recipients would be forced to buy an annuity with their private account, or sign up for a systematic withdrawal plan, to provide a monthly supplement to their government check. From year to year, these private accounts and annuities would be reduced through fees levied by the giant Wall Street investment firms that administer them. Further reductions would come in the form of government fees—or benefit offsets—charged to those with private accounts, according to Social Security Administration actuaries.

The Center for Economic and Policy Research estimates that the average retiree who is 20 years old in 2005 would lose a total of $152,000 in benefits under this plan if he or she lives 20 years after retirement.

Labor, other groups oppose president’s privatization plan

Former U.S. Rep. Barbara Kennelly, a Democrat, who now heads the National Committee to Preserve Social Security and Medicare, believes “proposals to privatize Social Security will be increasingly unpopular once people understand the risks and tradeoffs. ... What we are really talking about here is shredding the social safety net.”

President Bush has said that his plan will limit risk, along the lines of the federal employees’ Thrift Savings Plan, for example, which has five options: an S&P 500 fund, a small cap fund, an international fund, a bond fund and a government securities fund.

But the thrift plan shifts the burden of risk to individual investors for part of their retirement security, while Social Security relies on the government to absorb market risk. Moreover, the thrift plan is just one part of the retirement package for federal employees.

The president’s claim that Social Security will experience a shortfall of $11 trillion turns its back on traditional forecasts that are based on 75-year projections. The 75-year figure is $3.7 trillion—large, but not so great that it cannot be addressed with modest changes and by rejecting the private-account hysteria.

“The president’s main pitch is that these accounts will yield higher returns than Social Security does. The pitch also includes rhetoric about the accounts being ‘your money’ and giving every worker a stake in the ‘ownership society.’ These claims are mostly bad math, faulty logic and deception,” says Dean Baker, co-director of the Center for Economic and Policy Research.

“What President Bush doesn’t want Americans to know is that the private investment accounts he asserts will save Social Security are actually designed to weaken the system and cause drastic benefit cuts,” says Ed Coyle, president of the AFL-CIO’s Alliance for Retired Americans. “They amount to massive debt that future generations will have to pay off.”

In a statement released by the AFT executive council earlier this year, AFT vice presidents warned of the risk to future generations: “Analyses of privatization proposals show that younger workers will get hit twice: once with a reduction in Social Security benefits and again with the burden they will be forced to carry to pay off the grossly expanding federal debt.”

The moral dilemma

What happens if a person’s private account falls short of the break-even point? Will the government underwrite the losses?

On the one hand, Americans will not be comfortable with a system that casts citizens into Depression-style poverty. On the other, some might argue, if a person has paid one-third less into the system, what right does he or she have to full benefits?

What of the widows or widowers and orphans whose spouses and parents were in the program? Would they be able to scrape by on a reduced survivors benefit (reduced by as much as 45 percent), or would the government have to step in? And what about a young worker who becomes disabled after joining the ranks of the “ownership elite”? Without sufficient time in the workforce to build up other assets, would he or she have to suffer in poverty as a result of reduced disability payments? Would a compassionate America stand for such a thing?

“This is the major fault of the Bush administration, which campaigns on
‘values’ but cynically overlooks the impact those ideas have on real people—the elderly, disabled and survivors,” says Bill Cunningham, associate director of the AFT department of legislation.

Many argue that a guaranteed benefit for private account holders would open the door to wild speculation: Get lucky and you beat the system, suffer losses and the government will underwrite your bet.

Young workers will pay the $2 trillion tab for ‘transition’

How this scheme affects the U.S. economy will be the focus of world economic markets.

To finance the shortfall created when money is diverted into private accounts, the federal government would have to borrow to meet the promised benefits for those already retired. This is called “transition cost.”

The transition cost is commonly estimated to be $2 trillion over the next decade. But Alan Blinder, a Princeton economics professor and former vice chairman of the Federal Reserve Board, thinks the effects of private accounts will linger for 60 years. He calculates that the most widely discussed reform model would cost $4.5 trillion in the second decade of reform.

How can the government borrow that kind of money? It does so by selling government bonds backed by the “full faith and credit” of the United States—just like the IOUs in the Social Security Trust Fund. Forty percent of these debt obligations are held by foreign investors. If their confidence in the United States’ ability to repay the debt is shaken, there may not be a market for these securities.

So we have a president presiding over the largest deficits in history, and yet he is proposing to lock in the tax cuts of 2001 and 2003 and make fixes to the alternative minimum tax (a cost of $1.9 trillion over 10 years); he already has run up deficits under current law projected at $2.6 trillion; the price tag for the war in Iraq is yet to be determined; and now comes the Social Security “fix” that could run added red ink of up to $6.5 trillion in the next 20 years.

At some point, the bond market is going to gag on all this debt, and interest rates will rise as it becomes harder to sell U.S. Treasury issues on the world stage. The economy will end up worse off, not better. And it will be young workers and future generations who must pay off this massive new debt.

Sleight of hand

As details of a potential plan continue to take shape, it seems clear that private accounts are no more than a smokescreen for an even more insidious presidential “reform.” While our attention is focused on defeating private accounts, the change in the method of calculating benefits—from a wage base to an inflation base—will emerge as the Bush solution to the manufactured “crisis” in the system. That change alone will cut the benefits of every potential Social Security beneficiary—that means you.

If private accounts become a reality, the drain of revenues to pay current retirees will force trustees to tap into the Social Security Trust Fund in 2006 rather than 2018, as now projected.

The Bush administration has signaled that it will propose changing the formula that sets initial Social Security benefit levels, cutting promised benefits by nearly one-third in the coming decades, say Jonathan Weisman and Mike Allen in a January article in the Washington Post.

“Under the proposal, the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker’s lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century.”

In fact, if this standard had been in force since the program’s inception, retirees today would be living like those in the 1940s—receiving roughly $300 a month in today’s dollars, as opposed to the average benefit of about $1,200.

According to the Social Security Administration’s chief actuary, if the change to an inflation-based system is made, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, the average monthly benefits for middle- and high-income workers would fall by more than 25 percent. A retiree in 2075 would receive 45 percent of the benefit now promised.

“President Bush plans to undermine the most successful social insurance program in history,” says the AFT’s Cunningham. “The president’s aggressive support of private accounts and reduced benefits for all workers under 55 means future generations will not have the safety net they paid for through their payroll taxes.”

AFT president McElroy vows to put the union’s weight behind saving the safety net. “The AFT will lead the fight to protect and strengthen the Social Security system by assuring rock-solid funding to guarantee workers the benefits they have paid for,” he pledges.

There are less draconian measures that could be taken. Social Security taxes are not collected on income exceeding $90,000 a year. Tweak it: Lift the income cap, boost the rate of taxation slightly or consider authorizing the Social Security Administration to hire professional money managers to invest a portion of FICA taxes for a greater return than Treasury securities produce (like your state retirement system).

A few simple and reasonable changes to the existing program would make President Bush’s proposal unnecessary. The only losers would be the big investment and insurance companies that are lining up to rake in huge profits from millions of potential account holders.

The Bush administration and the Republicans seem to believe there is a free-market solution to every problem. As the New York Times said in a January 2005 editorial: “That faith is misguided. For a society to be functional and humane, it is not enough that some people have a chance to be rich in old age. Rather, all old people must have the dignity of financial security, and that requires universal [Social Security] coverage.”