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Future Fairness: The Debate over Social Security
Privitization of social security is a priority for George W. Bush. We will track the debate here including thoughts of: Paul Krugman, Gene Sperling, Norma Cohen, Hubert G. Locke

2/25/05 - The President is Lying

Hubert G. Locke, former dean of the Daniel J. Evans Graduate School of Public Affairs at the University of Washington, in a column in the Seattle PI, comes right out and says the president is lying about Social Security. He reveiws how Social Security has benefitted his own family. And he says this issue is crucial for the future of the Democratic Party. "One thing is for certain. The battle over Social Security is where the Democratic Party better draw a clear line in the political sand. It had best be prepared to obstruct, filibuster and do everything else within reach to drive a stake through the heart of the obscene White House plan to 'privatize' Social Security. If the Democrats muff this one, the party can forget about its future -- it will neither have nor deserve one."

2/25/05 - Poverty Rate Cut from Nearly One in Two to One in Twelve

"If Social Security income is not counted, nearly half (46.8 percent) of all elderly Americans have incomes below the poverty line. Social Security reduces the poverty rate among the nation’s elderly to one in twelve (8.7 percent). This effectiveness in reducing poverty is true for every state in the nation. For example, Social Security cuts the elderly poverty rate from 50.2 percent to 8.7 percent in Florida, from 48.0 percent to 5.1 percent in Idaho, and from 37.0 percent to 5.0 percent in Connecticut. 'One of Social Security’s primary goals is to reduce poverty among the elderly, so it is worthwhile to examine how the program is doing in this area, especially at a time when Social Security’s future is the subject of public debate,' noted Arloc Sherman, senior researcher at the Center on Budget and Policy Priorities. “The program is extremely successful in accomplishing this goal,” Sherman added.

2/4/05 - Most Private Accounts Cannot be Inherited

President Bush regularly says that it will be possible for people to leave private accounts to their children and grandchildren. Sounds good, but it's not really true. According to Martin Wolk, chief economics correspondent at MSNBC, who was briefed on the program by a senior administration official, most people choosing private accounts will be required at the time of retirement to purchase an "annuity" to insure that they have stable income over time. An annuity pays out monthly for the life of the person but the balance in the annuity at death cannot be inherited. Wealthy folks, who have other income sources, will not be forced into an annuity. As the details of the president's proposal become more available there seems fewer and fewer reasons to support it. It leads me to wonder about the motivation of the president; why is he so committed to this program? Who will it really benefit?

2/4/05 - A War against Government

Yesterday in Fargo, North Dakota, Bush told thousands of selected supporters at North Dakota State University about his proposal to privatize Social Security: "It's your money. It's money you can decide to leave to whomever you want. It's money the government can never take away."

Notice that "government" is used as a scare word; that terrible government could take away your money. Your money would be safe in private accounts in the stock market. Really? What needs to be recognized here is the degree to which the Bush proposal is based on hatred of government and love of financial institutions. Bush represents in his domestic policies a literal "war on government." Even though he claims that we need to support democratic government around the world he doesn't really believe in government at home; very strange.

But there are some in government who have indeed "spent the people's money" and these are the current Republican congress and president. The huge tax cuts favoring the wealthy have created huge deficits so that it can be claimed the money is no longer there in the Social Security trust fund that workers have been higher taxes for decades. But that trust fund is based on treasury bills which will be redeemed unless the whole government goes under. I heard a Republican senator in a Senate hearing say that the system was broke as of 2020, when the trust fund will kick in to help pay benefits. It is broke only if Republican senators fail to adjust the tax cuts so that there is money in the trust fund.

Republicans want people not to trust the government; but they are the very ones that we should not trust because they themselves are the biggest threat to fair and honest democratic governance in this country.

2/2/05 - Bush Says System is Bankrupt in 2042

True to expectations, President Bush in his state of the union speech claimed that Social Security would be "bankrupt" in 2042. Again he is using fear to generate support for drastic changes to the program the people in this country have relied on for financial security in old age. Without any changes in 2042 the system will be able to pay only 78% of promised benefits, but it will not be bankrupt. In fact, if the economy grows at a better rate than in conservative calculations there will be no problem at all! The president is engaging in a form of public lying.

1/27/05 - Previous Prediction on Social Security

Turns out this isn't the first time President Bush has warned that Social Security was about to go broke. In 1978, while running for Congress in Texas, Bush was quoted by USA Today and the Texas Observer as saying the system would go broke by 1988 if Congress failed to privatize the system. The Observer notes that Bush "warned that Social Security would go bust in ten years unless people were given a chance to invest the money themselves." USA Today also had the congressional candidate saying that "Social Security would go broke in 10 years." Asked about his remarks by Rep. Charles Rangel (D-NY) at a meeting with the Congressional Black Caucus Wednesday, Bush reportedly responded, "I lost." Rangel said he responded, "the Lord works in mysterious ways."



1/25/05 - Who Supports Privatization?

The Center for Responsive Politics has published a background paper on who will be financing support for privatization of Social Security. Here is one section of their report:

"The Alliance for Worker Retirement Security is the leading business coalition backing Bush's proposal that would allow workers to invest some of their Social Security payroll taxes in private investment accounts. The Alliance's 35 members include representatives of industries that could profit enormously from such a plan, including the Securities Industry Association, Wall Street's main trade group, and PaineWebber -- now called UBS Financial Services and one of the biggest campaign contributors in the securities and investment industry.

The Alliance also includes powerful business groups such as the U.S. Chamber of Commerce and the National Federation of Independent Business, computer company Hewlett-Packard, pharmaceutical giant Pfizer and two lobbying groups funded in part by drug makers: the 60 Plus Association and the United Seniors Association.

Combined, the Alliance members have donated $34.6 million to federal candidates and political parties since 1999. Of that, $25.8 million went to Republicans, including $972,000 to Bush for his two presidential campaigns. In addition, Alliance members spent nearly $108 million lobbying the federal government during 2003 and the first half of 2004.

The Alliance is headed by Derrick Max, who has worked as a Social Security specialist for the National Association of Manufacturers. NAM, the nation's largest industrial trade association, founded the Alliance in 1998 and remains a member. Max succeeded Chuck Blahous, who left the Alliance in 2001 to serve as special assistant to President Bush for Social Security reform."

1/16/05 - History of an Ideological Debate

The historical background on Social Security is presented in an article, A Question of Numbers: The Conservative New Deal by Roger Lowenstein in the NY Times on January 16, 2004. The article demonstrates how conservative Republicans have opposed the whole concept of Social Security since its very beginnings. Current conservatives now claim they want to "fix" and "save" the program, but do you really trust that those opposed to it really want to save it?

1/11/05 - Britain's Privatization Scheme is a Disaster

It is always prudent to learn from mistakes of others. Maragaret Thatcher's government in Britain in 1985 was able to privatize public pensions, to do what Bush wants to do with Social Security today. It has been a disaster; read the account by Norma Cohen who writes on pensions for the Financial Times. Even conservative and business leaders there are now urging changes that would return their system to be more like current U.S. Social Security. One of the main problems has been the costs of managing a system of millions of private accounts; say each account costs 1% to manage each year; over thirty years that means the value of the account is 30% less. Conservatives hate bureaucracy, but they fail to take into account the cost of private management, all those money handlers. Ros Altmann of the London School of Economics says of the British system: "These people would have been better off keeping their money under the mattress." So before you decide to support Bush's proposed changes in Social Security, be sure to read the Norma Cohen report; let us in this country learn from Britain's bad experience.

1/11/05 - Many Republicans Oppose Change

From the Washington Post: Most alarming to White House officials, some congressional Republicans are panning the president's plan -- even before it is unveiled. "Why stir up a political hornet's nest . . . when there is no urgency?" said Rep. Rob Simmons (Conn.), who represents a competitive district. "When does the program go belly up? 2042. I will be dead by then." Simmons said there is no way he will support Bush's idea of allowing younger Americans to divert some of their payroll taxes into private accounts, especially when there are more pressing needs, such as shoring up Medicare and providing armor to U.S. troops in Iraq. Rep. Jack Kingston (Ga.), a member of the GOP leadership, said 15 to 20 House Republicans agree with Simmons, although others say the number is closer to 40. "Just convincing our guys not to be timid is going to be a big struggle," he said. "It's going to take a lot of convincing," which he said can be done.

1/7/05 - Democrats Coalesce Against Bush Proposal

Senator Max Baucus of Montana today announced he would oppose changes in Social Security to provide for private accounts. Yesterday news reports indicated that congressional Democratic leadership groups were going to oppose the measure. Without some Democratic support there is little chance the proposal will pass.

Peter Wehner is White House director of strategic initiatives. He sent out this memo on Social Security. It presents the thinking of the administration at this time. Notice that it especially focuses on the importance of telling a lie: "We will focus on Social Security immediately in this new year. Our strategy will probably include speeches early this month to establish an important premise: the current system is heading for an iceberg." See the whole memo here.

1/5/05 - A Better Way: New Private Retirement Accounts

From Center for American Progress: President Bush has a Social Security scheme which costs $2 trillion and would entail massive cuts in promised benefits. There is a better way to improve retirement security in America. In today's New York Times, American Progress's Gene Sperling suggests "a new universal 401(k) that offers all Americans a private retirement account in addition to Social Security, and uses government funds to match contributions made by moderate and lower-income workers." Unlike the president's plan, this would not reduce Social Security benefits. Sperling's plan would include a "dollar-for-dollar match by the government for initial contributions by moderate-income workers and even more for the working poor." The new accounts could be paid for by reclaiming a small fraction of the massive tax giveaways for the rich that Bush pushed through in his first term. (Those tax cuts cost the federal government $100 billion-a-year.) Sperling suggests a 3-percent surcharge on all income over $200,000 – whether from earnings, dividends or capital gains." Unlike privatization plans – which just shift money around and add risk – the new accounts would actually increase national savings.

1/4/05 - Paul Krugman Paper

See his excellent paper called Confusions about Social Security. This is the best item I have seen which gives a comprehensive view of the issue.

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The following was written on 12/7/03:

The Center for American Progress sponsored on November 18, 2004 a discussion on Social Security and President Bush's proposal for individual Social Security accounts which he claims will "strengthen" Social Security. Here are some notes on that event.
  • No shortfall till 2042. There really isn't a problem with Social Security even according to very conservative assumptions about economic growth. So when anybody starts hollering about Social Security being broke you know they are not telling the truth, they are just screaming their own ideology (they don't like the idea of Social Security in the first place). This is an issue where facts really do matter so when listening to people talk about it watch to see if they are expressing ideology or debating real options based on facts. A column by Paul Krugman on December 7, 2004, explains how Social Security is a government program that really does work and that's why those who dislike government oppose it.

  • Transition costs are the key issue! Proponents of privatization ignore this issue in their public discussion of their proposal. Bush didn't even discuss it during the campaign; he just talked in general about an "ownership society". If individual accounts are established they have to be paid for. If they are paid for from current payments by workers then current benefits have to be drastically reduced (since it is current workers who pay for current benefits). If they are paid for by new government spending then that money has to be raised in some way, from increased taxes or spending cuts in other programs. On December 6 Reuters reported that the White House is considering borrowing up to $1 trillion to pay the transition costs!

  • Money handlers like privatization because it would mean they could manage millions of private accounts and they would make money from such management. But the management costs could be up to 40% for all these small accounts, reducing the value of the accounts for their holders. So this is just a way to get lots more money into the hands of the money managers.

  • Many people may buy the idea of individual accounts because it is a way for common folks to get into the stock market to accumulate capital. But this assumes there will be no stock market crashes which could wipe out account values. Current Social Security benefits are solid and provide a base of income to beneficiaries. It is good for the economy to have this base of income which provides some stability outside the ups and downs of the market.

  • Social Security was never intended to be the only source for retirement income. It doesn't provide enough income during old age. So individual retirement accounts are a good way to augment Social Security, and lots can be done to improve the way current IRAs work. But these improvements can be done without touching Social Security.

  • The real problem facing the federal budget over the next years is health care, not Social Security. That's what should be discussed right now. Discussing Social Security keeps our attention away from this main problem.


So, as you watch the unfolding debate these are some factors to keep in mind. And to send a message to your congressional representatives right now you can use this link: http://action.ourfuture.org/action/index.asp?step=2&item=23131

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Additional links:

Bush's Social Security Plan Is Said to Require Vast Borrowing, NY Times - http://www.nytimes.com/2004/11/28/politics/28secure.html

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The 'Other America' May Be Coming Back

By Harold Meyerson, Washington Post

Wednesday, January 5, 2005; Page A17

Once upon a time, in a land that stretched from one great sea to another, half the elderly were poor. When their work life was done, they retreated into their rented room or their trailer, or their room at their children's home, or even the county poorhouse. Their rulers looked at their plight and concluded that, "at least one-half of the aged -- approximately eight million people -- cannot afford today decent housing, proper nutrition, adequate medical care . . . or necessary recreation."

And the name of this nation, and the unimaginably distant time when half the elderly lived this way? The United States of America in the year 1960.

We have come so far in such a short time that's it's hard for people who aren't seniors to imagine an America in which old age was all but synonymous with desperation. In 2003 just 10.2 percent of Americans aged 65 or older lived in poverty -- a figure two points lower than the national poverty rate of 12.4 percent. Once the age group with the highest rate of poverty, seniors have become the age group with the lowest rate.

There's no great mystery to unravel here. Above all, what changed the lives of America's senior citizens were the significant increases in Social Security benefits enacted in the 1960s and '70s, and the indexing of those benefits to average wage growth. But since the Bush administration is reportedly soon to propose ending that indexing, and replacing it with a different formula that would greatly reduce benefits, it's worth taking a moment to look back at senior poverty as it existed in the year of John F. Kennedy's election as president.

In 1960, when the Senate Subcommittee on the Problems of the Aged and Aging issued its report -- which is the source of the quotation in the first paragraph -- poverty among the elderly was pervasive. Two years earlier the Census Bureau had concluded that almost 60 percent of seniors had annual incomes under $1,000 a year, at a time when the government estimated an adequate yearly budget for a retired couple to be roughly $3,000. Family members and friends helped support seniors, of course, but the 1961 White House Conference on Aging concluded that that assistance amounted to just 10 percent of seniors' incomes -- and less than that, of course, among poorer families. The elderly received their Social Security checks, too, but they still amounted to chump change. In 1959 the average monthly check came to just $70.

I've culled these mournful numbers from Michael Harrington's 1962 classic exposé of destitution amid affluence, "The Other America," a book that dared to propose that the nation could eliminate the poverty in its midst. "The Other America" was one factor that led Kennedy and Lyndon Johnson to initiate a war on poverty -- a major component of which was a war on senior poverty that included the establishment of Medicare and a vast expansion of Social Security. Forty years later the war on senior poverty stands as a stunning success.

Today, however, the United States is governed by a president who is affronted by the very idea of a successful government program. According to a story in yesterday's Post, President Bush wants to change the Social Security indexing formula in a way that will reduce monthly payments by 32.5 percent by 2052 and 45.9 percent by 2075. Today a retiree receives a Social Security check that equals 42 percent of the average worker's wage; if Bush's plan is enacted, that check will shrink to just 20 percent of that wage.

Having tossed America's future seniors 100 feet overboard, the administration then proposes to toss them a 50-foot rope: They can invest a portion of their incomes in the stock market. Problem is, as a retirement system, the stock market offers nothing close to the security that Social Security offers. The lower a worker's income, moreover, the less he has to invest and the smaller his return will be. Social Security, by contrast, deliberately distributes its benefits to provide extra income to those recipients whose earnings were low.

Worse yet, the shift from Social Security to the stock market parallels a shift in employer-provided retirement plans. In 1980, 39 percent of American workers had defined-benefit pension plans; today just 21 percent do, as employers have shunted their employees into 401(k) investment plans. If Bush gets his way, both the government's retirement plan and employers' will be supplanted by plans based on stock performance. If Bush gets his way, his chief domestic achievement will be to have turned "secure retirement" into an oxymoron. And to have taken some sizable number of our seniors and plunged them back into an almost forgotten Other America.

meyersonh@washpost.com

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Peter Wehner is White House director of strategic initiatives. He sent out this memo on Social Security. It presents the thinking of the administration at this time. Notice that it especially focuses on the importance of telling a lie, that Social Security is "heading for an iceberg."

From: Wehner, Peter H.
Sent: Monday, January 03, 2005 2:57 PM
Subject: Some Thoughts on Social Security

I wanted to provide to you our latest thinking (not for attribution) on Social Security reform.

I don't need to tell you that this will be one of the most important conservative undertakings of modern times. If we succeed in reforming Social Security, it will rank as one of the most significant conservative governing achievements ever. The scope and scale of this endeavor are hard to overestimate.

Let me tell you first what our plans are in terms of sequencing and political strategy. We will focus on Social Security immediately in this new year. Our strategy will probably include speeches early this month to establish an important premise: the current system is heading for an iceberg. The notion that younger workers will receive anything like the benefits they have been promised is fiction, unless significant reforms are undertaken. We need to establish in the public mind a key fiscal fact: right now we are on an unsustainable course. That reality needs to be seared into the public consciousness; it is the pre-condition to authentic reform.

Given that, our aim is to introduce market reforms in Social Security and make the system permanently solvent and sustainable.

We intend to pursue the first goal by using our will and energy toward the creation of Personal Retirement Accounts. As you know, our advocacy for personal accounts is tied to our commitment to an Ownership Society -- one in which more people will own their health care plans and have the confidence of owning a piece of their retirement. Our goal is to provide a path to greater opportunity, more freedom, and more control for individuals over their own lives. That is what the personal account debate is fundamentally about -- and it is clearly the crucial new conservative idea in the history of the Social Security debate.

Second, we're going to take a very close look at changing the way benefits are calculated. As you probably know, under current law benefits are calculated by a "wage index" -- but because wages grow faster than inflation, so do Social Security benefits. If we don't address this aspect of the current system, we'll face serious economic risks.

It's worth noting that wage indexation was not part of the original design of Social Security. The current method of wage indexation was created in 1977, under (you guessed it) the Carter Administration. Wage indexation makes it impossible to "grow our way" out of the Social Security problem. If the economy grows faster and wages rise, this produces more tax revenue. But the faster wage growth also means that we owe more in Social Security benefits. This has produced a never-ending cycle of higher tax burdens, even during periods of robust economic growth. It is the classic case of the dog chasing his tail around the tree; he can run faster and faster, and never make any progress.

You may know that there is a small number of conservatives who prefer to push only for investment accounts and make no effort to adjust benefits -- therefore making no effort to address this fundamental structural problem. In my judgment, that's a bad idea. We simply cannot solve the Social Security problem with Personal Retirement Accounts alone. If the goal is permanent solvency and sustainability -- as we believe it should be --then Personal Retirements Accounts, for all their virtues, are insufficient to that task. And playing "kick the can" is simply not the credo of this President. He wants to do what needs to be done for genuine repair of Social Security.

If we duck our duty, it can have serious short-term economic consequences. Here's why. If we borrow $1-2 trillion to cover transition costs for personal savings accounts and make no changes to wage indexing, we will have borrowed trillions and will still confront more than $10 trillion in unfunded liabilities. This could easily cause an economic chain-reaction: the markets go south, interest rates go up, and the economy stalls out. To ignore the structural fiscal issues -- to wholly ignore the matter of the current system's benefit formula -- would be irresponsible.

Here's a startling fact: under current law, an average retiree in 2050 would be scheduled to receive close to 40 percent more (in real terms) in benefits than an average retiree today -- and yet there are no mechanisms in place to produce the revenue to pay out those benefits. No one on this planet can tell you why a 25-year-old person today is entitled to a 40 percent increase in Social Security benefits (in real terms) compared to what a person retiring today receives.

To meet those benefit levels, one option would be to raise the age at which people receive benefits. If we followed the formula used when Social Security was first created -- make the age at which you receive Social Security benefits above the average age of mortality -- we'd be looking at raising the benefit age to around 80. That ain't gonna happen.

Another way to meet those benefit levels is through the traditional Democrat/liberal way: higher taxation. According to the latest report of the Social Security Trustees, the current system's benefit formula would require some $10 trillion in tax increases over the long term. We'd therefore need to raise the payroll tax almost 20 percent simply to provide wage-indexed benefit levels to those born this year.

This will all sound familiar. In the past, the way Congress usually addressed the built-in funding problem was by raising payroll taxes (from 2 percent in 1937 to 12.4 percent today). In fact, Congress has raised Social Security taxes more than 30 times -- but it has never addressed the underlying problem. Avoiding the core issue by raising taxes is not the modus operandi of this President.

The other key point, as you know, is that personal accounts, through the miracle of compound interest, will provide workers with higher retirement benefits than they are currently receiving from Social Security.

At the end of the day, we want to promote both an ownership society and advance the idea of limited government. It seems to me our plan will do so; the plan of some others won't.

Let me add one other important point: we consider our Social Security reform not simply an economic challenge, but a moral goal and a moral good. We have a responsibility to fulfill the promise of Social Security, not undermine it. And we have a duty to ensure that we do not create an inter-generational conflict -- which is precisely what will happen if the Social Security system is not reformed. We need to retain strong ties between the generations, which is of course a deeply conservative belief.

The debate about Social Security is going to be a monumental clash of ideas -- and it's important for the conservative movement that we win both the battle of ideas and the legislation that will give those ideas life. The Democrat Party leadership, the AARP, and many others will go after Social Security reform hammer and tongs. See today's silly New York Times editorial (its only one for the day) as one example. But Democrats and liberals are in a precarious position; they are attempting to block reform to a system that almost every serious-minded person concedes needs it. They are in a position of arguing against modernizing a system created almost four generations ago. Increasingly the Democrat Party is the party of obstruction and opposition. It is the Party of the Past.

For the first time in six decades, the Social Security battle is one we can win -- and in doing so, we can help transform the political and philosophical landscape of the country. We have it within our grasp to move away from dependency on government and toward giving greater power and responsibility to individuals.

There are of course other important issues dealing with Social Security; for now, though, I've covered quite enough ground. I wanted to let you know where things stand. If you have any questions, or if we can send you anything to clarify our plans and respond to critics, just let me know. The President remains flexible on tactics -- and rock-solid on the principles. But there's nothing new there.

In one of his last public acts of an extraordinary public life, the late Democratic Senator from New York, Daniel Patrick Moynihan, co-chaired the President's Commission to Strengthen Social Security. In the introduction of its report, Senator Moynihan (along with Richard Parsons, his co-chair) wrote, "the time to include personal accounts in such action [reforming Social Security] has, indeed, arrived. The details of such accounts are negotiable, but their need is clear.... Carpe diem!"

And so we shall.

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Date Added: 11/23/2004 Date Revised: 2/25/2005 11:24:59 AM

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