I love robbing poor widows and orphans
Mike P, from the Man of the House blog, was the
direct impetus for me to start writing this blog. So, it is with respect that I
venture forth to call him to the carpet for a recent
post... The theme of this particular blog entry was that intelligent
discourse was missing from America's politics, and I won't argue that point. But
in arguing this, Mike said the
following:
I have been fairly liberal since I was in high school. However I find myself liking some of the changes Georgy porgy is pushing during his second term. I love the social security reform. I get to control the growth of my money? That rocks!
Mike is buying into one of the key thrusts of President Bush's salesmanship, namely that initiating private accounts as an arm of Social Security encourages an "ownership society." The other element Bush is pushing for, by which he attempts to lend an air of urgency, is that there is a "crisis" in Social Security that needs to be fixed this year, and that privatization will do the job.
I believe that Bush's Social Security direction is flat wrong, for the following reasons:
1) There is no crisis.
2) Social Security was never intended to be an investment engine. It is a security mechanism, so the elderly are not destitute.
3) The transition to private accounts will endanger Social Security, rather than address core issues.
4) This is a heartless attempt on the part of Republicans to break a key entitlement program and therefore further erode the power of the Democratic Party.
More on each point after the jump...
I have been fairly liberal since I was in high school. However I find myself liking some of the changes Georgy porgy is pushing during his second term. I love the social security reform. I get to control the growth of my money? That rocks!
Mike is buying into one of the key thrusts of President Bush's salesmanship, namely that initiating private accounts as an arm of Social Security encourages an "ownership society." The other element Bush is pushing for, by which he attempts to lend an air of urgency, is that there is a "crisis" in Social Security that needs to be fixed this year, and that privatization will do the job.
I believe that Bush's Social Security direction is flat wrong, for the following reasons:
1) There is no crisis.
2) Social Security was never intended to be an investment engine. It is a security mechanism, so the elderly are not destitute.
3) The transition to private accounts will endanger Social Security, rather than address core issues.
4) This is a heartless attempt on the part of Republicans to break a key entitlement program and therefore further erode the power of the Democratic Party.
More on each point after the jump...
What
crisis?
From this CNN article dated Jan 17 2005:
The President last week surrounded himself with citizens ranging from children to an 80-year-old and warned that the Social Security system will be "flat bust, bankrupt" by the time workers in their 20s retire. As early as 2018, Bush said, "you're either going to have to raise the taxes of people or reduce the benefits."
Really? The following is copied from a report compiled by the Democratic Staff of the Committee on Ways and Means:
The CBO [Congressional Budget Office] projections confirm the actuary’s findings that there is no crisis in Social Security, and that we are decades away from experiencing shortfalls in the program. The CBO report, in combination with the annual reports of the Trustees, continues a decade-long trend of stability and even improvement in the long-range forecast. Here are the three key dates:
• The year that interest on the Trust Funds’ assets is first tapped to supplement tax revenues in order to pay for benefits: CBO estimates 2019, the Trustees estimate 2018. However, the Trust Funds will continue to run annual surpluses for another two decades.
• The year that the bonds held in the Trust Funds begin to be redeemed to supplement payroll taxes in order to pay for benefits: CBO estimates 2033, the Trustees project 2028.
• The year that the Trust Funds’ reserves are fully drawn down: CBO projects 2052, a full ten years longer than the Trustees’ 2042 date. Note that this does not mean that benefits can no longer be paid, however. Social Security will continue to receive payroll tax contributions. These will be sufficient to pay about 80 percent of benefits due in years following 2052, according to CBO; the Trustees estimate that ongoing revenues can finance about 70 percent of benefits due.
Furthermore, economist Paul Krugman has the following to say on the topic:
You've been sold a scare story. Right now Social Security has a large and growing trust fund -- a surplus that has been collected to pay for the surge in benefits we'll experience when the baby boomers start to retire. If you're twenty now, you'll be hitting retirement around 2052. That's the year the Congressional Budget Office says the trust fund will run out. In fact, many economists say it may never run out. If the economy continues to grow at an average rate, the trust fund could quite possibly last forever.
What happens if the trust fund does, in fact, run out in 2052? How will we continue to provide for retirees? There are a number of available options aside from private accounts:
- Raising the retirement age slightly. As Americans have longer life expectancies, it makes sense to revisit the retirement age.
- Raising the cap on payroll taxes. Many Americans make more than $88,000 per year, but no income above that level is taxed for Social Security purposes. this would be the easiest way to maintain solvency, and remain true to Social Security's intended aim, to provide for America's poor elderly.
- Begin to use "means testing" so that people to ensure a minimum standard of living for retirees, but to decrease the amount of Social Security entitlement provided to those who are already well-off.
- Tie increases in benefits to increases in the cost of goods instead of to the rate of increase in salaries. The Wal-Mart effect means that if we made this change, retirees could maintain their purchasing power, but benefits would not increase as rapidly as they have been in the recent past.
I get to control the money I put into Social Security?? Cool!
Who wouldn't get excited at the thought of being able to control the funds they contribute to Social Security, and to get a better return than what one would expect if privatization did not occur? Me, for one.
Social Security was intended to provide a social safety net for the elderly, to reduce the population of elderly who are living in poverty. How well has it worked? According to this article in the New York Times Sunday March 6 2005 ("Who Wins in a New Social Security?"):
According to government figures, old-age poverty has dropped from about 50 percent in the 1930's to around 10 percent today. Most of the credit goes to Social Security.
Franklin D. Roosevelt said at the time:
"We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."
What Bush is proposing is essentially a big 401K investment scheme. What's wrong with that? We all like 401Ks, right? Sure, but we already have access to invest in 401Ks. They serve completely different goals. I invest in my 401K to take the steps in my power to ensure a comfortable retirement. I like contributing to Social Security because it not only guarantees me a minimum standard of living in my retirement (and also guarantees that my daughter and wife will be provided for if I am killed or disabled), but it ensures that minimum standard of living for everybody who contributes to it. Further quote from the NY Times:
Social Security uses taxes from the rich to bolster the retirement income of the poor through a benefit scale that now replaces about 60 percent of preretirement earnings for low-income workers but only 30 percent for the workers in the highest earning band.
It should be noted that not every worker will be able to retire during a bull market. Today, there is some balance, because even in a bear market, retirees whose investment portfolios are underperforming still receive acceptable Social Security entitlements. If Social Security is privatized, that safety balance disappears.
Who is most likely to fare poorly under a privatization scheme? The poorest and least educated of America's workers. Workers who do not have the education to research investment engines and make informed decisions on their own. Workers whose union representation has been eviscerated by years of Republican rule and therefore do not have the amount of leisure time to study investment options to the same degree that wealthier workers do.
If we can all pretend there's a crisis, privatization will fix it, right?
In a word, no. The president hand-picked a Social Security Commission in 2001, the findings of which will probably form the underpinnings of Bush's proposals. The text below is copied from a separate report compiled by the Democratic Staff of the Committee on Ways and Means:
The plan would divert one-third of a worker’s Social Security contributions to private accounts, cut Social Security benefits for all future beneficiaries (whether or not they have an account), with additional cuts for those who sign up for an account.
Here are the specific effects of the commission’s plan:
• $2.2 trillion is drained from the Trust Funds in just the next 10 years. Described as “transition costs,” proponents fail to mention that the transition lasts for half a century. $2.2 trillion is drained from the Trust Funds in just the first decade of the plan’s operation -- but the losses continue forever.
• Benefits to current Social Security recipients could NOT be paid in full. Diverting one-third of workers’ Social Security contributions into private account blows a hole in the Trust Funds. This directly threatens our ability to pay current retirees.
• Financial condition of Social Security is WORSENED, not improved. The Trust Fund reserves will be exhausted by 2021 – two decades sooner than projected under current law .
• National debt would explode. The plan relies heavily on deficit-financing to make up the loss to the Trust Funds. The President’s own 2004 Economic Report forecast that, under the commission plan, the debt will be higher for 60 years. At its peak, this additional debt caused by privatization would equal 24 percent of GDP.
To return to Rolling Stone's interview with Krugman:
What do you mean? Those who are pushing privatization say that our financial markets are one of our greatest strengths -- that private investment will work better in the long run than government-managed accounts with lower rates of return.
There are two problems with that. First, the fees charged on private accounts will be a significant drain on returns. In a typical portfolio, we're probably looking at a return of four percent. But fees are likely to take at least one percent, like they do in Britain. So now we're down to a return of three percent or less on private accounts. And since Bush wants to borrow $2 trillion to pay for the transition, we're talking about borrowing at interest rates of three percent to establish private accounts that will yield three percent -- with a lot of additional risk. So it's a lose-lose proposition, except for the mutual-fund industry.
The second problem with the market is that some people -- probably many people -- will end up getting much less than they would have under the current system, depending on which funds they pick and how the market does. A lot of people will hit age sixty-five with very little in their private account -- and that means a big return of poverty among the elderly, which is exactly what's happening in Britain right now. As a result, the government will have to step back in and rescue people. We'll have more suffering and bigger bills. People will ask: Where did all that money go? The answer will be: It basically went into mutual-fund fees.
But what if stocks do well? Isn't it possible that privatization would work?
The only possible way that stock returns can be high enough to make privatization work is if the U.S. economy grows at three to four percent a year for the next fifty years. But Social Security's own trustees expect the economy's growth rate to slow to 1.8 percent. If that happens -- if their own assumptions are correct -- then privatization would be a disaster. And if that doesn't happen -- if the economy continues to grow at a steady rate -- then the trust fund is good for the rest of the century, and we don't need privatization.
So why is Bush pushing for an initiative that won't achieve either of its stated aims and that his own party is scared shitless of?
To further marginalize the Democrats. If the Democrats can not protect their weak constituency's interests in this showdown, they will have an even weaker base in future years. Keep in mind that despite McCain-Feingold, politics is centered on money. These proposals will hit Democrats' base in their pocketbook, limiting their ability to elect the losers who could not keep them from getting steamrolled.
Again, Krugman says it excellently:
So if there's no crisis in Social Security, why is President Bush pushing so hard to privatize it?
It's politics. Since the days of Barry Goldwater, the Republican right has really wanted to dismantle Social Security. And now they have a degree of political dominance that lets them push it to the top of the agenda -- even though no rational analysis of the actual problems facing the U.S. government would say that it belongs there.
Why do they want to dismantle it?
It's hard to understand why anyone would want to return us to the days before the New Deal, when millions of elderly people lived in poverty. But if you really dislike the notion that the government provides a safety net for the poor, then Social Security is the prime target. The U.S. government is a big insurance company, with a side business in national security. Social Security is the biggest social-insurance program that we have. It's been highly successful, and it's extremely popular. It's one of the things that makes people feel somewhat good about government -- and so, therefore, it must go.
The president and his party are telling us that Social Security is in crisis and they can fix it. It is worthwhile to note that these are the same people who rushed us into a war because Iraq's government had Weapons of Mass Destruction. Oh wait, our bad. No WMD after all. And they are the same forces who pushed through a tax reduction program to permanently shoot the government's budgetary surplus in the ass.
I have attached the two reports I referenced, compiled by the Democratic Staff of the Committee on Ways and Means. I also recommend you go to thereisnocrisis.com, which is also linked as a blogroll for this site.
The Consequences of Social Security Privatization.pdf
Financial Outlook for Social Security.pdf
From this CNN article dated Jan 17 2005:
The President last week surrounded himself with citizens ranging from children to an 80-year-old and warned that the Social Security system will be "flat bust, bankrupt" by the time workers in their 20s retire. As early as 2018, Bush said, "you're either going to have to raise the taxes of people or reduce the benefits."
Really? The following is copied from a report compiled by the Democratic Staff of the Committee on Ways and Means:
The CBO [Congressional Budget Office] projections confirm the actuary’s findings that there is no crisis in Social Security, and that we are decades away from experiencing shortfalls in the program. The CBO report, in combination with the annual reports of the Trustees, continues a decade-long trend of stability and even improvement in the long-range forecast. Here are the three key dates:
• The year that interest on the Trust Funds’ assets is first tapped to supplement tax revenues in order to pay for benefits: CBO estimates 2019, the Trustees estimate 2018. However, the Trust Funds will continue to run annual surpluses for another two decades.
• The year that the bonds held in the Trust Funds begin to be redeemed to supplement payroll taxes in order to pay for benefits: CBO estimates 2033, the Trustees project 2028.
• The year that the Trust Funds’ reserves are fully drawn down: CBO projects 2052, a full ten years longer than the Trustees’ 2042 date. Note that this does not mean that benefits can no longer be paid, however. Social Security will continue to receive payroll tax contributions. These will be sufficient to pay about 80 percent of benefits due in years following 2052, according to CBO; the Trustees estimate that ongoing revenues can finance about 70 percent of benefits due.
Furthermore, economist Paul Krugman has the following to say on the topic:
You've been sold a scare story. Right now Social Security has a large and growing trust fund -- a surplus that has been collected to pay for the surge in benefits we'll experience when the baby boomers start to retire. If you're twenty now, you'll be hitting retirement around 2052. That's the year the Congressional Budget Office says the trust fund will run out. In fact, many economists say it may never run out. If the economy continues to grow at an average rate, the trust fund could quite possibly last forever.
What happens if the trust fund does, in fact, run out in 2052? How will we continue to provide for retirees? There are a number of available options aside from private accounts:
- Raising the retirement age slightly. As Americans have longer life expectancies, it makes sense to revisit the retirement age.
- Raising the cap on payroll taxes. Many Americans make more than $88,000 per year, but no income above that level is taxed for Social Security purposes. this would be the easiest way to maintain solvency, and remain true to Social Security's intended aim, to provide for America's poor elderly.
- Begin to use "means testing" so that people to ensure a minimum standard of living for retirees, but to decrease the amount of Social Security entitlement provided to those who are already well-off.
- Tie increases in benefits to increases in the cost of goods instead of to the rate of increase in salaries. The Wal-Mart effect means that if we made this change, retirees could maintain their purchasing power, but benefits would not increase as rapidly as they have been in the recent past.
I get to control the money I put into Social Security?? Cool!
Who wouldn't get excited at the thought of being able to control the funds they contribute to Social Security, and to get a better return than what one would expect if privatization did not occur? Me, for one.
Social Security was intended to provide a social safety net for the elderly, to reduce the population of elderly who are living in poverty. How well has it worked? According to this article in the New York Times Sunday March 6 2005 ("Who Wins in a New Social Security?"):
According to government figures, old-age poverty has dropped from about 50 percent in the 1930's to around 10 percent today. Most of the credit goes to Social Security.
Franklin D. Roosevelt said at the time:
"We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."
What Bush is proposing is essentially a big 401K investment scheme. What's wrong with that? We all like 401Ks, right? Sure, but we already have access to invest in 401Ks. They serve completely different goals. I invest in my 401K to take the steps in my power to ensure a comfortable retirement. I like contributing to Social Security because it not only guarantees me a minimum standard of living in my retirement (and also guarantees that my daughter and wife will be provided for if I am killed or disabled), but it ensures that minimum standard of living for everybody who contributes to it. Further quote from the NY Times:
Social Security uses taxes from the rich to bolster the retirement income of the poor through a benefit scale that now replaces about 60 percent of preretirement earnings for low-income workers but only 30 percent for the workers in the highest earning band.
It should be noted that not every worker will be able to retire during a bull market. Today, there is some balance, because even in a bear market, retirees whose investment portfolios are underperforming still receive acceptable Social Security entitlements. If Social Security is privatized, that safety balance disappears.
Who is most likely to fare poorly under a privatization scheme? The poorest and least educated of America's workers. Workers who do not have the education to research investment engines and make informed decisions on their own. Workers whose union representation has been eviscerated by years of Republican rule and therefore do not have the amount of leisure time to study investment options to the same degree that wealthier workers do.
If we can all pretend there's a crisis, privatization will fix it, right?
In a word, no. The president hand-picked a Social Security Commission in 2001, the findings of which will probably form the underpinnings of Bush's proposals. The text below is copied from a separate report compiled by the Democratic Staff of the Committee on Ways and Means:
The plan would divert one-third of a worker’s Social Security contributions to private accounts, cut Social Security benefits for all future beneficiaries (whether or not they have an account), with additional cuts for those who sign up for an account.
Here are the specific effects of the commission’s plan:
• $2.2 trillion is drained from the Trust Funds in just the next 10 years. Described as “transition costs,” proponents fail to mention that the transition lasts for half a century. $2.2 trillion is drained from the Trust Funds in just the first decade of the plan’s operation -- but the losses continue forever.
• Benefits to current Social Security recipients could NOT be paid in full. Diverting one-third of workers’ Social Security contributions into private account blows a hole in the Trust Funds. This directly threatens our ability to pay current retirees.
• Financial condition of Social Security is WORSENED, not improved. The Trust Fund reserves will be exhausted by 2021 – two decades sooner than projected under current law .
• National debt would explode. The plan relies heavily on deficit-financing to make up the loss to the Trust Funds. The President’s own 2004 Economic Report forecast that, under the commission plan, the debt will be higher for 60 years. At its peak, this additional debt caused by privatization would equal 24 percent of GDP.
To return to Rolling Stone's interview with Krugman:
What do you mean? Those who are pushing privatization say that our financial markets are one of our greatest strengths -- that private investment will work better in the long run than government-managed accounts with lower rates of return.
There are two problems with that. First, the fees charged on private accounts will be a significant drain on returns. In a typical portfolio, we're probably looking at a return of four percent. But fees are likely to take at least one percent, like they do in Britain. So now we're down to a return of three percent or less on private accounts. And since Bush wants to borrow $2 trillion to pay for the transition, we're talking about borrowing at interest rates of three percent to establish private accounts that will yield three percent -- with a lot of additional risk. So it's a lose-lose proposition, except for the mutual-fund industry.
The second problem with the market is that some people -- probably many people -- will end up getting much less than they would have under the current system, depending on which funds they pick and how the market does. A lot of people will hit age sixty-five with very little in their private account -- and that means a big return of poverty among the elderly, which is exactly what's happening in Britain right now. As a result, the government will have to step back in and rescue people. We'll have more suffering and bigger bills. People will ask: Where did all that money go? The answer will be: It basically went into mutual-fund fees.
But what if stocks do well? Isn't it possible that privatization would work?
The only possible way that stock returns can be high enough to make privatization work is if the U.S. economy grows at three to four percent a year for the next fifty years. But Social Security's own trustees expect the economy's growth rate to slow to 1.8 percent. If that happens -- if their own assumptions are correct -- then privatization would be a disaster. And if that doesn't happen -- if the economy continues to grow at a steady rate -- then the trust fund is good for the rest of the century, and we don't need privatization.
So why is Bush pushing for an initiative that won't achieve either of its stated aims and that his own party is scared shitless of?
To further marginalize the Democrats. If the Democrats can not protect their weak constituency's interests in this showdown, they will have an even weaker base in future years. Keep in mind that despite McCain-Feingold, politics is centered on money. These proposals will hit Democrats' base in their pocketbook, limiting their ability to elect the losers who could not keep them from getting steamrolled.
Again, Krugman says it excellently:
So if there's no crisis in Social Security, why is President Bush pushing so hard to privatize it?
It's politics. Since the days of Barry Goldwater, the Republican right has really wanted to dismantle Social Security. And now they have a degree of political dominance that lets them push it to the top of the agenda -- even though no rational analysis of the actual problems facing the U.S. government would say that it belongs there.
Why do they want to dismantle it?
It's hard to understand why anyone would want to return us to the days before the New Deal, when millions of elderly people lived in poverty. But if you really dislike the notion that the government provides a safety net for the poor, then Social Security is the prime target. The U.S. government is a big insurance company, with a side business in national security. Social Security is the biggest social-insurance program that we have. It's been highly successful, and it's extremely popular. It's one of the things that makes people feel somewhat good about government -- and so, therefore, it must go.
The president and his party are telling us that Social Security is in crisis and they can fix it. It is worthwhile to note that these are the same people who rushed us into a war because Iraq's government had Weapons of Mass Destruction. Oh wait, our bad. No WMD after all. And they are the same forces who pushed through a tax reduction program to permanently shoot the government's budgetary surplus in the ass.
I have attached the two reports I referenced, compiled by the Democratic Staff of the Committee on Ways and Means. I also recommend you go to thereisnocrisis.com, which is also linked as a blogroll for this site.
The Consequences of Social Security Privatization.pdf
Financial Outlook for Social Security.pdf
Posted: Mon - March 7, 2005 at 10:36 PM
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Published On: Mar 07, 2005 11:28 PM
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Published On: Mar 07, 2005 11:28 PM