To help PDA continue this work, please become a Sustaining Donor.

PDA Responds to Issues in New Hampshire Social Security Debate

By David I. Kelley

Vol. 2, No. 3--April 13, 2005

Crisis or Problem?

Social Security is facing challenges, but it is not in "crisis." The bipartisan Congressional Budget Office says that it can pay out all benefits perfectly until 2052. Calling it a crisis is dishonest.

PRIVATEERS SAY: It will start paying out more than it takes in before 2020, though, and that is a real problem.

PDA'S RESPONSE: Privateers must create a sense of imminent crisis or people will ask why they are ignoring the real crises in health care, jobs, and the biggest one of all: peak oil. They must manufacture a crisis. See "Social Security: The Phony Crisis" by Mark Weisbrot and Dean Baker.

If we use the very pessimistic projections of the SS trustees, which have uniformly overstated the severity of the problem, the Bush tax cuts are three times larger than the projected shortfall. For anyone to state as fact that there is a shortfall -- decades in advance -- is ludicrous. Since 1997 the "flat bust" date has been pushed from 2030 to 2041. They are merely projections and are clearly too pessimistic. Projections that the economy will only experience 1.9 percent real growth is certainly inconsistent with proposing private accounts invested in stocks.

If you look to the bipartisan Congressional Budget Office (CBO), the tax cuts given disproportionately to the richest Americans (for which we have little economic growth to show!) are five times greater than their shortfall.

My point? The Bush administration's profligate ways of sabotaging government programs to benefit the ownership class should not be conflated with the legal obligation to repay the debts. Incidentally, not to repay the Trust Funds in 2018 would cost the bottom 80 percent of American households $10,000 each while the top 1 percent would reap, on average, $800,000 each. The reason for this is straightforward. The government will finance itself with the most regressive of taxes. Not forcing the rich to pay their fair share would be a staggering windfall. See the details in a brilliant article by Dean Baker.

Privateers clearly want to make the Republican-created problem of "Borrow and spend" into our problem. They remind me of the man who throws himself on the mercy of the court after murdering his parents because he is now an orphan.

They have worked hard to create a budgetary crisis, but that is not a Social Security crisis; Social Security is funded independently. This administration gave $100 or less in tax cuts to over half the population and began in earnest to dig our country into a deeper debt hole: now $7.8 trillion. How many Americans would have given up their paltry tax cut for a secure and strengthened Social Security forever?

The projected shortfall according to the Social Security actuaries in their 2005 Trustees report is $4 trillion in present dollars. The tax cuts have been priced out at some $11.6 trillion with $3.4 going to the top 1 percent. The CBO doesn't give an exact shortfall as such but project the 2052 shortfall is 0.4 percent of GDP at that time and not 0.7 percent as SS says in 2041. Therefore, their shortfall is roughly in the range of some $2 trillion. That makes the tax cuts some five times greater than the projected SS shortfall.

Therefore, the Bush tax cuts tell you exactly where his commitments and values are. The CBO figures indicate that merely rescinding the Bush tax cuts to those averaging about $1.2 million a year in income would take care of the entire projected 75-year shortfall (by their estimates which are considerably more likely) and then some.

By the way when I say "rescind" I don't mean a return of the 34 percent rate to the 91 percent rate of the 1950s -- merely a return to those several percentage points higher in the Clinton era. Remember those terrible 90s when the economy only added 22 million jobs under Clinton and when he passed a tax bill without one Republican vote that brought the budget into balance?

Let me repeat that. The administration tax cuts cost the government about $20 trillion in present dollars over an infinite horizon. How many Republican politicians or privateers mention that fact in the same sentence that they mention the $11 trillion shortfall? Incidentally, the $11 trillion based on an infinite horizon has been dismissed by the American Academy of Actuaries as a meaningless number that has little validity and can easily confuse or scare people.

Republicans want to educate us to the reality of Social Security like they wanted to educate us to the danger of Iraq's WMD. Their actions to sabotage the most important program of a caring, compassionate, and just society should not be forgotten.

The 2005 Trustees Report from Social Security clearly states that the treasury bonds issued to the Social Security Trust is legally binding debt. So this "crisis" or "major problem" talk is plain deceitful. The CBO says that an increase of 0.35 percent in the employee and employer tax would make Social Security solvent for at least 75 years. That's a crisis when we have a federal government that is borrowing 32 cents on every dollar it spends? That racked up a $666 billion trade deficit last year and about $500 billion in national debt (if you include the borrowing from Social Security)?

The focus on 4 percent of wages for privatization is an artful distraction on the part of the administration away from stagnating wages for the poor and middle class and eroding savings and health care. Remember corporate-fed and Wall Street-fed think tanks have been looking for a way to dismantle Social Security for decades.

Private Accounts: Help or Hurt?

Private accounts make Social Security's challenges worse, not better. Even George Bush himself admitted when he was in Portsmouth last month that voluntary private accounts don't fix Social Security.

PRIVATEERS SAY: The system's very structure is unsustainable, so making a partial fix like the president's plan may not fix it.

PDA'S RESPONSE: "Sustainable" is an amazing word for a conservative to mouth. It has a hollow ring. Even the White House admits that private accounts don't help potential shortfalls. See the Peter Wehner White House memo.

The fact is that the health care system is not sustainable in the immediate future as it now exists. It is on the verge of collapsing. Why are Privateers not pushing for National Health Care as nearly 10,000 doctors have in the Journal of the American Medical Association? Why not focus on sustainable alternative energy sources? The oil-driven economies of this country and the rest of the civilized world will lie in ruins far sooner than Social Security will fail to pay 100 percent benefits. Clearly, the military expenditures of this government are also unsustainable as is capitalism if the middle class and poor are frozen out of real increases in income and resulting wealth.

Incidentally this "broken" system which is going "dead bust" will pay out more in benefits in 2041 (SS date for when the trust fund runs out) and 2052 (CBO) at the point of Trust failure than we currently pay to retirees. In other words, 74 percent of the wage- indexed benefits under the current system (in 2041) is greater than what retirees receive today, and 80 percent in 2052 of the current wage-indexed benefits (CBO and far more likely!) is far more than today's retirees receive.

The main issue: Why introduce more risk into the lives of American families who are seeing their savings and pensions disappear? We have just concluded the worst seven straight quarters for savings since 1934. Does anyone seriously believe that those who fought Social Security are now here to save and strengthen the system they have hated for so long? The Wehner memo mentions that the Republicans have their best shot at Social Security in six decades. Clearly, they have been waiting for this moment to attack our last great social safety net. Remember that George W. Bush told us in 1978 when running for Congress that the system would be "flat bust" in 10 years. He wanted private accounts at that time.

By the way, it appears he was off by about 74 years (22 + 52 using CBO numbers). Of course, George Tenet and the entire intelligence network weren't around for him to blame. I wonder who he would point the finger at if confronted on this error? Of course, we know that answer: never apologize for any error at long as you can extend your finger towards someone else.

The fact is that the Social Security numbers when fairly interpreted present a potential shortfall that is easily fixed. Merely rescinding the tax rates for the top 1 percent to Clinton-era levels would eliminate the shortfall according to the CBO. Of course, the Clinton tax increase put the U.S. on its strongest financial footing in decades without one Republican vote. Remember, they stopped borrowing from the Trust fund and started to pay down the debt.

What about raising the cap to $140,000, keeping the inheritance tax for estates over $3 million? Shouldn't Bill Gates pay some tax on his $45 billion much of which was never taxed because it was based on a loan from his father? His father thinks so and so do I. We know from David Cay Johnston's "Perfectly Legal" that the poster child for the "Death Tax" -- the loss of the family farm -- is a lie. Let me repeat that harsh line: statements that the estate tax is taking away family farms are just not true. The White House has yet to produce the evidence, despite repeated requests.

There are so many reasonable, straightforward ways to tax care of the POTENTIAL problem other than introducing tremendous risk into the retirements of our children. They will have enough risks without this one.

Costs of Private Accounts

Bush privatization plan will cost trillions and increase the national debt. Estimates for the cost of transitioning to a system of private accounts range from $750 billion to $2 trillion in the first decade alone. This would blow a massive hole in the budget and pass on trillions in debt to the younger workers that are supposedly helped under this plan.

PRIVATEERS SAY: This problem is fixable by limiting government spending. And the figures may not be that bad with the increased economic activity generated by the private accounts. This could even end up creating a huge surplus. At least with the private accounts, the Congress is forced to do more honest budgeting rather than raiding payroll taxes for other budget expenses.

PDA'S RESPONSE: Does anyone seriously think that the administration will stop borrowing or that "your account" is really your account?

When you retire, the government will force you to repay the loan they used to set up your private account. This "claw-back" repayment equals the amount you diverted into "your" account along with interest; in other words, your "debit" account.

The "debit" account is straightforward. The diverted funds are compounded at the Consumer Price Index plus 3 percent. In other words, you are likely to pay 6 percent compound interest on "your" contributions into your private account at retirement. (A quick digression: If you earn less than this interest rate on your investments, you lose. Using "Life Cycle" accounts, the losers could be nearly three quarters of Americans. Robert Shiller's research on this subject is discussed below.) The compounded amount is then turned into a monthly figure and subtracted from your guaranteed benefit (which under the current administration rhetoric of no new taxes would lower -- perhaps 46 percent lower).

Next, the government will force you to buy an annuity to cover basic poverty-level existence. That will likely wipe out most private accounts.

If any is left over, that's yours. The administration doesn't dare call it passing on "wealth" because that is clear hyperbole, as research indicates. Instead, they are using the word "nest egg" in their talking points. However, the best available research from Robert J. Shiller at Yale, a noted market economist, indicates that 71 percent of retirees forced into Life Cycle accounts would do better under the current system. Read this detailed and compelling research. Even brokerage firms are weighing in to comment that "money for nothing" - that is money without risk - is not possible on this planet. In fact, the CBO never allows anything but risk-adjusted dollars to be used in their projections.

Michael Hudson, professor of economics at the U. of Missouri and author of many books on international and domestic finance makes the following stunning statements in the cover article, "The $4.7 Trillion Pyramid: Why Social Security Won't Be Enough to Save Wall Street," in the April issue of Harper's.

"The one sure mark of a con, though, is the promise of free money. In fact, the only way the stock market is going to grow is if we the people put a lot more of our money into it. What Bush seeks to manufacture is a boom -- or, more accurately a bubble -- bankrolled by the last safe pile of cash in America today. His plan is a Ponzi scheme, and in that scheme it is Social Security that is being played for the last sucker."

Professor Hudson explains that corporate America has underfunded its pension plans by some $100 billion in addition to the $23 billion that the Pension Benefit Guarantee Corporation fell into a deficit with last year. (Incidentally, that deficit is now some $26 billion!). Because the PBGC only collects $1.5 billion a year they need an influx of capital. Obtaining that money from the logical place, the companies, is dicey. "Higher pension set-asides will diminish corporate earnings," notes Hudson which will lead in turn to "dividend cuts and job losses" and then would come even more defaults as the market tanks.

"Why would anyone want to invest America's last line of pension defense in so perilous a market? asks the professor. His answer is unsettling. The Republicans need a stock market book "to rescue the pension funds, to rescue the stock market, and for matter, to rescue the political fortunes of the ruling party" he explains.

And what happens when the stock market bubble bursts? "Then we will be right back to where we are today, only much the poorer and with no guaranteed pension system for elderly Americans -- who will, of course, need guaranteed pensions more than ever as they watch their stock holdings continue to shed value," says Hudson. Should we listen to these academicians? I believe we should. They do not have the clear conflicts of the corporate fed and maintained think tank economists who have been thoroughly domesticated by their masters. The main allegiance for academic economists is to finding the truth -- wherever it leads.

Why, indeed, as Hudson asks would we reintroduce this type of retirement, death, and disability risk to American families for meager returns when there is no question but that many will fare less well than in the traditional system?

It is true that this administration has been totally irresponsible with their budgets. Howard Dean was correct: Republicans have proven unable to handle money. We should force them to actually balance their budget for once.

What's Your Plan for Social Security?

We need to discuss ideas that make Social Security stronger, not ones that make it weaker. As long as others are pushing a controversial idea like privatization, we won't be able to make progress towards discussing plans that actually lengthen the life of Social Security.

PRIVATEERS SAY: And what possibly could work aside from privatization? All the other plans talk about raising taxes and cutting benefits, neither of which are popular or really sensible for people's lives.

PDA'S RESPONSE: As a starter why don't we talk about saving the current system that has weathered 70 years so very, very well before we rush into another plan? Why -- as the AARP commercial shows -- are we tearing down the house to fix the sink? Privatization is the start of dismantling our most important social safety net by shifting risk to workers and their families.

Privatization will increase government debt for at least 40 years by perhaps $15 trillion? That is not an answer. It dramatically compounds a potential problem.

Imagine going into a bank and saying that you want to borrow money to invest in the stock market and that you will repay the loan with the guaranteed earnings? As Paul Krugman has pointed out in his columns in the N.Y. Times privatization is a "Borrow, Invest, and Hope" scheme.

What would a conservative -- or liberal for that matter -- banker say? I think you have a pretty good idea.

But that is exactly what they are doing with dynamic scoring of the borrowings for the accounts. Remember we need the FICA taxes to pay for current retirees and to build up the Trust Fund to prepay baby boomers. With dynamic scoring you can say that we are replacing this loan with the inevitable earnings and thus there is no loan, logic so wildly speculative that no true conservative would ever buy it. Why should we?

What can we do to strengthen and save Social Security?

1. Check the evidence and take responsibility for our actions before we change the most successful social insurance program on the earth. Have officials testify under oath as we should have before rushing into Iraq. Let's see how well they can evade responsibility or fudge evidence then.
2. Remove the massive waste in the military budget which has been well documented by retired general and admirals. See True Majority's web site.
3. Develop a sensible tax policy to lower taxes on the poor and middle class. For an example of a sensible tax reform see "A Progressive Approach to Tax Reform."

The share of federal tax revenues gained from corporations has dropped from 34 percent in the early 1950s to some 7 percent today. In the last three years, 82 of the nation's largest companies paid no taxes in at least one of the three years; 28 companies paid nothing in any of the three years despite pre-tax profits of $44.9 billion. See more details. The tax burden has been shifted to ordinary Americans, and the least that should be done is to tax all income in the same way. To allow passive income like dividends to be taxed at a lower rate than wages devalues the sanctity of labor. It also hurts our consumer driven economy.

As David Cay Johnston points out in "Perfectly Legal," the taxes of the top 400 Americans -- those who own our government -- have dropped by 40 percent over the last several decades. Do those who earn, on average, $500,000 a day really need all of it?

If we raised taxes on those who need the additional income the most we could help the economy -- and ultimately those at the top of the economic pyramid -- the most. Last year, those earning more than $1 million paid about $123,592 on average -- less in taxes than before the Bush tax cuts. Contrast that to the average cut of $647 for the middle 20 percent of taxpayers.

The affluent are paying far less than they paid in the booming 1950s and 60s. Of course, the prospect is always raised on the corporate media that the rich would simply get angry and stop working.

Income and wealth inequality is almost never mentioned in the media. Why? If our administration was truly concerned with promoting an "ownership" society wouldn't they be talking about the shocking reality that the top 13,400 households have the same yearly income as the bottom 96 million Americans. But they never say A BLESSED THING ABOUT OUR RETURN TO A SECOND GILDED AGE.

My suggestion is to add 3 percent tiers on income at $500,000 levels. If you earn $500,000 you pay a 3 percent Social Security surtax; at $1 million it's 6 percent. This continues until you hit 18 percent. This is far less than many boom periods of American history. The American Progress proposal would tax all income on the same scale and have three tax rates: 15 percent for income up to $25,000; 25 percent for income from $25,001 to $120,000; and $39.6 for income over $120,000. Of extreme interest is that their plan would eliminate the 6.2 percent employee FICA tax on wages up to $90,000. This would do a great deal to eliminate the regressive aspects of our tax code.

Another good source of information is "Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes" by Joel Slemrod and Jon Bakija. In "Do Taxes Thwart Growth? Prove It" by Anna Bernasek (NY Times, April 3, 2005): the professors examined "the relationship between the marginal tax rate -- the rate imposed on additional income in a progressive tax system -- and productivity. After all, if you reduce the rate of taxation on income, people should work harder. But the opposite turned out to be true. Looking at the data from 1950 to 2002, the authors found that periods of strong productivity growth actually occurred when the top tax rates were the highest. And they showed that, on average, high-tax countries are the most affluent countries."

For decades, Americans have been fed the corporate propaganda that the poor will not work if we raise their wages (the minimum wage) while the rich will stop if we don't pay them more. Both statements are simply absurd.

What Returns Will Private Accounts Give?

Citizens don't get to decide where their money will be invested; the Government decides which corporations it will use to invest the funds. Given this administration's ties with and support for so many scandal-ridden corporations, should anyone really trust that these so-called investors will have anyone's best interests in mind but their own?

PRIVATEERS SAY: The process being talked about is very similar to the one federal employees get (Thrift Savings Plan). The plan I keep hearing about calls for the same vetting process for those funds. So what's the problem? And before someone brings up the whole "cash cow" for "Wall Street" argument, consider that the average expense ratio for an index fund is less than 1 percent.

PDA'S RESPONSE: If the expenses are even as low as 0.3 percent of total assets, that would take 5 percent of each payment. If the expenses are 1 percent, that would absolutely kill the plan. Remember that Social Security currently earns about 3 percent real (that above inflation) rate of return on the surplus while Privateers claim they can get 4.6 percent with a diversified conservative portfolio of stocks and bonds. Expenses such as we are discussing could destroy private accounts even under bull- market scenarios. Don't forget the very real expense problems and invest hyping that occurred in Great Britain and Chile. By the way, when the time comes to purchase the annuity, consider that insurance companies will charge in the range of 10 to 20 percent, In short, perhaps a quarter of your account has been used up even under good circumstances.

Most of all, why would anyone invest in stocks when the Social Security Administration is projecting the economy will only average about 1.8 percent real growth over the next 75 years? As Dean Baker and Paul Krugman at the N.Y. Times have explained, if the economy is that weak, young people will be buying stocks with Price/Earning multiples over 100. In other words, we will be trapping our young in a Ponze "Pump and Dump" scheme, while the 15 percent who own most financial assets will benefit as they flee the overpriced market. See Dean Baker's "No Economist Left Behind" challenge on his website which convincingly demonstrates that if one accepts the growth figures used by the Social Security Administration, stocks will be a speculative bubble. Earlier, of course, we quoted Michael Hudson's April cover story, "The $4.7 Trillion Pyramid," in Harper's Magazine which posited that the administration knows full well what it is doing but is desperate to shore up the PBGC, pension funds, the market and their benefactors in the ownership class.

How will those currently owning the vast bulk of the market flee before those impressed into stock market ownership? Simple. "The President's Commission to Strengthen Social Security" report in 2001 suggested that those holding private accounts only be allowed to change their investments once a year. That, my friend, is an Enron trap. Remember how Enron employees went through a blackout period when they were not able to sell their shares - until it was too late?

Why Not Put Stocks in the Trust Fund?

If investing the money is such a good idea, why aren't they investing it now?

PRIVATEERS SAY: Because the Social Security Administration has no legal authority to do so. And having the government directly invest in the economy strikes some as either socialism, defined as state ownership of the means of production.

PDA'S RESPONSE: Part one of the objection is easily handled: Republicans can change the law whenever they wish. While they might face a filibuster in the Senate they have yet to propose any legislation like that which AARP has suggested: invest 15 percent of the Trust fund in stocks to spread out the risk to individuals.

The second part is the biggest reason the Trust Fund has never put money into the broad market. Republicans fear that people owning shares of corporate America in a Trust Fund is tantamount to socialism. Of course, there are straightforward ways around this objection. We could firewall off the stock investment in a true "Worker's Stock Trust" which invested according to broad index fund dictates and did not exercise proxy votes on companies. The government could not borrow the shares or any surplus without issuing the exact same treasury notes that they do to Japan and China. It's amazing that we could appoint bankers to independently run the banking system, but we can't find a way to set up an independent trust to invest in the overall market.

By the way "The President's Commission to Strengthen Social Security" that we mentioned earlier gives some indication of likely future proposals. Remember, the President has made no proposal except for the privatization balloon. Some salient points made by the Commission in discussing the "Administration of Personal Accounts" in Chapter 2 of their December 2001 report:

1. "Investment allocations should be allowed to be changed not more than once during a 12-month period..."
2. "Private-sector account administrators in Tier II may offer the same funds as in Tier I, and possibly other broadly diversified mutual funds certified by the governing Board..."
3. "Pre-retirement access to funds in personal accounts should not be allowed..."
4. "At retirement, personal account distributions should be permitted to be taken as an annuity or as gradual withdrawals..." (Administration officials are now indicating that the annuity will be forced upon participants).

Most of all, the Commission called for eliminating wage indexing in favor of price indexing which would reduce current benefits by about 1 percent a year. In other words, future retirees would see the guaranteed replacement rate of Social Security reduced. In the 25 years price indexing has been in place in Great Britain the replacement rate has fallen from 25 percent of final salary to 11 percent. No wonder there are constant demonstrations in Britain. As Norma Cohen has written in the "American Prospect Online"; article "A Bloody Mess": "Britain's experiment with substituting private savings for a portion of state benefits has been a failure."

Are Private Accounts Truly Voluntary?

"Privatization" and "voluntary personal accounts" are the same thing. If some people take money out of Social Security, it cuts benefits for everyone.

PRIVATEERS SAY: That sum would have to be a rather large percentage. Please remember that the president's and the other plans are optional.

PDA'S RESPONSE: A 4-percent carve-out of Social Security taxes that currently go to beneficiaries without borrowing trillions would cause the Trust Funds to be depleted within a decade. Then, even current retirees who live that long would see benefit cuts. Immediate deep benefit cuts.

It is true that the plans are termed voluntary but what would you do if you were told that your guaranteed benefits would be deeply cut even if you remain in the system? This, of course, is inevitable if we switch to price indexing. Would you try to make up the difference by jumping on the stock market express, or just quietly resign yourself to the large automatic cuts in the traditional system?

It doesn't sound like much of a choice to me: do you want to fix your slowly sinking boat or get on this unstable speed boat that's headed for a cataract?

Don't Worry -- Only Guaranteed Benefits Are Cut

The central issue: privatization is a plan that cuts benefits and cuts the life of Social Security.

PRIVATEERS SAY: The benefit cuts everyone keeps worrying about are only for the guaranteed-benefit part. Even a very conservative investment portfolio will far exceed the returns on social security credits and more than make up for it.

PDA'S RESPONSE: It is prima facie fraud for anyone involved in the securities business to tell someone that their stock purchase "will" exceed the return they will get with government bonds. The reason that the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) are so tough on such statements is that making that assertion is just plain dishonest. Such a guarantee cannot be made. Yet the same Vice-President who told us with certainty that Iraq had reconstituted its nuclear program is now guaranteeing that private accounts "will" earn more.

Fortunately, this type of deception is uncommon. Normally, privateers hedge and say "private accounts give people the chance to earn more than they would otherwise." That statement is, of course, true. However, it also clear that you only have the chance of making less and it is also undeniable that many will just be casualties. The market has winners and losers; not everyone wins.

Stating that the benefit cuts are only on the "guaranteed" portion makes my earlier point: the safety net system is being dismantled by introducing inordinate risk The traditional system's guarantees will be reduced by some 1 percent a year. That's real money over time.

Even the White House has admitted that privatization does not cure the shortfall they fret about.

Back to Table of Contents