Social Security isn’t broken, but Washington is full of reformers looking to fix it. Many, especially those who favor privatization, claim that the retirement of baby boomers and budget problems will cause the Social Security Trust Fund to run out of money within anywhere from the next decade to the next 40 years. Ideologically driven claims rather than facts, however, lie at the heart of the pro-privatization arguments.
How does Social Security work? It is pretty simple actually. Working people pay a payroll tax just like the two generations before them did. The Social Security Administration (SSA) uses the money (1) to pay the benefits of retired and disabled workers and the rest is (2) saved in the Trust Fund or more literally used to purchase US bonds as a form of savings in order to help pay future benefits. Since the money taken in through payroll taxes is higher than what is paid in benefits, we often here about the Social Security surplus. During 2003, the Treasury received $544 billion in Social Security taxes and paid out $406 billion in Social Security benefits. The one-year surplus was $138 billion despite an economy plagued by unemployment and falling wages. This is money that is supposed to be used for option two.
Both Democrats and Republicans talk about keeping the surplus in a "lock box" or not using it for other spending. This part of the system is a bit fuzzy. In order to pay for things the government needs that it doesn’t have the cash on hand for, it has to borrow. The Treasury Department does this by selling bonds. The SSA purchases some of these bonds with the promise that the government will repay the Trust Fund when the bonds are sold. The ability to repay is more of a problem now since Bush has turned large budget surpluses under Clinton into huge annual deficits. Bush’s antipathy for Social Security partially explains why he doesn’t seem too concerned about deficits.
In 2001, Bush appointed a commission whose sole purpose, despite claims to the contrary, was to devise the best Social Security privatization methods available. This commission was composed entirely of investment-oriented technocrats and pro-privatization ideologues who followed a long right wing trend. For nearly two decades, the far right has worked on generating the political momentum to dismantle Social Security. Their goal is ideologically motivated rather than based in any factual claims about Social Security’s viability. They use reports and analysis produced by right-wing think tanks like the Heritage Foundation and the Cato Institute that start from the ideological premise that Social Security is bad and from the political premise that it is going broke.
Despite large annual surpluses, anti-Social Security propagandists insist that the system has about 14 years before it collapses (2018). They forget to mention that about ten years ago they were predicting that it would have collapsed by now. They arbitrarily set 2018 as the date because the sell date of many US bonds purchased by the SSA is that year. Of course they don’t tell us that just like any other public debt Social Security bonds will be rolled over into the next cycle just as they have since the system was invented. Following the logic of the privatizers, foreign investors who hold trillions in US bonds could bankrupt the US government at any time by demanding payment. But privatizers don’t seem overly worried about that. In fact they encourage foreign investment in US bonds. They know that people who buy US bonds have more to gain by holding onto them.
Privatizers also claim that the growing and aging workforce will put greater pressure on the system once those workers retire over the next decade. Surpluses will disappear and large annual deficits will grow. But this assumption hinges on slower than normal average economic growth. Since the Social Security depends on current workers paying in through a small payroll tax, its financial future depends on how well the economy creates jobs and how well those jobs pay. Job creation under capitalism is related to how well the overall economy grows. Economists measure this overall growth by calculating the growth of the gross domestic product (GDP) -- or the overall value of the economy.
Since the Reagan era, the Social Security Trustees have predicted a dire economic picture with slower than average rates of GDP growth in order to provide information about the financial future of Social Security. Even with pessimistic predictions -- they paint an economic picture worse than the Great Depression -- the Trustees conclude the system without any changes will remain financially sound until 2042 when some benefits would have to be cut. If Bush used the same numbers to forecast the growth of the federal debt or the number of jobs his administration’s policies would create, he’d never pass a single tax cut plan.
A conflicting Congressional Budget Office report released last June, using more realistic predictions, said that surpluses would persist until 2052, and in 75 years the financial trouble it would incur would be about half of what the Trustees predict. Further, when compared with the current federal debt (4 percent of GDP) amassed under Bush or the current foreign debt (5 percent of GDP) propelled by "free trade" and outsourcing policies, the Social Security’s financial shortfall -- 75 years from now -- would account for an easily manageable 0.4 percent of the entire economy. The cost of Bush’s tax cuts alone over the same period of time, according to Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research, will be about three times that amount.
To avoid collapse, privatizers claim that benefits will have to be cut or payroll taxes raised. A better option in their view is simply to dismantle the system by allowing current workers to opt out. Instead of paying a tax to the SSA, the government would withhold part of their earnings and put them in private accounts managed by large investment firms. Investment bankers would invest the money in the stock market or whatever speculative schemes they have cooked up at the moment: junk bonds, Enron-type deals, housing bubbles, price or currency prediction schemes and so on. This kind of activity, while it doesn’t stimulate much real production or job growth and only enriches the lucky few, according to ideologically motivated privatizers, is crucial to the "free market" principle.
Their real aim, however, is to shift the government’s role from protecting the economic future of retiring and disabled workers to providing trillions of dollars for already wealthy investment firms. When government works for big business, they don’t have a problem with it.
Individuals wouldn’t control these accounts; corporate financial bureaucrats would. They aren’t guaranteed to give workers any return in the future, but you better believe that brokers’ fees and commissions will fatten the bottom line of some investment companies. According to Barbara B. Kennelly, of the National Committee to Preserve
Social Security and Medicare, it would cost $940 billion to move from the current system to private accounts brokers’ fees alone. That money isn’t going to fall from the sky.
By allowing trillions to be put into private accounts, this plan will speed up Social Security’s financial problems in just a few short years. Current retirees and disabled workers could expect severe cuts in their benefits almost immediately despite the claims of the privatizers. Rather than saving Social Security, a personal investment account plan as the one favored by the Bush administration would eliminate it faster than if the US suffered several decades of depression.
Further, if Argentina’s privatization scheme holds any clues, the loss of funds would negatively affect the government’s overall financial stability. After withdrawing hundreds of billions from the public pension system, Argentina’s economy collapsed as its government found itself unable to pay its debts. Because hundreds of billions of Social Security surplus dollars are used to cover part of the US government’s spending needs, the loss of the money is likely to have a similar impact on the US debt.
The rapid loss of so much money would still require cuts in benefits or higher payroll taxes to ensure that current retirees would continue to receive any benefits. The Center on Budget and Policy Priorities estimates that beneficiaries could lose between $300 and $500 monthly, pushing many below the poverty line. Meanwhile, as the Chile’s failed private system reminds us, private accounts would yield less than actual benefits under the current system. In Chile, since privatization in 1981, poverty among retirees has grown and the income gap has sharply widened.
In the bigger picture, the government’s current financial troubles are partially fueled by skyrocketing health care costs that overburden the Medicare and Medicaid systems, two deceptively efficient public programs with low administrative costs. The problem is that without controlling medical costs -- prescription drug prices for example - the government’s financial responsibilities to health care providers through these programs grows very rapidly. Nevertheless, Medicare and Medicaid may be the last barriers to an unrestrained health care cost explosion. The plain fact is that a rational and comprehensive health care program that better manages costs than private corporations are willing to do would decisively buttress the long-term financial solvency of the government generally and Social Security specifically.
Without a single change, however -- no cuts in benefits, no additional taxes, no privatization -- the Social Security system over the next 75 years would continue to pay the same benefits for more than half that time without any financial problems, according to the Trustees, the CBO and others. After that, any financial problems that might develop could easily be managed with sound budget policies that prioritize preserving the system. A lot could happen in those 75 years to improve the bleak future predicted by the privatizers.
Some general changes that could help prevent a long-term imbalance include:
1. create more jobs (fair trade, investment in infrastructure development and manufacturing),
2. protection of wages (living wage laws, raise the minimum wage, union contracts),
3. shift spending from the bloated military to social investments (job training, education, health care and others),
4. institute a progressive tax system, and
5. aggressively control rising health care costs that drain public resources.
Because Social Security’s financial future would be strengthened by these measures, it is possible to see why Bush has worked so hard over the past four years to do the opposite.
If Social Security has a problem, it is that is doesn’t do enough to prevent poverty among seniors. A system of larger benefits coupled with complete health care coverage and rational choices about social spending and job creation would do better. Privatization schemes, however, will rob our parents, us, and our children of the promise of financial security after a life devoted to work. Let’s not allow the fruits of our labor to line the pockets of the filthy rich.
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