Social Security Reform
Copyright © by Dan Schneider, 12/10/04
President George W. Bush narrowly won re-election there has been talk of his
‘ambitious second term agenda’. While the wars in Afghanistan and Iraq
(especially) are front burner items, on the domestic front there have been three
foci: ‘Tax Reform’- which basically means a call for a more flat, or
non-progressive tax (guess what?, favoring the rich), possible Supreme Court
nominations- with the fear that Bush will try to pack the Court with myopic
‘Strict Constructionists’, who seem to not get that the Constitution is a
document whose very vagueness of wording was to allow for the most liberal
interpretation of its tenets, and what is touted as ‘Social Security
Reform’- which, like Tax Reform, is ultimately geared to helping out the rich,
specifically Wall Street brokers, who have been slavering for decades to get
their hands on the poor and working classes’ often only tangible asset- their
Social Security trust funds- via privatization.
Now, don’t get me wrong, there is a need to change and improve SS, but it can be done over the course of a few decades with minimal damage to all, and by not privatizing it. It’s claimed that when President Franklin Delano Roosevelt signed the Social Security Act of 1935 he hoped to have it privatized within a decade. Others dispute that. But, the main argument over the current system is that it is a Ponzi scheme, and unsustainable, because as the population ages there will be less workers to pay into the current system, which does not invest that worker’s funds, but pays out funds to the already retired. This is a problem, but one due to the Congress’s repeated raiding of the SS store when full.
Ponzi schemes are illegal pyramid schemes named for Charles Ponzi, who duped thousands of New Englanders into investing in postage stamp speculation in the early 1920s. Ponzi thought he could make money off the difference between American and foreign currencies used to buy and sell international mail coupons. He told investors he could return 40% in 90 days compared to paltry bank savings accounts. He took in $1 million in a day. Some early investors were paid to make the scheme look legitimate, but Ponzi only purchased $30 worth of international mail coupons. His, like all pyramid schemes, collapsed, because he could not raise enough money from new investors to pay earlier investors, and many people lost their money. While the SS system is not this cut and dried, there are problems, but even with nothing being done the system, by all accounts, is solvent until about 2040, and with tinkering can be made solvent through 2100. This is not to say that real reform is not warranted and that laws should be enacted preventing Congress from ever raiding the SS Trust Fund again, but the Bush Plan is not real reform, it’s a scheme to allow the Wall Street crowd to bilk gullible wannabe investors by playing off their American Dreams of becoming rich in Bush’s Utopian ‘Ownership Society’.
The reason for these alarums is that some believe the Social Security system will run a deficit in 15-20 years (paying out more in benefits than it collects in taxes). What periodic Congressional raiding of the Trust Fund has wrought is a pay-as-you-go system, with no money set aside by the government to pay benefits in the future. FICA taxes collected are paid out as benefits to current retirees, with leftovers going to the Federal Treasury in exchange for IOUs to finance the gap between the Federal Budget’s deficit between what it spends and takes in. The feeling is that Congress will then be forced to deal with significantly increased public debt by cutting federal spending, raising taxes, and/or cutting SS benefits (some guess as little as 60˘ on every dollar of scheduled- and earned- return) which will only hit the middle class, of course.
The biggest logistical problem with the Bush Administration’s plans to privatize accounts is that the costs will be prohibitive- basement estimates start at $2 trillion over a decade (yet we all know it is likely to be several times higher), and there is no guarantee that it will work because a far greater problem than the above doomsday scenario looms, and that is that once privatized there is nothing to guarantee that the person’s money will be there when they retire, should said person be snookered by an incompetent and/or crooked investment broker, or a formerly sound investment option tanks. What the privatization scheme does is unmoor the SS money from government protection and allow it to drift into the hands of the Wall Street crowd- those same fellows who brought you numerous stock market crashes, the Great Depression, deregulation, the Savings & Loan scandal, Leveraged Buyouts in the 1980s, and the Dot.com ‘New Economy’ of the 1990s. Recall how, 15-20 years ago, IRAs and 401Ks were touted by Wall Street as being better than pensions. Didn’t work out that way, eh? Am I the only person who sees a potential disaster looming ahead?
Recall what deregulation wrought to the airline industry in the 1980s- along with the PATCO mass firings it helped bring about the most dangerous decade of air flight since the 1940s. Transfer that over to the national economy and the implications ripple across industries. Basic questions need to be addressed- what happens to folks like me, midway through their Social Security career? Oldsters who are retired or within a decade or so will not be forced to switch over, and will pretty much get what they put in and expected. Youngsters just starting out may argue that in the long run the majority of them will be better off (specious, but typical of the mass faith put in the ‘free market’ until its mythology explodes in their individual faces), but folk like me, with decades of putting in with the promise of what we should expect will be told the rules are changing midway- expect less, work longer for it, and yeah, by the way, from now on you’ll have to trust Wall Street. Of course, Bush and co. say that no one will be forced to switch, but you can bet that additional legislation will fiscally squeeze folk over because the government’s return rates will become ever more penurious once they see that X amount of people have ‘privatized’ and that there won’t be anything left for middlers unless they switch, too.
Another question is what will happen to the inevitable millions (or tens of millions?) of people who invest poorly, or are duped? I’ve put money away in savings accounts and 401Ks for years, so know a bit more than most on how to invest, but you know many of the impatient younger generation will want their private SS funds to reap a bonanza by 40, so they can retire. Millions will wager it all, and a small percent will win, but the majority will inevitably lose- due to bad advice, instincts, or outright thievery. They will then turn to the Federal Government and say, ‘You sold me this bill of goods, you helped me lose my money, you fix it by reimbursing me my loss plus interest lost.’ Lawsuits will proliferate, and eventually an S&L type bailout will occur, except it will dwarf that scandal, as well as the presumed Doomsday scenario currently being trotted out by privatization propagandists. And who will pay for this reimbursement of the stupid and gullible? The rest of the middle and working class. Not the super-rich to whom SS is just a phrase.
Some folk argue that the tinker approach is best. Currently, SS pays out only 70˘ of every dollar it collects, with the rest going to the Trust Fund. By putting that estimated $1 trillion surplus in Al Gore’s infamous ‘lock box’ estimates of between $5-7 billion would be available by 2030. Critics argue that that other 30˘ is being spent, though. Well, yes and no- it is being spent, but financed by U.S. Treasury Bonds. Some see this as a classic robbing Peter to pay Paul variation on Ponzi, but if the current Social Security surplus is dedicated to paying off our national debt, even more billions of dollars a year in interest saved could be specifically devoted to Social Security. Of course, this requires politicians with vision and/or guts. There are other proposed areas of investment of the SS surplus, as well.
But, one should bear in mind that under Bill Clinton the Reagan deficit was on the verge of being squared, and SS was not even on the radar- for it was brimming with money. If the economy takes off in the next decade (unlikely in the short term due to the drag of the wars we are in) a few years’ high tide could again make the supposed SS problem seem as cogent, in retrospect, as the Y2K bug was. My point is that the alarmists have specific reasons for wanting to scare the masses- to get a hold of the most vulnerable in society’s only real tangible asset, to feebly attempt to slake their insatiable greed. This is why their estimates for the SS deficit are based on worst case scenarios- future sustained economic growth of the next few decades of only 1.5%. No 30 year period in American history has seen so slow an economic growth over its full course, not even those years including the dozen year Great Depression.
Let’s look a little at some Bush proposals. Currently he wants to allow 2% of the FICA payroll tax to be put in private accounts- a pittance for individuals ($600 per annum for a middle class worker making $30,000 a year), but a windfall for brokers preying on the 100 million or more in the workforce. That’s $60 billion in just one year, at a minimum. At higher investments, which would follow, in a decade as much as $10 trillion could be at stake, just from what is put in. Add in rates of return and in little over a decade there would upwards of $100 trillion waiting to be plundered- with NO protection for the investors. Can you smell lawsuit heaven for those who’ve been wronged by stupidity, greed, and/or con men? Especially since, given a few years of seeming success will inevitably spur calls for allowing riskier and riskier investment strategies. Twentysomethings, flush on early returns, will lobby for being allowed to invest ‘their’ money in, say, their own proposed small business. After all, they were smart enough to invest wisely early and they surely are a better investment than strangers? Of course, no one will ever think to include legislation that precludes such investors from ever seeking recompense once their business goes in the toilet. And who will be first in line to be paid off? Their private account, or the creditors?
Even bigger problems loom with not only crooked plans and schemers, but with brokerage firms that seek to manipulate funds. The SEC has seen in recent years that firms like Morgan Stanley, Charles Schwab, Merrill Lynch, and Ameritrade were doing all sorts of unethical things, like failing to get the best returns for customer stocks they traded, just so they could not injure other larger investors’ stocks. And that’s not even coming close to addressing the possibly millions of small time fraudsters who will put out shingles and lure the gullible in on their own. Nor does it deal with the Enron, WorldCom, or Tyco scenarios, where the robbers were the senior management who wiped out investor portfolios.
While the argument is that over a 30 or 40 year period the market has always performed better than savings accounts that does not take into account those steep valleys that often pass in between. Overall, the market has done so well because its main investors have been the wealthy, most of who can ride out the financial riptides. Even in the 1930s the bulk of the rich were those who were rich in the prior decade. But, if the SS privatization comes to its full fruition the majority of investors will be the little people (even if still not the majority of the capital). The rich will still be able to ride out financial maelstroms, but the little folk will be swamped. It’s the difference between luxury liners and rowboats. 999 rowboats will sink for every cruise ship, whose industry will be little affected, even if one or two big fish drown. Anyone who thinks that the system isn’t rigged for the rich believes that there are not surveillance cameras watching them in casinos, to ensure the house wins.
Of course, there will be a small percentage of folk who get three cherries, or are smart enough to leave the table while ahead, but most will lose. It’s about the only guarantee about privatization that can be made. Don’t think so? Ask yourself how many of your friends and neighbors, or you and your wife, can currently balance your own checkbook, much less pay off college debts, mortgages, or even monthly credit card bills? Laissez-faire has always been a recipe for disaster on macro-economic issues. On these millions of micro-economies it will be a holocaust the likes this nation has not seen since the Great Depression.
Yes, it’s true that SS has problems, but they are vastly overstated, and yes no one will ever get rich from SS as it is. But, that’s not what it was intended for. It was not even intended as a retirement fund- merely a supplement. No one forces anyone to do a thing with their disposable income. That worker making $30,000 a year surely can squeeze another $600 in savings by refraining from beer, sweets, movies, cable tv, etc., if it’s really worth it to them. Then, the rest of us are not on the hook if he blows it. For seven decades now SS has been the single greatest success story as far as government plans go- it provides a stable, economic floor that prevents the old and ill from suffering even more than their age and infirmities inflict. It is a meager safety net, and to privatize it, even incrementally, means the beginning of the end of a vital part of the social contract all civilized nations make with those who, by age, illness, or bad luck, are not as fortunate as the average person. It destroys the benefits of the pooling effect, which says we are all, to a degree, in this together, absorbing the full effects of shocks that could destroy individuals, but not societies.
As I end I should say that there are ideas out there that incorporate partial privatization, voluntary privatization, and a host of other ideas that limit government liability on those riskier investors, but overall, the scheme put forth by the President will only create far larger problems than the ones that now exist, and the scare tactics used to sell this flawed plan are not borne out by even a little research, yet it’s on the agenda because Bush owes his corporate supporters and by letting them feast on the gullible he pays them off, and the Right Wing and Wall Street have effectively trumpeted the Doomsday call so well, in part by assuring that, via their tax cuts for the wealthy, the direst economic forecasts look more fashionable than the optimism of a few years ago. Of course, their numbers are just numbers, as were the Clintonian pie in the sky projections. All of the numbers I’ve used, however, are gooey, and just that tossed out to the public- highly disputed, and volatile.
Whatever the ultimate solution to SS is it must include protection for those folk like me that trust Treasury Bonds more than corporate stocks, and want to collect their fair share of what they’ve put into the system. In theory, Social Security privatization sounds nice, but so did Trickle Down economics. The problem is the reality gap, which is why so many people, a quarter century after Trickle Down, are still waiting for the rain.
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