The Bush Assault on Social Security

In one of the continuing ironies of the Bush administration, the Pentagon is reportedly "engaged in bitter, high-level debate over how far it can and should go in managing or manipulating information to influence opinion abroad," according to a recent story in the New York Times. Meanwhile the administration apparently has no qualms about manipulating information to influence opinion at home, particularly with regard to its proposals to undermine one of the most successful and well regarded products of progressive government in the US: Social Security.

At the sham economic conference in Washington this week White House officials made it clear that attacking Social Security would be the first priority of the new administration. Conservative organizations like the Heritage Foundation and the Cato Institute have been enlisted in the campaign, along with groups with friendly-sounding names like the "Alliance for Worker Retirement Security" and "Women for Social Security Choice." Alliance for Worker Retirement Security was created in the late 1990s by Leanne Abdnor with cooperation and direction of the National Association of Manufacturers. A number of lobbying groups have now joined the alliance, as well as large corporations such as Pfizer, Seagrams & Sons, and TRW. Abdnor's successor at the alliance was Charles Blauhaus who, as a member of the National Economic Council, is one of the architects of the Bush Social Security proposals .

With conference signage proclaiming that it was addressing "Financial Challanges [sic] for Today and Tomorrow," Office of Management and Budget Director Josh Bolten introduced Sandra Jaques of Iowa as a representative of "regular folks" who supported the Bush agenda. Jaques identified herself as a "single mom," "I have a daughter at home," Jaques said. "Her name is Wynter. I want to make sure that she has Social Security when she retires as well." Jaques is the Iowa director of the conservative advocacy group Freedom Works, founded by former vice-presidential candidate Jack Kemp, and former House Republican leader Dick Armey. Jaques is also employed as Iowa director of For Our Grandchildren, a group that advocates personal savings accounts. Another group advocating the Bush Social Security agenda is SocialSecurity.org, which is backed by the free-marketeer Cato Institute, and USANext. Known until recently as United Seniors Association, USANext is headed by former Reagan administration official Charles Jarvis. Jarvis boasted to the New York Times that his group was supported by "Health care companies, energy companies, the food industry, just about everybody...," except perhaps seniors.

There Is No Crisis

The administration needs these elaborate subterfuges because their proposals will do serious harm to the Social Security program as we know it. In particular, "privatizing," i.e. replacing all or part of the system with personal investment accounts, won't do anything to help Social Security, and will likely make things worse. But, as Dan Froomkin wrote in his "White House Briefing" column for the Washington Post on December 10, the first phase of the Bush administration strategy is to convince the public that the Social Security program is in danger of imminent collapse, or in Paul Krugman's words "that we must destroy Social Security in order to save it," In brief comments after meeting with the Social Security trustees on December 9, Bush used the word "problem" at least fourteen times.

After convincing the public that Social Security is in crisis, the administration must sell the idea that private accounts will help, and that borrowing $2 trillion now to pay for "transition costs" to the new program is a good idea.

Krugman describes Social Security as "a government program supported by a dedicated tax on payroll earnings, just as highway maintenance is supported by a dedicated tax on gasoline." Thanks to an increase in the payroll tax recommended by current Federal Reserve Board Chairman Alan Greenspan twenty years ago, revenues from the payroll tax now exceed the amount paid in benefits. Greenspan successfully argued for the payroll tax increase on the grounds that it would build up a trust fund that could be used to pay benefits when the large number of baby boomers begin to retire.

Greenspan's tax increase was not quite big enough, and according to recent estimates from the nonpartisan Congressional Budget Office (CBO), the trust fund will run out in 2052. Revenues will still cover 81% of Social Security benefits, but the grain of truth in the Bush administration's alarmism is that there is a long term financing problem. The CBO report found, however, that additional revenues of only 0.54 percent of the Gross Domestic Product (GDP) would enable the trust fund to continue operation with no change in benefits into the next century. This amount represents less than 3 percent of federal spending, and is less than we're currently spending on Iraq. It also represents approximately one-quarter of the revenue lost each year because of the Bush tax cuts, and is roughly equal to the amount of tax cuts that go to individuals who earn more than $500,000 per year. The government as a whole does face a large financial shortfall, but that is much more a result of Bush's tax cuts (which he plans to make permanent) than anything to do with Social Security.

Krugman points out that opponents of Social Security (the Bushies who are masquerading as "reformers") like to argue that the Social Security trust fund created by Greenspan's tax increase is meaningless because Social Security is not really separate from the federal government, while at the same time they argue that when benefit payments start to exceed revenues it represents a crisis because Social Security is separate from the federal government and must be have its own funding.

Privatization Doesn't Work

A review of other nations' experience with attempts at privatizing government retirement plans reveals two factors that have not been widely publicized:

• A large portion of retirees' funds are paid as fees to investment companies
• Many retirees are reduced to poverty

The Cato Institute, among other groups advocating the Bush Social Security agenda, has praised the privatized government retirement plan in Chile. Yet management fees in Chile are approximately 20 times those of Social Security, or around 20 percent -- a figure Krugman calls "typical for privatized systems." Fees in the British retirement system, which has been privatized since the Thatcher administration, grew so large that government regulators had to impose a "charge cap." Krugman suggests that a 4 percent return is a reasonable expectation for personal investment accounts. With management fees at the level of the British system, returns to workers would be reduced by more than 25 percent. Guaranteed benefits would also likely be reduced, and the risk of investment would increase, creating "a 'reform' that hurts everyone except the investment industry," says Krugman

Advocates of the Bush plan argue that a US privatized plan could keep expenses much lower than the British system. This might be achievable if low-overhead index funds are the only available investment options, but then the claim that the so-called reforms represent a "choice" rings hollow. Investment decisions would be made by government officials. Moreover, suggests Krugman, if investment options were limited to low-cost funds, investment industry lobbyists would work to overturn those restrictions. The windfall in investment management fees is a major reason Wall Street is so gung ho about "privatization."

Those who praise the Chilean system usually do not mention that, despite initial claims that privatization would reduce government expenditures, the Chilean government has continued to pour money into the system, 20 years after its inception. According to a Federal Reserve study, the Chilean government provides "subsidies for workers failing to accumulate enough capital to provide a minimum pension." "In other words," writes Krugman, "privatization would have condemned many retirees to dire poverty, and the government stepped back in to save them." Similarly, the British Pensions Committee has warned that significant government spending will be needed to avoid widespread poverty among the elderly. Those who think privatization fixed the British pension system are living in a "fools paradise," the Committee said.

Reduce Benefits or Increase the Budget Deficit?

Borrowing to finance the costs of private accounts is already meeting opposition from Republicans as well as Democrats. Republican Senator Lindsey Graham, who favors private accounts, told the Wall Street Journal, "I don't think you're going to get bipartisan support" for financing the program with borrowing.

Economist Brad de Long writes that the real crisis is with the General Fund, not Social Security. (The General Fund refers to the government's main operating account, as distinct from trust funds like the Highway Trust Fund which are funded by specific revenues, like the gasoline tax.) If de Long is right, then borrowing to finance private retirement accounts would make things worse. De Long notes that the General Fund deficit represents 5.5% of GDP.

Within a generation General Fund taxes will have to go up (or spending will have to go down) by enough to (a) close this deficit, (b) cover cost growth in Medicare and Medicaid, (c) deal with other unexpected contingencies, and (d) produce a 2.5% of GDP surplus to pay back the Treasury Secretary's obligations to the Managing Trustee of the Social Security Trust Fund.

Graham's plan, which was reportedly developed with White House staff, would essentially legislate a proposal produced by Bush's Social Security Commission in 2001 that reduces Social Security benefits over time. Currently Social Security benefits represent approximately 42 percent of earnings of an average wage-earner who retires at 65; that percentage is scheduled to decline to 36 percent over the next twenty years, while the "normal retirement age" increases to 67. Under the Graham plan, by 2075 benefits would on average represent only 20% of pre-retirement earnings, and the percentage would continue to decline after that.

Supporters of the Graham proposal have tried to represent the loss of benefits as "curbing excess growth of Social Security benefits." The Social Security Administration's Office of the Chief Actuary, however, estimates that:

• An average wage earner who retired in 2042 would receive monthly Social Security benefits 26 percent lower than under the current benefit structure.
• Someone who is child today, works at average wages, and retires in 2075, would receive monthly Social Security benefits 46 percent lower than under the current structure.
• Reduced benefits would apply to all Social Security beneficiaries, not just those who chose to invest a portion of their earnings in an individual account.
• The benefit reduction apparently also would apply to people who receive Social Security disability or survivor benefits.

Other advocates of the Bush Social Security agenda have sought to downplay the significance of the $2 trillion that would be required if one of the commission's proposals were funded with borrowing. White House press secretary Scott McClellan argued recently that $2 trillion was a "... savings, because the cost is $10 trillion of doing nothing, and this will actually be a savings from that cost of doing nothing." According to the Center on Budget and Policy Priorities (CBPP) this argument is misleading because it is an estimate based not on the 75-year horizon usually referenced when discussing Social Security financing, but to a theoretical "infinite horizon."

Over a 75-year horizon, the shortfall of Social Security revenues over the cost of benefits is estimated by Social Security actuaries at 0.7 percent of GDP, and by the CBO at 0.4 percent of GDP. By contrast, if the Bush tax cuts are made permanent, their cost over the same 75-year period will be 2 percent of GDP, or three to five times greater than the size of the Social Security deficit. Even using the misleading and perhaps useless "infinite horizon," the cost of the tax cuts ($18 trillion) exceeds the cost of the Social Security deficit ($10 trillion).

The American Academy of Actuaries warned in December 2003 that "infinite horizon" projections should not be used in policy discussions, because they "provide little if any useful information about the program’s long-term finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic, and actuarial aspects of the program’s finances into believing that the program is in far worse financial shape than is actually indicated."

Moreover, the $2 trillion figure really has nothing to do with addressing the long term Social Security shortfall. The plan that includes the $2 trillion borrowing addresses the deficit by reducing benefits -- the real source of the $10 trillion savings over the infinite horizon. The plan also allows individuals to divert some of their payroll taxes into private accounts, in exchange for an additional reduction in benefits. But the revenue that Social Security would lose from the diversion of funds to private accounts would exceed the savings from the additional reduction in benefits. $2 trillion (or more) would have to be transferred from the rest of the budget to cover the losses to Social Security created by the private accounts.

Enron Accounting

An analysis by the President’s Council of Economic Advisers in 2004 acknowledged that introducing personal retirement accounts into the Social Security system would increase the Social Security deficit. "Personal retirement accounts widen the deficit by design — they refund payroll tax revenues to workers in the near term while lowering benefit payments from the pay-as-you-go system in later years." Recently, however, members of Congress and the administration have begun to float the idea that losses associated with a personal retirement account program should not be recorded as an increase in the budget deficit.

The magic trick works like this: the proposals under consideration that include personal retirement accounts also call for a reduction in Social Security benefits over time; advocates of this budgetary maneuver, which is inconsistent with established budgetary rules, want to credit these projected savings immediately, offsetting the borrowing described above. (It is interesting to note that the technique of booking future savings immediately is similar to accounting gimmicks used by Enron and other corporations to inflate their reported profits.)

The CBPP argues that this budgetary chicanery should not be adopted for several reasons:

• Borrowing several trillion dollars from credit markets over the next few decades represents a significant increase in government indebtedness to domestic and foreign creditors. Openness and accountability demands that this be clearly reported and not hidden through an accounting maneuver.
• The proposal does not merely exchange future government debt for current government debt, as proponents argue, but could worsen the nation’s fiscal outlook and reduce the government’s fiscal flexibility. Current borrowing is "explicit" debt, which would have to be financed in the credit markets. Projected Social Security benefits payable do not have to be financed in the next several decades because of the surplus in the Social Security Trust fund, and may not have to be financed even after that because the shortfall could be reduced by future policy changes. The situation is not dissimilar from that in 1983 when, as discussed above, Alan Greenspan recommended, Congress passed, and President Reagan signed into law modest payroll tax increases substantially reducing the long term projected Social Security deficit.
• Not recording the costs of borrowing large sums to fund individual accounts would undermine the goal of increasing national savings. National savings is defined as private savings less government deficits. So if the savings in personal retirement accounts represents government borrowing, there is no increase in national savings.
• Creating a precedent for government plans of all sorts whose costs are not accounted for ("free lunch" plans) could unsettle financial markets both because of the increase in government borrowing and because of lack of confidence in federal fiscal policy and budget reporting.

The Brookings Institution's Henry Aaron argues that private accounts simply cannot attain the goals of Social Security. He advocates encouraging private accounts in addition to Social Security, but Social Security, says Aaron, is intended to provide basic income. That objective is inconsistent with private accounts which "must bear the risk that asset values will fall." One need look no farther than 2000-2001 for evidence of the risk associated with the stock market. During that period the S&P 500 index fell 50%, a loss of value which, in a retirement account, Aaron terms "catastrophic."

Inflation during the years following an individual's retirement erode the value of private accounts; Social Security, by contrast, is protected against inflation. Moreover, says Aaron, using 2% of payroll taxes to fund private accounts would add $1 trillion to the estimated $5 trillion deficit over the next decade alone. This, says Aaron, would subject workers' children " to debts they should not be asked to bear."

The three privatization plans proposed by the commission Bush appointed to design ways to privatize Social Security would, by the commission's own estimates, each add $4 trillion to government debt by 2040. The increased debt would "threaten the financial and economic stability of the nation," Aaron asserts.

Rather than undermining Social Security by siphoning of 2% of revenues into private accounts, Aaron urges Congress to "buttress the system." Aaron endorses the Wisconsin Representative David Obey's plan, which increases the portion of earnings subject to the Social Security tax from 85% to 90%, adjusts benefits for inflation more accurately than is currently done, and assigns to Social Security the tax on estates in excess of $3.5 million. These measures would close the deficit projected by the CBO for the next 75 years.

It's the Ideology...

Conservative control over the language of political discourse over the last forty years has created the impression that government programs inevitably create inefficient bureaucracies, while the private sector is clean and efficient. With Social Security, the opposite is true, however. Less than 1 percent of Social Security revenues go to administration, while more than 99 percent go to benefits.

As Josh Marshall wrote recently, advocates of so-called 'Social Security reform' "...want to phase out the program; but they're just too cowardly to say it. They lack the confidence of their ideological ambitions."

Krugman agrees:

... the Bush administration wants to scrap a retirement system that works, and can be made financially sound for generations to come with modest reforms. Instead, it wants to buy into failure, emulating systems that, when tried elsewhere, have neither saved money nor protected the elderly from poverty.

For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people's lives better and more secure. And that's why the right wants to destroy it.

References:

Shanker, Thom and Eric Schmitt "Pentagon Weighs Use of Deception in a Broad Arena" NY Times 13 Dec. 2004

Andrews, Edmund L. "Clamor Grows in the Privatization Debate" NY Times 17 Dec. 2004

Andrews, Edmund L. "Bush Puts Social Security at Top of Economic Conference" NY Times 16 Dec. 2004

Krugman, Paul "Inventing A Crisis" NY Times 7 Dec. 2004

Krugman, Paul "Buying Into Failure" NY Times 17 Dec. 2004

Froomkin, Dan "Bush's Big Problem" Washington Post 10 Dec. 2004

De Long, Brad "The Coming General Fund Crisis" Brad DeLong's Semi-Daily Journal 7 Dec. 2004

Aaron, Henry J. "Privatize Social Security? No" The New York Daily News 1 Nov. 2004

Cooper, Christopher and Jackie Calmes "Bush Seeks Bipartisan Backing For His Social Security Plan" Wall Street Journal 17 Dec. 2004

Furman, Jason et al. Should The Budget Rules Be Changed So That Large-scale Borrowing To Fund Individual Accounts Is Left Out Of The Budget CBPP. 13 Dec. 2004

Furman, Jason et al. Would Borrowing $2 Trillion For Individual Accounts Eliminate $10 Trillion In Social Security Liabilities? CBPP. 13 Dec. 2004

Greenstein, Robert So-called "price Indexing" Proposal Would Result In Deep Reductions Over Time In Social Security Benefits CBPP. 17 Dec. 2004.

See also: Twelve Reasons Why Privatizing Social Security is a Bad Idea from the Century Foundation.