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Social Insecurity: Push to Privatize Threatens Retirees and Economy
In the Social Security debate, there are three things economists across the political spectrum agree on:
But just how much fixing does the system need, and how quickly? The nonpartisan Congressional Budget Office gives the system nearly another 50 years, until 2052, before it would require changes in benefit levels. Even the president's own Social Security trustees estimate the system is fully solvent until at least 2042.
"The public has been overwhelmingly convinced that Social Security is in deep trouble," economist Dean Baker of the Center for Economic and Policy Research writes. "Ironically, the only real threat to Social Security comes not from any fiscal or demographic constraints but from the political assaults on the program by would-be 'reformers."'
Baker isn't making a partisan argument. It's from his 1998 book, "The Phony Crisis," written when President Clinton raised the Social Security issue.
To put the finances in perspective, the Center on Budget and Policy Priorities says that over the next 75 years, the cost of making the 2001 and 2003 tax cuts permanent - $11.1 trillion - will be triple the amount of the projected Social Security shortfall.
"We have to separate the facts from the politics and one way to do that is to listen to what economists are telling us," CWA President Morton Bahr said. "Social Security isn't in a crisis, but meddling with it is likely to create one-for individuals who put their retirement security at risk and for our country's financial stability."
Retirement Insecurity
Social Security was created under Franklin D. Roosevelt's presidency as a safety net to keep the elderly out of poverty. Economists say it's been overwhelmingly successful, with poverty rates among older Americans dropping from nearly 50 percent in the 1940s to just 8 percent today.
But as strong as the program is, it was never intended to meet all of a retiree's needs. That's where pensions and personal savings come in. And today both are suffering, making changes to Social Security's guaranteed benefits that much more of a risk.
According to the 2000 Population Survey, only 50 percent of workers have a pension at all. But employer cuts in contribution levels, changes from guaranteed defined-benefit plans to cash-balance and defined-contribution plans, and the implosion of companies such as Enron and World Com have hurt the bottom line for many retirees. Workers at those two notorious companies alone lost $2 billion in 401(k) retirement savings.
Union members aren't immune. CWA-represented employees at United Airlines are among those fighting for their pension as the airline tries to back out of its commitment in bankruptcy court.
The trend in pensions is solidly toward 401(k) and similar plans in which employees, rather than employers, make most of the contribution. The number of 401(k) participants soared from 7.5 million in 1984 to more than 37 million in 1998, according to an AFL-CIO report. "All of that money is already at risk in the stock market," Bahr said. "It's grossly irresponsible to put Social Security at risk, too."
Like tax cuts, even pensions favor the wealthy, who are more likely to be covered than low-income workers. "Two-thirds of pension benefits go to the 15 percent of households with more than $100,000 in income," EPI's Ross Eisenbrey says in a report titled "Pensions Under Assault."
Add in the increasing lack of personal savings for the majority of Americans and guaranteed Social Security payments are that much more critical. "On average, Americans have nearly stopped saving," and many are going further into debt, an EPI "economic snapshot" said last November. "Last quarter, total saving was just 0.4 percent of pre-tax income, from 2.2 percent of four years ago. That's the lowest level of personal saving since the Great Depression of the 1930s."
Privatization
Surveys already show the majority of Americans range from skeptical to opposed when it comes to private accounts. Far more are opposed when told how much the plan would cost and that they wouldn't have any control over the Wall Street firms - handpicked by the government - that will manage their accounts for a fortune in fees.
While corporate America greedily champions the plan, economists outside of Wall Street say that for average retirees there's simply no way the risk outweighs the possibility - and only a possibility-of having a few thousand extra dollars at retirement.
These figures, first published in the New York Times, were compiled by the Center for Retirement Research at Boston College. They show the effects on Social Security benefits of two of the major components of the White House proposal, private accounts and price-indexing. Until now, benefits have been tied to wages, which have risen faster than prices over the years. Both private accounts and tying benefit levels to prices instead of wages would result in lower benefits for recipients, substantially so when today's children reach retirement age.
Jason Furman of the Center on Budget and Policy Priorities says what people must realize is this: "Any person who sets up a private account would get an automatic reduction in their Social Security benefit. This would offset much or all of the value of their account."
White House officials have acknowledged as much, say reporters who attended a not-for-attribution briefing shortly before President Bush unveiled the plan in his State of the Union address. Pressed about the plan's many shortcomings, the official admitted that the only way investors would come out ahead is if the government-sanctioned mix of conservative stocks and bonds earns more than 3 percent after inflation. "So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent rate of return," the official said.
A Washington Post analysis explained it this way: If young workers set aside $1,000 a year for 40 years and earn 4 percent a year on the investment after inflation, each account would grow to $99,800 in today's dollars. The account balance would belong to the workers upon retirement but it would reduce their traditional Social Security benefits by $78,700 - an amount equal to what the worker would have contributed to the system, plus 3 percent interest above inflation.
The workers' net gain would be $21,100, but even that relatively small return is bigger than what the Congressional Budget Office projects. The CBO estimates assume a 3.3 percent rate of return, meaning most workers would wind up with virtually nothing more-.03 percent-than they're already guaranteed through Social Security.
But retirees can't count on even that pittance. "To invest in stocks is to take a gamble because nothing about investing is guaranteed except risk," the Alliance for Retired Americans says. "Poor or conservative investment choices could result in lost retirement incomes and a shrinking nest egg for future retirees. Many seniors could end up in poverty if their private investments don't do well."
Setting up the accounts would mean taking trillions of dollars out of the system that pays current retirees, and that money would have to be borrowed, likely from China or Japan.
Even Federal Reserve Chairman Alan Greenspan is urging caution on borrowing such large amounts, saying Feb. 16 there's no way to predict how world financial markets would react and that the vast debt would likely cause interest rates to rise.
FDR's Legacy
Among those most upset about the Social Security scheme is James Roosevelt, grandson of FDR and a former Social Security commissioner. He's even angrier that right-wing proponents of changing the program have twisted his grandfather's words to suggest that he would have supported the Bush plan.
"The implication that FDR would support privatization
of America's greatest national program is an attempt to deceive the American people and an outrage," Roosevelt said in an op-ed piece in the Boston Globe.
He said his grandfather believed Social Security benefits should be guaranteed and available to all Americans. He fully supported Wall Street investments for individuals, but as an addition to Social Security, not a substitution.
James Roosevelt said those pushing privatization are
stirring up fear and trying to avoid a real debate by using words such as "crisis" and "bankruptcy."
"Every honest person knows there is no crisis," he said. "What is needed are adjustments, not drastic measures like privatization. Just as bad is the use of terms like 'worthless IOUs' to describe U.S. Treasury bonds held by the (Social Security) trust fund. These are scare tactics designed to create fear.
What You Can Do:
One: Private accounts would do nothing at all to resolve the program's long-term funding problems.You won't hear anything about risk from political supporters. But White House officials, Vice President Dick Cheney and even President Bush have owned up to the need to borrow vast sums of money for their plan. And Bush himself admitted in mid-February, after weeks of misleading claims, that "The personal account doesn't fix the system."
Two: Setting up the accounts would quickly thrust the country trillions of dollars deeper into debt.
And three, though some are loathe to admit it: The accounts are inherently risky.
But just how much fixing does the system need, and how quickly? The nonpartisan Congressional Budget Office gives the system nearly another 50 years, until 2052, before it would require changes in benefit levels. Even the president's own Social Security trustees estimate the system is fully solvent until at least 2042.
"The public has been overwhelmingly convinced that Social Security is in deep trouble," economist Dean Baker of the Center for Economic and Policy Research writes. "Ironically, the only real threat to Social Security comes not from any fiscal or demographic constraints but from the political assaults on the program by would-be 'reformers."'
Baker isn't making a partisan argument. It's from his 1998 book, "The Phony Crisis," written when President Clinton raised the Social Security issue.
To put the finances in perspective, the Center on Budget and Policy Priorities says that over the next 75 years, the cost of making the 2001 and 2003 tax cuts permanent - $11.1 trillion - will be triple the amount of the projected Social Security shortfall.
"We have to separate the facts from the politics and one way to do that is to listen to what economists are telling us," CWA President Morton Bahr said. "Social Security isn't in a crisis, but meddling with it is likely to create one-for individuals who put their retirement security at risk and for our country's financial stability."
Retirement Insecurity
Social Security was created under Franklin D. Roosevelt's presidency as a safety net to keep the elderly out of poverty. Economists say it's been overwhelmingly successful, with poverty rates among older Americans dropping from nearly 50 percent in the 1940s to just 8 percent today.
But as strong as the program is, it was never intended to meet all of a retiree's needs. That's where pensions and personal savings come in. And today both are suffering, making changes to Social Security's guaranteed benefits that much more of a risk.
According to the 2000 Population Survey, only 50 percent of workers have a pension at all. But employer cuts in contribution levels, changes from guaranteed defined-benefit plans to cash-balance and defined-contribution plans, and the implosion of companies such as Enron and World Com have hurt the bottom line for many retirees. Workers at those two notorious companies alone lost $2 billion in 401(k) retirement savings.
Union members aren't immune. CWA-represented employees at United Airlines are among those fighting for their pension as the airline tries to back out of its commitment in bankruptcy court.
The trend in pensions is solidly toward 401(k) and similar plans in which employees, rather than employers, make most of the contribution. The number of 401(k) participants soared from 7.5 million in 1984 to more than 37 million in 1998, according to an AFL-CIO report. "All of that money is already at risk in the stock market," Bahr said. "It's grossly irresponsible to put Social Security at risk, too."
Like tax cuts, even pensions favor the wealthy, who are more likely to be covered than low-income workers. "Two-thirds of pension benefits go to the 15 percent of households with more than $100,000 in income," EPI's Ross Eisenbrey says in a report titled "Pensions Under Assault."
Add in the increasing lack of personal savings for the majority of Americans and guaranteed Social Security payments are that much more critical. "On average, Americans have nearly stopped saving," and many are going further into debt, an EPI "economic snapshot" said last November. "Last quarter, total saving was just 0.4 percent of pre-tax income, from 2.2 percent of four years ago. That's the lowest level of personal saving since the Great Depression of the 1930s."
Privatization
Surveys already show the majority of Americans range from skeptical to opposed when it comes to private accounts. Far more are opposed when told how much the plan would cost and that they wouldn't have any control over the Wall Street firms - handpicked by the government - that will manage their accounts for a fortune in fees.
While corporate America greedily champions the plan, economists outside of Wall Street say that for average retirees there's simply no way the risk outweighs the possibility - and only a possibility-of having a few thousand extra dollars at retirement.
These figures, first published in the New York Times, were compiled by the Center for Retirement Research at Boston College. They show the effects on Social Security benefits of two of the major components of the White House proposal, private accounts and price-indexing. Until now, benefits have been tied to wages, which have risen faster than prices over the years. Both private accounts and tying benefit levels to prices instead of wages would result in lower benefits for recipients, substantially so when today's children reach retirement age.
Jason Furman of the Center on Budget and Policy Priorities says what people must realize is this: "Any person who sets up a private account would get an automatic reduction in their Social Security benefit. This would offset much or all of the value of their account."
White House officials have acknowledged as much, say reporters who attended a not-for-attribution briefing shortly before President Bush unveiled the plan in his State of the Union address. Pressed about the plan's many shortcomings, the official admitted that the only way investors would come out ahead is if the government-sanctioned mix of conservative stocks and bonds earns more than 3 percent after inflation. "So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent rate of return," the official said.
A Washington Post analysis explained it this way: If young workers set aside $1,000 a year for 40 years and earn 4 percent a year on the investment after inflation, each account would grow to $99,800 in today's dollars. The account balance would belong to the workers upon retirement but it would reduce their traditional Social Security benefits by $78,700 - an amount equal to what the worker would have contributed to the system, plus 3 percent interest above inflation.
The workers' net gain would be $21,100, but even that relatively small return is bigger than what the Congressional Budget Office projects. The CBO estimates assume a 3.3 percent rate of return, meaning most workers would wind up with virtually nothing more-.03 percent-than they're already guaranteed through Social Security.
But retirees can't count on even that pittance. "To invest in stocks is to take a gamble because nothing about investing is guaranteed except risk," the Alliance for Retired Americans says. "Poor or conservative investment choices could result in lost retirement incomes and a shrinking nest egg for future retirees. Many seniors could end up in poverty if their private investments don't do well."
Setting up the accounts would mean taking trillions of dollars out of the system that pays current retirees, and that money would have to be borrowed, likely from China or Japan.
Even Federal Reserve Chairman Alan Greenspan is urging caution on borrowing such large amounts, saying Feb. 16 there's no way to predict how world financial markets would react and that the vast debt would likely cause interest rates to rise.
FDR's Legacy
Among those most upset about the Social Security scheme is James Roosevelt, grandson of FDR and a former Social Security commissioner. He's even angrier that right-wing proponents of changing the program have twisted his grandfather's words to suggest that he would have supported the Bush plan.
"The implication that FDR would support privatization
of America's greatest national program is an attempt to deceive the American people and an outrage," Roosevelt said in an op-ed piece in the Boston Globe.
He said his grandfather believed Social Security benefits should be guaranteed and available to all Americans. He fully supported Wall Street investments for individuals, but as an addition to Social Security, not a substitution.
James Roosevelt said those pushing privatization are
stirring up fear and trying to avoid a real debate by using words such as "crisis" and "bankruptcy."
"Every honest person knows there is no crisis," he said. "What is needed are adjustments, not drastic measures like privatization. Just as bad is the use of terms like 'worthless IOUs' to describe U.S. Treasury bonds held by the (Social Security) trust fund. These are scare tactics designed to create fear.
What You Can Do:
- Letters to the editor help shape public opinion and media coverage in your community. Submit letters to your local weekly and daily newspapers. Check their editorial pages or websites for addresses and length restrictions. Write about the issue of Social Security privatization in general or respond to a specific article or commentary in your newspaper.
- Stay informed. All the organizations quoted in our story have websites with frequently updated news and analyses about proposed changes to Social Security. Check out www.cbpp.org, www.cepr.net, www.epinet.org, www.aarp.com and www.retiredamericans.org. And don't forget CWA and the AFL-CIO, ga.cwa-union.org and www.aflcio.org.
- To find out how you would be affected by Social Security privatization and price-indexing, as detailed in the chart above, check out the Social Security calculator website. Enter your retirement year and wages to see how much you stand to lose. Go to www.democrats.senate.gov/ss/calc.html, or just try www.democrats.gov and follow the links. Urge your friends and co-workers to try it, too.