.Social Insecurity

Women and Children Last: This poster, created in support of the burgeoning Social Security movement in the 1930s, touts the importance of caring for others.

Without a Net

The Bush administration wants to save Social Security by killing it

By R. V. Scheide

At the dawn of George W. Bush’s second administration, everything seems to be up for grabs, including freedom itself. “The survival of liberty in our land increasingly depends on the success of liberty in other lands,” the president warned the world in his inaugural address last week. But what is this universal liberty that Bush now claims is the United States’ duty to enforce, both at home and abroad? Bush himself seems to imagine it as a sort of Promethean flame that burns “in the minds of men,” “warms those who feel its power” and “burns those who fight its progress.”

In his address, Bush spent the first 10 minutes scaring the bejesus out of the world with such brimstone and treacle; the reaction was mixed. In socialist Venezuela–like Iraq, a small relatively defenseless country sitting atop a large nationalized oil reserve–the populace quite properly shivered. A few of our pundits accused the president of overreaching with his foreign policy. But Bush didn’t really reach out and touch the third rail until he turned to domestic policy.

“In America’s ideal of freedom, citizens find the dignity and security of economic independence, instead of laboring on the edge of subsistence,” he intoned. “This is the broader definition of liberty that motivated the Homestead Act, the Social Security Act and the G.I. Bill of Rights.”

It was no coincidence that Bush situated Social Security between the twin tombstones of the G.I. Bill (a shadow of its former self) and the Homestead Act (hello, 19th century). With his next sentence, he consigned Social Security and the philosophy behind it to the dustbin of history. “And now we will extend this vision by reforming great institutions to serve the needs of our time.”

In neoconservative parlance, this is what Bush means: As with the oil fields in Iraq and Venezuela, Social Security–the largest and most successful social insurance system in the world–is a natural resource ripe for privatization. But they don’t call Social Security the third rail of national politics for nothing. There’s an invisible current running through it that goes straight to the core of American Democracy. Just because Bush and company can’t see it doesn’t mean they won’t get fried.

The magnetic core that binds us all to Social Security is known as the “solidarity principle,” reminds Sonoma State University economics professor Carlos Benito. That’s the notion that all working people and their families–rich, middle class and poor alike–deserve at least some sort of minimum income when they retire, are too sick to work or if the family breadwinner passes away. It’s something we all agreed upon a long, long time ago.

When President Franklin D. Roosevelt signed the Social Security Act into law in 1935, the nation was still mired in the Great Depression. The 1929 stock market crash had wiped out private retirement nest eggs. Unemployment was at a chronic 25 percent, and more than 60 percent of seniors subsisted below poverty level. The free market had failed miserably. Social Security was the stopgap. The program’s original aim, says Benito, was “to humanize capitalism,” and by most accounts, it’s been a tremendous success.

In 2003 Social Security collected $632 billion in payroll taxes and provided $471 billion in benefits to more than 47 million people. The excess, $161 billion, was stored in the so-called Social Security trust fund. Locally, the money was well-spent. According to the Sonoma County Council on Aging, which provides aid such as Meals on Wheels to local retirees, 61,500 seniors age 65 and older in the county receive Social Security benefits. “Social Security is often the primary income for the 1,400 clients we see on any given day,” says director Shirlee Zane. “Probably 80 percent are females over the age of 80.”

The funding for the system is provided by the payroll tax, a levy on the total wages paid to workers during their lifetimes. Half comes out of a worker’s paycheck; half is paid by the employer. The amount of benefit received is based on the money paid into the program over a 35-year span. The more an individual pays in, the more he or she receives in retirement. The poor get slightly more benefits as a percentage of income than the rich. The trade-off for the rich is that no payroll taxes are collected on income after a certain threshold has been crossed. Called the “payroll tax cap,” it currently sits at $80,4000 per year.

Conservative think tanks such as the Cato Institute have railed against the program for decades, seeing it as just another extension of the socialistic nanny state brought into being by Roosevelt’s New Deal. But because it continues to enjoy a high level of public support, Social Security has so far remained bulletproof to such attacks. That’s why, beginning with the presidential campaign last year, Bush and his minions have engaged in a well-orchestrated attempt to convince the public that Social Security is going bankrupt, and the only thing that can save it is to allow workers to invest their payroll taxes in the stock market.

On Jan. 11, Bush was on message at a carefully scripted discussion panel on the topic held in Washington, D.C. Using Josh Wright, a twenty-something Utah dairy farmer attending the panel as an example, he warned, “If nothing happens, and we don’t start moving on it now, by the time Josh gets to retirement age, the system will be flat broke.”

When Bush talks about the system going broke, he’s referring to Social Security’s trust fund. Because Social Security is a pay-as-you-go system, surpluses develop when there are more workers paying into the system than retirees drawing benefits. Such surpluses are forecast to continue through the year 2018. After that year, as more baby boomers retire, more money will be required for benefits than is being paid into the system. The difference will be made up with money from the trust fund, which contains enough savings to provide fully scheduled benefits through 2042.

From then until 2078, the program will begin incurring deficits, and benefits will have to be cut as the trust fund is gradually exhausted. Nevertheless, because payroll taxes will still be coming in, Social Security will be able to continue paying benefits at the 75 percent level. The system can’t really go “bankrupt.”

In short, when Bush talks about Social Security going bankrupt, he’s referring to the exhaustion of the trust fund 73 years in the future. In his pitch to sell private retirement accounts, he’s counting on the fact that most Americans, particularly those Josh’s age and younger, know little about the history of the Social Security system or how it works.

“This is a fabricated crisis,” says Rep. Mike Thompson, D-Napa, who was recently appointed to the House Ways and Means Committee, which oversees Social Security. “A more accurate description would be that there is a challenge [to Social Security].”

Politicians already have the tools to meet this challenge, according to Benito. “There are specific formulas to adjust the contribution according to demographic changes and changes in wages and the rate of inflation,” he says. For instance, small adjustments in the retirement age or payroll taxes can be made to balance the system’s accounts. “You increase or reduce, you make adjustments. If we had done these changes, we wouldn’t be talking about this at all.”

But rather than turn to these time-trusted tools, Bush instead wants to allow up to 2 percent of payroll taxes to be invested in the stock market in private accounts that individuals will “own,” even though they won’t be able to access the money until retirement. The president’s logic is fairly simple.

Historically, Social Security’s return on investment is 2 percent; the stock market rate of return is more than triple that, averaging 7 percent over the long term. Doesn’t it make sense to give workers an opportunity to get the most out of their money?

It would if the president’s comparison was valid, but comparing Social Security to a private retirement portfolio is like comparing apples to oranges. Besides providing retirement benefits, Social Security provides disability insurance and benefits to families of workers killed on the job–factors that aren’t considered in Bush’s privatization proposal and add considerable value to the program. In fact, in order to continue such benefits under Bush’s plan, the system will have to borrow as much as $3 trillion (that’s “trillion with a t,” as the president likes to say) in the next decade to meet so-called transition costs.

“They’re selling public debt to privatize Social Security,” says Benito. The implications could be fatal for a system that’s been built on the public’s trust. “The Bush administration will eliminate the Å’crisis’ not by increasing the contribution to Social Security, but by eliminating the system.”

Thompson scoffs at Bush’s privatization proposal. “Not only is there no need to do it, there’s no need to even talk about it. They’re really talking about going back in time.”

Thompson is referring to 1929 stock market crash, but one needn’t travel that far back to recall the risks inherent in the stock market.

“Can we trust Wall Street?” Shirlee Zane chides. “Let’s just look back the last three or four years.” That of course is when the tech bubble burst and trillions were lost in the stock market. With the recent crash still fresh in many people’s minds, the timing of the Bush administration’s privatization proposal seems all the more absurd. That is, until other factors are taken into account. “It’s the largest pension system in the world,” says Benito. “If a private company could run it, can you imagine the profits that are there?”

Remarkably, Social Security’s administrative costs total less than 1 percent of the revenue taken in. If Bush’s privatization proposal passes, 2 percent of that revenue will be diverted to the stock market, where administrative costs average 15 percent to 20 percent and higher. Additionally, new infrastructure will have to be put in place to keep track of millions of new private accounts. These costs are rarely mentioned in Bush’s proposals, and companies in the financial services sector (as a group, one of the Bush administration’s largest campaign donors) are licking their lips in anticipation of the windfall headed their way.

“It’s incredible the number of organizations in the financial sector that have websites supporting Social Security reform,” says Benito. “Hundreds of organizations are excited about this new business they’re going to create.”

If Thompson has his way, they’ll never get the chance.

“If there is someone other than members of the Bush administration or the corporations who would benefit from a $3 trillion injection into their coffers who thinks this is a good idea, they ought to consider a couple of things,” he says. “It’s not a voluntary program. If you don’t want to do it, you still experience a benefit deduction.”

In other words, privatizing Social Security–instead of saving the system–will create more debt that will gradually erode all benefits. In turn, that could lead to the dissolution of the solidarity principle that’s held the program together for 70 years.

No member of Congress wants to be remembered in the next election as the person who killed Social Security, and privatization will be a tough sell. For seniors and baby boomers nearing retirement, the issue is a nonstarter. Perhaps that’s why Republicans have been targeting young voters with their privatization proposals.

“Younger voters, that’s just a lay-up,” Rep. Paul Ryan, R-Wis., recently explained to CBS news. “When they see the Democratic Party trying to oppose giving them access to their own Social Security [investment] account, that’s a political winner for us and a loser for them.”

Ryan may be correct. It’s much easier to steal candy from a baby who’s never tasted it before. But it also seems likely that once voters become fully informed on the issue, George W. Bush may be in for the shock of his political life. They don’t call Social Security the third rail of national politics for nothing.

From the January 26-February 1, 2005 issue of the North Bay Bohemian.

© Metro Publishing Inc.

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