Posted on 06/04/2002 9:10:04 AM PDT by Stand Watch Listen
YES: These plans gut guarantees of a basic level of financial security for all Americans.
By Sen. Jon S. Corzine
The President's Commission to Strengthen Social Security has developed privatization plans that would make deep cuts in guaranteed benefits and could lead millions of Americans to delay their retirement. These privatization plans erode Social Security's basic promise of retirement security for all Americans. They would take the security out of Social Security, and they should be rejected.
Social Security promises all Americans that if they work hard, pay their taxes and play by the rules, they will be able to retire and live in dignity. Social Security is not a handout. It's an earned benefit that rewards and promotes work. It guarantees that, regardless of the state of the economy or the stock market, every contributing American will have a basic level of financial security. The commission's privatization plans gut that guarantee.
The Bush commission has developed privatization plans that would take trillions of dollars out of the Social Security trust fund to finance privatized accounts. This would force deep cuts in guaranteed benefits. According to the nonpartisan actuaries at the Social Security Administration, those cuts would exceed 25 percent for many current workers. In the future, cuts could exceed 45 percent. These cuts would apply to all retirees, even those who choose not to invest in private accounts. Although the commission does not explicitly raise the retirement age, its cuts almost certainly would force millions of Americans to delay their retirement in order to build up their financial assets.
Even without these cuts, Social Security's guarantee ensures only a basic existence. Today, the average Social Security benefit is less than $10,000 a year, and for women the average benefit is closer to $9,000. For most seniors, especially those who live in high-cost areas such as my home state of New Jersey, that's barely enough to maintain even a basic standard of living. President George W. Bush may believe that $10,000 a year is too much to promise America's seniors. I disagree.
Each week, America's workers send a portion of their paychecks to the Social Security trust fund so that, when they retire, their benefits will be there. The trust fund is supposed to be used to guarantee those benefits. Unfortunately, Republicans want to use this money to pay for other programs, including tax breaks for large corporations, while proposing changes that would result in drastic benefit cuts for seniors.
Some argue that we need deep cuts in Social Security benefits to save the program. But the numbers prove them wrong. During the next 75 years, the entire Social Security shortfall will be $3.7 trillion. Meanwhile, last year's tax cut, if made permanent, will cost $8.7 trillion during the same period. In other words, the tax cut will cost more than twice the entire Social Security shortfall. Remember that the next time you hear someone argue that we have no choice but to cut benefits. We have the resources to meet our obligations and honor our promises. It's simply a matter of setting priorities and maintaining fiscal discipline.
To be clear, I am not opposed to the use of private accounts to save for retirement. To the contrary, it is essential that Americans save privately for their retirement, and that is why I strongly support providing tax subsidies for 401(k) plans and IRAs. But private accounts, by their nature, cannot provide the same level of security as does Social Security. When investments tumble, health declines and all else fails, Social Security benefits are there —guaranteed — as a final lifeline for seniors.
Privatizers dismiss concerns about cuts in guaranteed benefits by arguing that defenders of Social Security simply are trying to "scare seniors." But given the 25 percent cut proposed by the Bush commission, Americans of all age have a right to be scared.
Some argue that privatized accounts will give seniors better returns. However, having earned my living as a trader and investment banker for 30 years and having run one of America's largest financial companies, I understand something about markets. I can assure you it is pure folly to assume that privatized accounts always will increase in value and that they will be at a high water mark when an individual retires. The truth is, markets go up, down, and sideways — sometimes for many years. One thing they never do is provide guaranteed protection against both inflation and the risk of outliving your savings — only Social Security does that.
Some privatizers argue disingenuously that privatization won't actually cut guaranteed benefits. They do this by assuming that, without privatization, Congress will break its promise to retirees by allowing benefits to be cut rather than shoring up the Social Security trust fund. In effect, the privatizers argue that Congress, having used Social Security funds for other purposes, now should be able to break its promise to retirees because there is not enough money in the trust fund.
If an ordinary citizen used this line of argument, it wouldn't pass the laugh test. Imagine, for example, that you borrowed money from a bank and promised to repay it. Later, you overspent and failed to save enough to repay the loan. Would your failure to save be an excuse for reneging on your obligation? Would it be a basis for pretending that you, the borrower, didn't really promise to repay the loan in the first place? Of course not. Yet now that Congress has failed to save enough and faces a shortfall in the Social Security trust fund, some privatizers want to use that as an excuse for reneging on benefits promised to those who paid into the system in good faith. That's wrong.
Other privatizers admit that privatization would cut benefits but claim that "current or near-retirees" would be protected. However, this is far from clear.
First, to the extent that individuals contribute to private accounts, these contributions automatically could trigger offsetting cuts in guaranteed benefits. This is a classic "bait and switch" — giving with one hand, then taking away with another. The cuts in guaranteed benefits would apply even if the value of a privatized account declines substantially. Those unlucky enough to lose money in their privatized accounts would have fewer Social Security benefits upon which to fall back. While some have argued that each of the commission's plans ban older Americans from investing in privatized accounts, the text of their report suggests otherwise.
It also is important to emphasize that the Bush commission avoids calling directly for deeper and more immediate cuts in guaranteed benefits only by assuming massive general-revenue subsidies of the Social Security trust fund worth up to $6.5 trillion in today's dollars. Yet the Bush budget includes not a single penny to pay for these subsidies. And now that the Bush tax cut has been enacted and the government again has begun running large deficits, it is highly unlikely that the subsidies will materialize. Without them, the Bush commission would force the Social Security trust fund into a negative cash flow by 2010, and it would be insolvent as early as 2025. At that time, many of today's middle-aged and older Americans will be retired and dependent on Social Security.
In other words, current and near-term retirees are not protected under the Bush plan, notwithstanding claims to the contrary. Even while proposing deep cuts, the Bush commission assumes general-fund subsidies that are unlikely to materialize. This makes probable additional cuts, including cuts for current and near-term retirees.
There is another problem with privatized accounts that rarely is understood — they are very costly to administer. One reason is that many accounts are quite small, so a significant share of any gains is eaten up by management fees and administrative charges. The administrative costs associated with a similar system in the United Kingdom reduced the account balance of the typical worker by 36 percent, relative to the balance that would have accumulated without any administrative costs.
Privatization is a good deal for the big financial companies that would earn fees to administer privatized accounts. That explains why many might support such an initiative. But while a few big financial firms would hit the jackpot if privatization were approved, ordinary Americans would be the big losers.
I congratulate Insight magazine for highlighting the debate on privatization. We need to get the public engaged in this discussion. Unfortunately, the Bush administration has tried to shove its privatization plans under the rug until after this fall's election. Remember, their commission released its report late in the day on the last Friday before Christmas — an obvious attempt to avoid public scrutiny.
But the future of Social Security is too important to be decided behind closed doors by a handful of politicians and policy technicians. It needs to be debated in the open — in the media and on the floors of Congress. Even the chairman of the Republican National Committee, Marc Racicot, agrees that we should start the debate now. Unfortunately, he has been unable to convince the GOP leadership. That's a shame. The American people have a right to know that their benefits are at stake, and they should have an opportunity to have meaningful input into that decision.
Social Security at its most basic level provides a simple guarantee: Work hard and contribute now, and your financial future will be secure. For proponents of privatization, including President Bush, to suggest cutting guaranteed benefits in favor of individual bets on the market strikes at the very core of Social Security's promise. Those who disagree with that promise have a right to call for the program's repeal. But they shouldn't pretend that privatization promises security for America's seniors — it doesn't.
Corzine, a Democrat, is a U.S. senator from New Jersey. A former investment banker, he serves on two subcommittees of the Senate Banking, Housing and Urban Affairs Committee, as well as the Budget Committee and the Joint Economic Committee.
NO: Voluntary personal account plans allow all workers to build wealth throughout their lifetimes.
By Andrew G. Biggs
Opponents of personal retirement accounts say they would make Social Security less social and less secure. In this election year, barely a day passes in Washington without some new accusation designed to scare seniors about personal accounts.
In truth, voluntary personal-account plans such as those from the president's bipartisan reform commission strengthen Social Security's finances while letting all workers, rich and poor alike, build wealth throughout their lifetimes and pass it on to their heirs. If account opponents have a better proposal to maintain Social Security for the future, they should put it forward. Their silence regarding their own plans speaks volumes.
Social Security today is running surpluses, but as the population ages those surpluses soon will turn to deficits. Increased life expectancies and low birth rates mean more retirees to support and fewer new workers to support them. Over the long term, the cost of paying benefits will almost double as a share of workers' wages. By 2017 Social Security will be paying out more in benefits than it collects in payroll taxes. At that point, Social Security must begin redeeming the government bonds held in its trust fund. But, as a Congressional Budget Office official pointed out on May 22, the trust fund's solvency is only on paper — it is nothing more than an accounting device, not a store of wealth.
Barry Anderson, C.B.O. deputy director, said: "Even calling it a trust fund can be misleading and confusing to retirees, members of Congress and the media alike. The trust fund holds not money but IOUs from the government to itself. No matter how healthy the trust fund is claimed to be, the economy must generate the cash needed to pay these IOUs to fund claims to eligible beneficiaries. The only date that really is important is the date when payments to beneficiaries exceed taxes levied to cover them."
That does not mean we will not repay the trust fund's bonds — all proposals from the President's Commission to Strengthen Social Security honor them in full — it merely means that we must be honest with ourselves about the true cost of paying Social Security benefits. For too many, the trust fund serves as an excuse to put off much-needed action.
During the next 75 years, Social Security faces a $23 trillion gap (in today's dollars) between the benefits it has promised and those it actually can pay. The aim of reform is to fill this benefit gap, enabling Social Security to meet its promises.
Traditionally, the "solution" to Social Security's financing problems was to raise taxes, reduce benefits and increase the retirement age. The last major "reform" in 1983 did all three, proving exactly how insecure Social Security's politically determined benefits can be: With the stroke of a pen, workers were told they would have to pay more, and for more years, to receive less in retirement benefits.
Today, many reformers reject further tinkering with Social Security's pay-as-you-go financing in favor of a new approach that is based on real saving and investment in personal retirement accounts. Real saving, in stocks and corporate bonds, builds the economy and earns a higher rate of return than the current program.
The President's Commission to Strengthen Social Security, headed by former New York Democratic senator Daniel Patrick Moynihan and AOL Time Warner Chief Executive Officer Richard Parsons, put forward three proposals that guaranteed benefits to current and near-retirees, offered voluntary personal accounts to younger workers and improved Social Security's financing health. Two commission plans made Social Security permanently solvent. These personal account-based plans offered workers higher benefits at lower cost than the current program, while giving every worker the opportunity to build real assets and wealth. Opponents of personal accounts reacted with barely concealed rage, their rhetoric rising ever higher in this important election year. Luckily, when countered by the facts, these attacks fall far short.
For instance, critics charge that personal account-based reform plans will cut benefits by as much as 45 percent. Account opponents conjure up these "benefit cuts" by counting the benefits the current program promises but not the increased taxes required to pay them, while for reform proposals they count the taxes needed to fund personal accounts but not the benefits accounts would pay. This comparison isn't apples and oranges; it's apples and elephants.
The nonpartisan Congressional Research Service warned in August of 2001 against using such reasoning: "Comparing a proposal's projected benefits to those resulting from the rules of current law can be misleading, since the full amount of benefits promised under current law would not be payable under the trustees' projections. For example, a proposal that is shown to result in benefits that are 10 percent or 20 percent lower than under current law may at first glance appear politically unattractive, but may appear less so if compared with the 27 percent reduction in benefits that would have to occur if policymakers were to take no action."
An honest evaluation tells a very different story. For instance, a 25-year-old woman who earns a low wage and will retire in 2042 is "promised" $896 (in today's dollars) per month from the current Social Security program. However, because Social Security will be insolvent in 2042, by law the program can pay her only $655 per month (with larger cuts in future years).
Under the commission's proposal, this same woman could expect to receive $611 in traditional benefits from the government plus $375 from her personal account for a total of $986 per month. Her benefits would be $331 per month more than Social Security will by law be able to pay and $90 more than Social Security even promises. Does this sound like a benefit cut to you?
Reform opponents counter that the "transition cost" of implementing personal accounts would bust the budget. But the President's Commission plans reduce the $23 trillion in additional tax revenue needed to prop up the current system by up to 68 percent. Budgetary pressures are a reason for the commission's plans, not against them.
Critics also accuse the commission's plans of raising the retirement age. In fact, none of the plans would alter Social Security's retirement age by even a day. Moreover, since commission proposals would pay higher benefits than the current program, personal accounts could enable workers to retire earlier than under current law. For instance, the 25-year-old, low-wage woman cited earlier would have to work past age 70 under the current program to receive the same benefits that she could receive at age 65 under the commission's Plan 2.
Reform opponents also charge that personal accounts would force workers into the stock market, risking their retirement savings as Enron employees did. In fact, all account plans are voluntary, and no worker with an account is required to invest even a penny in the stock market. In addition, the President's Commission modeled its personal accounts after the federal Thrift Savings Plan (TSP), which requires that government workers invest only in approved, low-cost, diversified stock-and-bond mutual funds. Millions of federal workers are happy with the TSP. Shouldn't ordinary Americans have a similar option?
Moreover, a recent National Public Radio poll showed that most Americans think the Enron scandal is a reason for personal accounts, not against them. Individuals were asked to respond to the following statement: "This is not the time to turn Social Security over to the stock market. We need changes to improve Social Security, but not ones that reduce the guaranteed monthly benefits for future retirees. Or, what happened at Enron proves people need more choice and to be in control of their own retirement options, including the right to invest a portion of their Social Security taxes into government-approved and diversified mutual funds?" By 55 to 39 percent, respondents said that Enron's collapse strengthened the case for personal accounts.
Perhaps the most scurrilous charge of all is that reform would cut benefits for current retirees. These accusations are made for one purpose: to scare seniors into the voting booth. A May 2001 McLaughlin & Associates poll found 63 percent of seniors would support personal accounts for younger workers if their own benefits still would be paid. If seniors were to join the nearly two-thirds of working-age Americans who already support personal accounts, the political game would be over.
But charges of benefit cuts for current retirees are just plain false. Under all plans from the president's commission, individuals older than age 55 remain in the current program and are guaranteed everything they have been promised. For those 55 and older, nothing would change — nothing.
Reform opponents say personal accounts would take the security out of Social Security. But if Social Security is an insurance policy, it's a very expensive one. Today, a low-wage worker can pay one-eighth of his wages into Social Security all his life and still retire into poverty. Where is the security in that? By contrast, commission plans guarantee that a minimum-wage worker would retire above the poverty line, lifting up to 1 million seniors out of poverty. This would give workers not just security, but dignity.
Today, one-third of black men entering the workforce will not live long enough to collect a penny in retirement benefits. They pay a lifetime of taxes with nothing to leave behind. Where is the security in that? Commission plans would enable a low-wage worker to pass on $70,000 or more to his spouse, children or heirs.
Today, Social Security allows 12 percent of women to retire into poverty, versus only 7 percent of men. Among widows, divorcées or never-married women, poverty rates can approach 25 percent. Where is the security in that? Commission reform plans give new rights to divorced women and raise benefits for 2 million to 3 million widows, freeing countless women from poverty in their old age.
Today, a worker has no legal right to his Social Security benefits. The Supreme Court has ruled that, with the stroke of a pen, Congress may raise taxes or cut benefits at any time, by any amount, for any reason — or no reason — at all. Where is the security in that? Personal accounts give each worker a legal property right to his Social Security savings. Instead of a politically determined entitlement, he gets a legally owned asset.
Social Security's independent actuaries confirm that personal-account plans from the commission would pay higher benefits at lower costs than the current program, enhance the program's financing, strengthen the Social Security safety net and reduce poverty, while giving all workers the chance to build wealth and pass it on in a voluntary personal accounts.
Personal-account opponents have a perfect right to air their views, and in an election year it's to be expected that politicians will push the truth a little far. But account opponents also have an important obligation to construct their own reform proposals. What would account opponents do to keep Social Security solvent? Raise taxes? Cut benefits? Increase the retirement age? Let the government itself invest in the stock market? It's anybody's guess, since almost to a man, personal-account opponents refuse to put their own reform proposals on the table.
Until they do, we only can assume that they favor the status quo. The problem is, under the status quo Social Security goes broke, dragging millions of seniors into poverty. Americans deserve more than that from their Social Security program, and they deserve more than that from their politicians.
Biggs is a Social Security analyst at the Cato Institute, a free-market think tank in Washington, and a former staff member of the President's Commission to Strengthen Social Security.
No, it's a form of socialistic confiscatory taxation, taken out on the front end of paychecks, and denying Americans to use their hard earned pay the way they see fit.
Social Security benefits promise < $10,000 a year to beneficiaries. Certainly anyone who lives in a major metro area has to spend more than that for bare survival.
If you earn $33,333 a year on average during your lifetime, you are spending about $4,666 a year in SS. If you maintain that average income for 30 years, you will have put $1,000,000 into the system. This is assuming an investment return of 0%!
A 3% return on that $1,000,000 after retirement would give you $30,000 a year, and after you died, your kids would inherit $1,000,000.
It's not impossible that I am forgetting something, such as the 2.5% that go to medicare, but I think it would be very hard to make a case that SS as it exists today is anything but a bald-faced ripoff of the American people.
This is the one political issue that makes me furious; there is no reason in the world why the government should have its slimy paws on my retirement money if I don't want it to. And I never have.
D
I agree 100%. Of course, as the Supreme Court has held, it's *not* your retirement money, and the government is under no obligation to return any of it. As I've said before, this is the issue that most clearly convinces me that liberal leaders are actually malicious rather than misguided. I can see no reason to oppose privatization except to keep millions of voters dependent upon government handouts, and by extension the Democratic Party.
Right. And if you die before retirement your heirs would receive whatever you put in.
When my wife died, I received a check for $255 from Social Security. I would have gotten more than that if I'd taken 1/4 of her SS payments starting from when we were married and put that into First Mattress Bank. This despite our only being married less than six months.
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