What precisely about the current Social Security “reform” debate makes it so hateful and repellent? Why–to quote Brookings economist Henry Aaron, normally a temperate establishment figure–are we headed toward “the My Lai of American social policy” if “partial privatization” reforms go through?
Make no mistake: As President Clinton plays television talk- show host to a series of “Town Hall” meetings and then convenes a White House conference later this year on “retirement security,” he will–all earnestness and concern–ask Americans to “think” with him about “what we need to do” to “fix” the system. But Americans need to think first about several crucial facts before they buy one more “big-picture” policy reform from the Man from Hope:
(1) Social Security isn’t broke–and doesn’t need the fixes Washington will propose.
A government advisory commission last year produced “exact” dates and dollars that gave apparent concreteness to the dimensions of the Social Security “crisis.” Starting in 2029, it calculated, Social Security won’t have enough income to cover more than 75 percent of the benefits it must pay to aging baby boomers. But the specificity is illusory, all lever-pulling and smoke-blowing from the Wizard of Oz. The projections aren’t economic (no even semi-sane economist does decades-long projections) but actuarial extrapolations based on assumptions that Social Security’s own actuaries know are fictitious at best. Tweak them ever so slightly–lift real wages by a quarter- or half-percent per annum, or immigration by a little–and the same actuarial “crisis” disappears entirely. Federal law has mandated these projections for years, but–as the actuaries know well–they’re redone every time they’re revisited because the methodology is so poor. Until recently, apart from a handful of Washington technicians, nobody paid attention to them–knowing what they were worth. (Just a few weeks ago, we got an example of the slipperiness of these projections: Last year’s economic growth moved Social Security’s projected crisis date three years, to 2032.)
But amid Washington’s bipartisan passion for “marketizing” America–the capital’s new “anti-Communist” consensus for our post-Communist era–you might think the numbers have come down from Moses. They haven’t.
(2) But–just for a moment–let’s pretend there
a crisis. What should we do?
Fairness, you might think, is the place to start. Most Americans pay more into Social Security than they pay in income tax. Yet polls show most Americans don’t even know that contributions to Social Security are “capped” at $68,400 in individuals’ wages. By excluding wages above that line–those earned by the top 6 percent of U.S. households–and by excluding all nonwage income (dividends, interest, capital gains, rents, etc.) from Social Security taxation, guess what the effect is? It’s enormously regressive.
Senators and representatives, who each make $136,673 a year, effectively pay at just half the rate of those earning below $68,400 yet receive the same maximum benefits as a middle-class worker at retirement–plus, of course, a hefty Congressional retirement package. Bill Gates likewise will get the same maximum benefits, but pays FICA only on his first ten minutes of income each year. Gates, of course, has $40 billion to tide him over; but 60 percent of U.S. workers retire without a private pension, and 66 percent of retirees count on Social Security for more than half their income.
At his first town meeting on Social Security in Kansas City, President Clinton–neatly forgetting that Medicare has no similar cap–took “lifting the cap” off the table. It must be put back on, at the center of the table. Social Security officials forthrightly admit that raising the cap alone would remove two-thirds of their projected actuarial crisis–something that somehow largely escaped the President’s, and the press’s, attention.
(3) But what about putting some of Social Security’s money into the stock market–doesn’t everyone agree that over the long term markets outperform Social Security returns?
This is tricky but must be understood: First, there’s an “apples and oranges” problem–Social Security provides disability benefits, survivor benefits and other features apart from just retirement income; factor these in, and the performance “advantage” of equity markets gets razor-thin at best. Second, Social Security benefits are already moderately progressive, meaning that the bottom 60 percent of retirees get more back than the affluent relative to their contributions.
Third, markets are subject to gravity–what goes up, comes down, in both long and short waves. Since the Little Crash of October 1987, U.S. markets have been on a nonstop charge; but if you’d gone into the same markets in 1970, you were worse off by 1980–not to mention where you’d be today if you’d bet on Japan in the mid-eighties or Southeast Asia’s “sure thing” markets a couple of years ago. Forget hyper-collapse 1929-style for a moment; think instead about retiring to find that your income’s eroding each year as you grow older. Will you do all right in the long term, as brokers and economists insist? Well, probably yes–but that gives a new and nasty twist to Keynes’s caustic observation that “in the long run, we’re all dead.”
Fourth, market averages aren’t the same as individual returns. Turn 120 million workers loose to bet the markets (40 million of whom are marginally literate or numerate), and guess how many will beat the averages? The mutual fund industry’s dirty little secret is that three-fourths of funds under-perform market indexes. Yet such funds have millions of naïve investors in them; in one recent survey, a majority of mutual fund investors couldn’t even distinguish between a “load” and a “no-load” fund.
Here’s where the income and wealth distribution effects of privatization turn very ugly: Some will do well–but not surprisingly, they’re mainly the ones already well insulated against the financial vagaries of retirement. For millions of Americans–who bet on Kaypro instead of Microsoft (oops), Pan Am instead of American (sorry) or cattle futures without the skill and connections of Hillary Clinton (smile, please)–life at 75 could mean not “golden years” but working for the folks at the golden arches, or even being out on the street.
There is a fifth issue, which connects Social Security privatization to what has so far been undiscussed in the debate. Right now, Americans are delighted that, for the first time in nearly thirty years, the federal budget’s in balance. But it’s in balance because each year the Treasury borrows $80 billion from the Social Security Trust Fund surplus, and “covers” the deficit in the rest of the federal budget. If a big piece of Social Security contributions go into private accounts, the trust fund surplus will disappear and the federal budget will plunge back into deficit–launching gleeful Republicans on another round of “cut, cut, cut.” And which federal programs are likeliest to be cut by a Republican Congress? You fill in the blanks.
(4) What we could–and should–be doing.
First, we should strengthen the existing Social Security system. Single and divorced women fare poorly under the existing system: As a group, they’re twice as likely to be poor as the senior population as a whole. That should be fixed forthwith.
Second, we should help Americans acquire real wealth–but not at the expense of Social Security. Social Security is only one leg of the three-legged retirement stool. The other two legs are private pensions and personal savings.
Only 40 percent of workers today get private pensions (and, increasingly, those are risky defined-contribution, not defined-benefit, plans). With corporations earning record profits, now’s the time to expand corporate responsibility for helping workers create real personal wealth. Mandate that all employees share in those profit-payouts to senior executives; vest workers early; make plans fully portable; let workers draw from them for a first-time home purchase, lifelong learning and major medical expenses.
On increasing personal savings, the issue grows politically more difficult–yet it is the core political and economic challenge of our time. The richest 1 percent of Americans have more wealth than the bottom 80 percent. The solution is simple: Most Americans should be earning more, and the richest should be paying more taxes. Period. The politics of getting there are hellish.
But privatizing Social Security won’t make that job any easier–or wealth’s distribution any more equal. In the months ahead, we’ll take a more precise look at each of the issues outlined above and others as well, direct you to excellent information sources and opportunities for activism–and challenge you to do something before the clock runs out. And frankly, the minute hand is fast approaching midnight. Congress won’t vote on “reform” this year, but the deal that will prefix the legislation will be done by this fall unless other voices are heard.
For those who thought they saw democracy flicker alive in Columbus, Ohio, when the Clinton Administration tried to “Oprah” us into attacking Iraq, consider this: The President himself, anxious to talk about Social Security’s future, is headed for three more cities as yet to be announced and then will lead off his White House conference on the future of retirement security.
Social Security is the difference between a decent life and poverty for half of all Americans over 65. More than 90 percent of us pay into it during our working lives, and more than 90 percent of us will count on its benefits when we retire.
Now count the cost of Washington economic “reforms” over the past twenty years–to a once-viable savings-and-loan system, to Mexican workers and peasants (who’ve paid for bailouts not once but twice), to the world’s poor as they’ve worked off the global debt crisis. Think about the lives of Indonesian peasants, or Korean and Thai workers today–all set to pay for the “can’t miss” marketization of Southeast Asia, just as Americans have so wonderfully benefited from downsizing, capital-gains reduction and globalization.
Now it’s Social Security’s turn to face the capital’s ever-brilliant and ever-farsighted policy “reformers”–because a system that works doesn’t meet the ideological test of a fully marketized humanity. Today Social Security, alone, barely guarantees an old age lived in dignity and some measure of peace for those who’ve worked their entire adult lives. Lose it to full or partial privatization, and we’ll lose much more than our dignity.