The White House has pulled out all the stops on shady, shifty and sly, so here’s what you need to know in a nutshell:
1. "Privatization" will not cure the Social Security shortfall.
2. The president’s "$11 trillion" is meaningless and an attempt to pull the wool over your eyes.
3. This president appointed most of Social Security Trustees and they’re shading things to make you think there’s a crisis.
4. He’s using 1, 2 and 3 to mask the real issue: sneaking in "re-indexing" to cut your benefits in a major way.
5. I’ll also get into why they might be doing all this.
The White House and those on the right know this.
Last month, a memo from Bush adviser Peter H. Wehner got out and it explicitly says so:
"We simply cannot solve the Social Security problem with Personal Retirement Accounts [PRAs] alone. If the goal is permanent solvency and sustainability — as we believe it should be — then [PRAs], for all their virtues, are insufficient to that task." [Washington Times 01/13/2005] (Story links open in new windows)
We hear the same story from the Heritage Foundation, bastion of right-wing thinking:
"Says David C. John, a research fellow at the conservative Heritage Foundation who is a leading advocate of private accounts: ‘It’s wrong to say that private accounts can fill Social Security’s shortfall. They’re not a magic bullet.’" [Business Week 01/24/2005 subscription]
So it’s agreed – by the left, right and center – that "privatization" will not cure whatever ills Social Security may have.
Which begs the question: So why do it? (I’ll suggest an answer later.)
You may have heard the president and the vice-president using that number recently as a measure of the problem with Social Security.
What you need to know is that is a number cooked up by 4 of the 6 Trustees appointed by the president.
Their "lifetime" projection 75 years into the future is $3.7 trillion. This projection is the one that has been used for policy purposes since the inception of the trust fund. This is the one you should use.
But last year, the president’s men added an "infinite horizon" projection to their report for the first time in history and this number came to about $10 trillion.
Actuaries immediately objected because not only is it a bad number, it is misleading and deceptive:
"[We believe] that the new measures of OASDI’s unfunded obligations included in the 2003 report provide little if any useful information about the program’s long-range 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 condition than is actually indicated." [Letter from Eric Kleiber, Chairperson, Social Insurance Committee, American Academy of Actuaries pdf]
So the big number has never been used before, isn’t of much if any use and is likely to mislead? Do you think that was an accident?
If you look at the Trustee’s projections based largely on historical growth rates, rather than their more pessimistic ones, you’ll find that these show there will be no shortfall at all.
None, nada, zip.
Using historical rates as the right way to go is reinforced by what has happened during the last seven years, right through the recession, to today:
Each year, the date when Social Security goes negative has been pushed further and further away. In 1997, it was supposed to happen in 2029. Today, the projection is 2042 (or 2052 if you believe the less-partisan Congressional Budget Office). So in the last seven years, doomsday has been pushed back at least 13 years.
That doesn’t mean that nothing should be done, but it does mean that there is no "crisis."
And remember Point 1: "Privatization" will not solve the problem, if there is one, anyhow.
So why privatize?
All the hand-waving, crying "crisis" and huge numbers [are meant to?] take your attention away from a proposed cut in benefits.
What makes the benefit cut happen is "indexing." That’s not as esoteric as it might sound to some, but people tend to skip over it.
But you really should pay attention to it, because that’s "the rabbit in the trick bag."
The deal is that benefits are currently "indexed" so they rise as wages rise. If they weren’t, recipients would be stuck with payments at levels from 40 years and more ago.
The White House wants to change the basis to the consumer price index, instead.
It sounds harmless, but let’s see what happens when you do that. Here’s what the system promises today, using wage indexing:
If nothing is done, the Trustees’ pessimistic "intermediate" projection tells us that the benefits will be reduced:
What nobody seems to be telling us is what happens if indexing is changed to the consumer price index:
The take-away here is: Even if "privatization" is killed because it’s a bad idea, don’t let them change the "indexing" if you think the promise should be kept.
You tell me, but here are a few excerpts from my own version of CliffsNotes to help you with your thinking:
- "Privatizing" your benefits will throw at least $940 billion dollars to financial services firms in management fees. They’re slavering over this, and the stock prices of some of the firms have already risen on the expectation of this windfall. [See my earlier The "Privatization" Rip-Off for details and sources.]
- "Indexing" will have such an extreme effect that not only will it deal with the shortfall, it will transfer more than $1 trillion dollars in excess taxes to the Treasury. And that number is from Stephen C. Goss, the SSA’s chief actuary, so it may be low. [Business Week 01/24/2005 subscription ]
- Then, some simply want to eliminate Social Security entirely ("it’s socialism," "they’re all freeloaders") and this would be a great way to do it.
First, you take away two-thirds of workers’ contribution (4% of the 6.2% deducted from your paycheck) through "privatization."
Wait a bit, then within a year or two, businesses start agitating: "Workers aren’t putting anything into the system, so why should we?" and poof, a few campaign contributions later, there goes another third. At this point, the fund doesn’t have enough money to do much good for anyone, so it’s eliminated.
So what’s a person to do?
That depends on how you see Social Security.
I see it for what it was meant to be: insurance.
In my career, I’ve gone through an almost embarrassing amount of money, but don’t resent the FICA tax. To me, it was simply the "entry fee" that allowed me to participate in American society.
You might want to think of it as a "tithe" that goes to the less able and the less fortunate, or a membership fee in the Greater American Club.
I think it should be kept.
And because it’s insurance, that suggests straightforward ways to heal whatever financial problems it may have. I’ll get into that next time.
In the meantime, you might want to bone up on more background by checking my The "Ownership" Scam posts.