Chris Gaal
For years far-right critics of
Social Security have warned of the impending financial
collapse and bankruptcy of our nation’s public pension
system. Suddenly, these predictions of doom burst into the
headlines of the major news media. Are we finally going to
have to face the music about Social Security’s coming
insolvency?The predicted crisis stems
from official reports that the Social Security trust fund
will begin to experience a shortfall as the baby boomer
generation reaches retirement age–paying out more in
benefits than it takes in. This pessimism about the long-term
solvency of the trust fund has opened the door for radical
proposals to restructure how Americans plan for retirement.A growing number of Americans
now express cynicism about the future of Social Security.
Yet, much of this public sentiment has been engineered behind
the scenes by powerful interests. A coalition of Wall Street
money managers, conservative ideologues, and "new
Democrats" have joined forces to lend fresh credibility
to the tired prediction that Social Security will inevitably
go bust. Their preferred solution is to push for as much
privatization of Social Security spending as the public will
tolerate.The payoff from this campaign
will come in the form of huge new cash flows running into
Wall Street’s coffers. The Wall Street Journal
reported that even the most moderate privatization scheme
would divert $60 billion a year from the trust fund into
mutual funds to be managed by the big investment firms.
According to the Journal, Social Security
privatization could be "the biggest bonanza in the
history of the mutual funds industry." The New York
Times estimates that the more radical privatization
proposals could send over $400 billion annually toward market
speculation. Either way, financial middle men stand to siphon
billions in fees and commissions from this cascade of money.Naturally, the mutual funds
industry has been among the most adamant proponents of
privatization, speaking to political leaders in a language
both parties can understand. The Investment Company Institute
(ICI), the trade association and chief lobbyist for the
mutual funds industry, was the top political contributor
among trade associations in the last election. In a
commendable investigative report printed in Mother Jones
magazine, independent journalist Robert Dreyfuss quotes ICI’s
Director of Industry Studies Kathy Rabon-Summers saying,
"Privatization has been at the top of our list for some
time." While quietly lobbying Congress to promote their
agenda, ICI is careful not to attract too much unwanted
public scrutiny. As a Democratic Congressional aide put it to
Dreyfuss, "They don’t want to be seen as swarming over
the dying carcass of Social Security." ICI hired the
professional Washington lobbying firm of Verner Liipfert,
which currently employs former Treasury Secretary Lloyd
Bentsen and former Senate Majority Leader George Mitchell. To
further ICI’s agenda, Verner Liipfert orchestrated the
creation of the bipartisan Public Pension Reform Caucus in
the House of Representatives.Barely able to contain their
enthusiasm, individual investment firms such as Merril Lynch,
Fidelity Investments, and State Street Bank and Trust have
also increased their political contributions and begun
speaking out in favor of privatization. State Street’s CEO
Marshall Carter told the trade publication Pensions &
Investments that they have already begun preparing for
the influx of cash, saying "You could be staring at 130
million new accounts." And the fever on Wall Street is
not just limited to the money movers. The National
Association of Manufacturers and the U.S. Chamber of Commerce
have both established task forces to address the issue.
Dreyfuss reports that Ken Vest, spokesperson for the American
Council of Life Insurance (ACLI), says that the big insurers
"…want to do anything they can to encourage private
savings plans."As with any major battle to
sway the public’s opinion, it is not enough to merely spend
money in Washington. There must be a strategy to win the
hearts and minds of the voters. For this, big business turned
to the Cato Institute, a right-wing libertarian think tank,
providing $2 million for a 3-year campaign to sell
privatization to the people. The powerful ideological
motivators chosen to accomplish the task were already
familiar to Wall Street–fear and greed. First the public
must be convinced to fear that the Social Security system is
teetering on the verge of collapse. Greed is then employed to
sell privatization by promising higher rates of return on
private retirement savings via market speculation in stocks
and bonds.Pro-corporate
"grassroots" organizations, small in membership but
lavishly funded, also plan to spread fear about the
instability of Social Security. For instance, Dreyfuss
reports that Citizens for a Sound Economy, a group that in
the past has organized well-funded campaigns in favor of the
tobacco, pharmaceutical, and oil industries, plans to spend
$2 million to promote privatization through newspaper, radio,
and TV ads targeting the elderly, women, and the young.But if big business has given
steam to the issue, and right-wing think tanks have provided
the ideological cover, the real credit for putting
privatization on the map must go to the "new
Democrats" who saw yet another opportunity to upstage
their conservative peers. The Democratic Leadership Council
and the ill-named Progressive Policy Institute, two leading
"new Democrat" institutions, have joined the
privatization crusade. Bob Kerry, a prominent Democrat and
key sponsor of privatization legislation, was asked about
whether progressive Democrats might mobilize to defend Social
Security. According to Dreyfuss, Kerry brazenly remarked,
"I’ll kick the shit out of any liberal who tries
that."The problem for privatization
advocates is that Social Security works well, is immensely
popular, and is in no real danger of failing. Thus as
political commentator Alexander Cockburn keenly observed
prior to Clinton’s reelection, "Destroying the New Deal
has to be an inside job."According to the Washington
Post, both Clinton and Dole received briefing papers from
Wall Street interests that recommended the candidates remain
neutral on privatization until after the election. According
to Steve Elkins of the National Association of Manufacturers,
this silence would avoid politicizing the issue and forcing
either candidate into a defensive stance in favor of the old
system. For his part, Clinton appointed an advisory council
to look into various proposals for ensuring the long-term
solvency of the Social Security trust fund. Several proposals
have emerged, each endorsing some degree of privatization.
These range from allowing the trust fund itself to invest a
higher portion of its assets in stocks, to turning over
payroll taxes for individual accounts to be managed by stock
brokers.Given the high-stakes media
onslaught, it will be difficult for the average citizen to
argue against privatization, presented as the only way to
avoid approaching crisis. But what exactly is the crisis? The
Social Security trust fund maintained a surplus of over $60
billion last year alone. Yet, the law governing Social
Security requires that the fund show projections that it will
be in balance for 75 years into the future. According to the
Social Security trustees’ projections, there will be
sufficient funds to cover all retirees until the year 2030
with no tax increases whatsoever. As baby boomers retire and
the population shifts to higher age brackets, benefit levels
will start to exceed social security taxes collected. The
fund will then need to draw on interest to cover the
shortfall.Several economists have
pointed out that the trustee’s predictions are overly
pessimistic. For planning purposes, the trustees make three
financial projections 75 years into the future: a pessimistic
one, an optimistic one, and an official projection between
the two. The official guess used by the trustees assumes a
growth rate of 1.5 percent per year over the next 75 years.
This middle estimate thus relies on a growth rate half the
2.9 percent rate experienced during the last 75 years. Even
the great depression decade of the 1930s, with a growth rate
of 1.9 percent, outperformed the trustees’ planning estimate.
The trustees’ low estimate of 0.7 percent growth is slower
than even population growth. According to economist Doug
Henwood, "The system will go bust only if you assume
decades of stagnation. If the economy grows in line with the
1973-94 average of 2.4 percent, still slower than the 75-year
average of 2.9 percent, it will run a big surplus."
Thus, the fuel for dire predictions of "crisis"
stem from extremely pessimistic economic planning projections
75 years into the future.Yet, even if one accepts the
overly pessimistic numbers reported by the trustees there is
little cause for concern. Former Social Security commissioner
and Clinton advisor Robert Ball maintains that there is no
crisis. Ball claims that "with a few minor adjustments
Social Security can continue to pay full benefits for the
next 75 years." The 1996 trustees’ report noted that the
predicted problem could be solved for the next 75 years by a
2.2 percent increase in payroll taxes (about 1 percent on
employees and 1 percent on employers). Alternatively, Doug
Henwood notes that salaries above a fixed amount ($92,000 in
1992) are exempt from Social Security taxes. He notes,
"Lifting the cap and taxing higher incomes would keep
the system solvent indefinitely."Robert Ball’s own proposal is
to permit the trust fund itself to invest a certain
percentage of its funds in stocks (up to 40 percent),
allowing the fund to grow more quickly and avoid a possible
shortfall while still protecting individual retirees from the
risks of market speculation with the guaranteed safety net of
a public pension. On the downside, this proposal might lead
to increased government debt as fewer bonds are purchased.Other more punative proposals
include such "painless" solutions as lifting the
retirement age, or recalculating the consumer price index
(CPI) to lower benefits behind a political wall of smoke and
mirrors. Ironically, the major threat to Social Security
comes from the current proposals to fix it. Currently the
costs of administering the public system run at less than 0.7
percent of annual benefits. By handing over management of
retirement funds to a host of Wall Street professional
investment managers, administrative costs would skyrocket.
Indeed, this is the entire appeal of the privatization scheme
for investment management companies. They could be lining
their pockets with fees and commissions on the billions of
dollars currently being invested by the Social Security trust
fund.One of the popular models
touted by privatization reformers is practiced in Chile,
where individual retirement accounts are currently managed by
private investment firms. Administrative costs in Chile run
from 13 percent to 15 percent, biting deeply into any gains
from riskier stock investments. The private savings model in
Chile has severely reinforced existing inequalities. The
retirement safety net for the poor equals the price of a loaf
of bread and a cup of coffee per day. It is likely that half
of all retired workers in Chile will fall under the poverty
line. For the 30 percent of the workforce either unemployed
or in the informal sector there will be no private investment
accounts. The Detroit-based monthly Labor Notes reports that
at least 43 percent of those who have individual accounts in
Chile are not making regular contributions to them, thus
leaving these workers uncovered by an adequate pension in
their later years. Sylvester Scheiber of Clinton’s Social
Security Advisory Council models his proposal on the Chilean
system, noting; "They did have certain advantages in
Chile. They did have a dictatorship and they did have control
over the media." Ironically, Chile’s military personnel
held onto their publicly guaranteed pension benefits despite
the reform. The sparkling appeal of high returns on riskier
stock investments similarly dulls when one realizes that
markets go down as well as up. Along with the risk of picking
bad investments, and the cut taken by investment jockeys to
cover their costs and profits, is the possibility that one’s
retirement will coincide with a market downturn, recession,
or even depression as have been known to occur from time to
time. Given a 75-year planning period it doesn’t seem
ludicrous to take these possibilities into account.In addition, privatization is
guaranteed to create an immediate fiscal crisis in the Social
Security trust fund. Money diverted to private accounts would
no longer be available to pay current beneficiaries. The
transition costs would create an enormous shortfall which
would severely weaken the system, by as much as $7 trillion
over the next 75 years according to the Cato Institute.
Indeed, this is a primary goal of the anti-Social Security
forces. By changing Social Security from a universal program
to a stigmatized welfare program for poor and low-income
workers, opponents of the system hope to drive a wedge into
its support and make possible further dismantling. The rich
would opt out of the system in favor of private investments
while support would wane among middle-class workers.Despite the negative hype,
Social Security remains a popular program. Social Security
currently provides retirement income to over 35 million
people, disability insurance for all workers in case of
accident, and survivor insurance for families in the event of
the death of a parent or spouse. The system is fair,
administratively efficient, and in no real financial danger.The American Association of
Retired Persons (AARP) has so far remained the most vocal
advocate in favor of preserving the current system. According
to the AARP there is no present crisis and any deficiencies
in funding in the next century can be addressed without
converting the trust fund into individual investment
accounts, or having the government invest speculatively in
the stock market. Ever watchful of ways to bring the
opposition into the fold, Wall Street has apparently toyed
with the idea of trying to co-opt the AARP. State Street Bank
executive and funder of the Democratic Leadership Council
William Shipman suggested that AARP enjoy a share of the
windfall by marketing mutual funds to their retiree members.
To their credit, AARP has no plans to participate in such a
scheme.Sources include: The End
of Social Security As We Know It?, Robert Dreyfuss,
Mother Jones, Nov/Dec 1996; Privatizing Social Security,
The Wall Street Fix, Dean Baker, Economic Policy
Institute Issue Brief #112; Reforming Pensions Revisited,
Doug Henwood, Left Business Observer.