Wednesday, July 13, 2005

Social Security: "Fix It Till It's Broke" (Updated Edition)

It's now taken for granted that Social Security is broken. The baby boomers are going to drain the coffers and the smaller generations afterwards won't be able to pay for it.

No one notices something incredibly simplistic: The baby boomers were dependents at one point. They were kids. The economy diverted funds to paying for these dependents by buying diapers, toys, cereal and college funds; why can't it do the same for adult diapers, dentures and medication?

Further, the Social Security trustees use a median, worst-case scenario annual growth rate prediction of 1.5%, lower than the annual growth rate during the Great Depression. But even Clinton's Social Security commissioner, Robert Ball, says, ""Lifting the cap [every person pays up to a certain level and then stops, making Social Security a regressive tax] and taxing higher incomes would keep the system solvent indefinitely."

Social Security's real woes are caused by the fact, as noted in Take the Rich Off Welfare, that Social Security has now become a discretionary fund for Congress' patronage games. Get rid of that and you also get rid of a main siphon from Social Security.

The amazing logic of neo-cons and neo-libs is revealed drastically: If a program is failing, don't do a silly thing like fund it; instead, open it up to private sector speculation. The nice thing is that the only people who we know for a fact will benefit will be Wall Street. By some odd coincidence, these are the people who are pushing privatization.

Chile, the primary example used by privatization's supporters, is now a mess thanks to their flirting with capitalist insanity: "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."

Social Security is just that: a guaranteed investment in people's future. Whatever illusions Dubbya has about cutting administrative fees don't matter: The society determined in the New Deal that it wanted each generation to take care of the next. If you want to invest your own money, neo-cons, do it.


Well, Dubbya has still managed to squander his political capital and pick unwinnable fights as his approval ratings plummet. Social Security may remain, after all.

To see the AARP disgrace itself by saying that Social Security had problems was not especially illuminating, but it was infuriating. When will stupid liberals learn not to let the Right define the terms of the debate? From tax cuts to war to affirmative action to Social Security, they concede so many of the premises until the Right seems guaranteed to win.

A number of folks have said that supporting seniors probably costs more than kids. But:

1) That's actually not true - good economists have said the opposite.

2) In any respect, the cost wouldn't be astronomically more.

3) The economy's grown and continues to grow. Yes, the growth is more tepid (thanks to neo-liberalism); yes, living costs do go up too; but nonetheless there is real growth left behind. The natural growth of the economy should suffice to make Social Security work if the economy is controlled.

For those who doubt Social Security's benefits: "Social Security is the most successful insurance program ever created. It insures millions of workers against what economists call "longevity risk," the possibility they will live "too long" and not be able to work long enough, or save enough, to provide their own income. Today, about 10% of those over age 65 live in poverty. Without Social Security, that rate would be almost 50%."

An interesting point from the same article: "Social Security was originally designed to supplement, and was structured to resemble, private-sector pensions. In the 1930s, all private pensions were defined-benefit plans. The retirement benefit was based on a worker’s former wage and years of service. In most plans, after 35 years of service the monthly benefit, received for life, would be at least half of the income received in the final working year...

What has happened to private-sector defined benefit pensions? They’ve been replaced with defined-contribution (DC) savings plans such as 401(k)s and 403(b)s. These plans provide some retirement income but offer no real protection from longevity risk. Once a retiree depletes the amount saved in the plan, that pension is gone.
In a generous DC plan, a firm might match the worker’s contribution up to 3% of his or her pay.

With total contributions of 6%, average wage growth of 2% a year, and an average return on the investment portfolio of 5%, after 35 years of work, a retiree would exhaust the plan’s savings in just 8.5 years even if her annual spending is only half of her final salary. If she restricts spending to just one-third of the final salary, the savings can stretch to 14 years.

At age 65, life expectancy for women today is about 20 years, and for men about 15 years, so DC savings plans will not protect the elderly from longevity risk. The conversion of defined-benefit pensions to defined-contribution plans is the source of the real potential crisis in retirement income. Yet Greenspan did not mention this in his testimony to Congress."

Another true point that one should remember when reading the semantic obfuscation of Cato and the rest: "The logic is appealingly simple, but wrong for two reasons. First, this "old-age dependency" ratio in itself is irrelevant. No amount of financial manipulation can change this fact: all current consumption must come from current physical output. The consumption of all dependents (non-workers) must come from the output produced by current workers. It’s the overall dependency ratio—–the number of workers relative to all non-workers, including the aged, the young, the disabled, and those choosing not to work—that determines whether society can "afford" the baby boomers’ retirement years. In the 1960s we had 1.05 workers for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon. No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly. In 2030, we will have 1.27 workers per dependent. We’ll have more workers per dependent in the future than we did in the past. While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living."

Peterson points out two essential points:

1) "The liabilities of the Social Security system work exactly the same way. There is no such real thing as bankruptcy for Social Security. No such real thing as a projected shortfall. No such real thing as insolvency. Except the kind that exists between two arbitrary numbers: Between that which the Government chooses to spend on Social Security, and that which the Government could have chosen to spend on it. "

2) Want to do some homework? Check one of Bush's proposal speeches on Social Security and replace "Social Security" with "defense spending" and other nouns as appropriate. Now see if the arguments make any sense. They don't, do they? Here's the other problem: The DoD's spending could be cut; in fact, as I allege, it should be cut. But Social Security is mandatory, not like the DoD: It must be paid back. (A note: While Soc Sec is technically mandatory, it has been used as a discretionary fund like an income tax. We had a Social Security surplus, remember?)

Another point I wished I had make: Assuming the anemic growth of 1.5% a year is an interesting argument, not well supported but possible. But to then turn around and espouse stocks is now self-contradiction (Chomsky makes this point in an interview in Propaganda and the Public Mind), because stocks can't outpace the economy. Ever wonder where all that cash came from, supposedly? You know now: One set of assumptions using slow growth rates when describing the current system, another set using fast growth rates (probably inflated) to describe the alternative. Hmm.

The most important point: Not only is Social Security a successful anti-poverty program; not only does it reflect this strange notion that people should care about their next-door neighbor; but no economist, no matter what the mainstream pretends, can tell you how to evaluate the risk. They can tell you what they perceive to be the risks, but only you can plan around them. Social Security is our choice. Let's make the right one.

More resources:

An excellent article from the Economist (yes, that Economist) about the lack of social and economic mobility in this country:

Frank Ackerman, Hazardous to Our Wealth

Richard DuBoff, "Social Security Is Not In 'Crisis'", National Jobs for All Coalition Uncommon Sense 21 (February 1999).

Dean Baker/Mark Weisbrot, Social Security: The Phony Crisis (University of Chicago Press 1999). for more.


Blogger Sarah said...

"If a program is failing, don't do a silly thing like fund it; instead, open it up to private sector speculation."

You hit the nail on the head! It amazes me that increasing funding is not even considered an option. But, with the Bush machine toiling night and day to privatize anything and everything, blaring their agenda and propaganda through the mass media, I guess I shouldn't be suprised.

Great post, very informative and thought-provoking.

4:20 PM  
Blogger Frederic Christie said...

We shouldn't be surprised that the Bush administration does what it does. Their audacity is seemingly infinite, something that leftists need to get very fast.

What irks me is that liberals in this country, save a few (Paul Krugman most of the time, but not nearly as much as he should) let them get away with defining the terms of the debate.

10:47 PM  

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