Cutting the Lifeline: An Indepth Look at Social Security in the U.S.
Issue #
64

p5 socail welfarep5 cuttingSocial Security is a lifeline for more than 47 million retirees, disabled workers surviving spouses and children of workers who died young. But how many of these beneficiaries feel as passionately about this 70-year-old government program as the people who are eager to dismantle it?

Dedicated free-market conservatives see the demise of Social Security as a sort of Holy Grail in their quest to return America to a Victorian-era social-economic model. In a confidential memo leaked to Congress Daily, White House Director of Strategic Initiatives Peter Wehner laid it on the line: “For the first time in six decades, the Social Security battle is one we can win – and in doing so, we can help transform the political and philosophical landscape of the country. We have it within our grasp to move away from dependency on government and toward giving greater power and responsibility to individuals.” This could be “one of the most significant conservative governing achievements ever,” he concludes.

Ideology, plus the financial services industry’s desire to get a piece of the estimated $279 billion in fees that individual Social Security accounts could generate over the next 75 years, is driving the movement to partially privatize the program. That movement may be reaching a new high-water mark as Bush heads for his second inauguration.

Partial privatization means allowing – or maybe requiring – workers to take a portion of the payroll tax they contribute toward their Social Security benefits each time they get a paycheck, and invest it in the stock and bond markets. Along with cutting the long-term fiscal deficit Social Security is expected to accumulate as the working population ages, conservatives see partial privatization as the solution to everything from eliminating the welfare “entitlement culture” to raising anemic national savings rates to ending class conflict to freeing up the money needed for America to pursue its imperial destiny in the Middle East.

The second Bush administration is making Social Security its top-priority domestic-agenda item. That’s in spite of vehement Democratic opposition and a Republican congressional leadership that’s scared of being blamed for dismantling the country’s most popular and successful anti-poverty program. Social Security was created during the New Deal 1930s, when the Great Depression had plunged the majority of over-65s in the United States into poverty. Since the program began regularly indexing benefit payments to growth in wages, in the 1960s, old-age poverty has declined to just over 10 percent.

One of the prime ingredients Bush aides are talking up would be a change in the indexing formula: Instead of benefit increases being pegged to wages for social security recipients, they would be indexed to inflation.

Picking up the bill

That means those beneficiaries wouldn’t participate in a potential rise in the standard of living. What’ll that actually mean decades from now?
According to the Congressional Budget Office, middle-income workers born in the 1980s will take a 31 percent cut in their Social Security benefits under a plan developed by a Bushappointed commission early in his presidency. White House aides have recently held that plan up as an example of how they’d like to restructure Social Security in the president’s second term.

For those born in the 1990s, the hit would be even worse – nearly 38 percent. And that’s even if Social Security’s package includes the private investment accounts Bush is now stumping the country trying to sell to leery workers. Since Social Security isn’t that generous a program anyway, replacing only some 30 to 40 percent of pre-retirement income on average, that’s a significant reduction in a benefit workers have traditionally been able to count on.

For children of workers who die young and receive survivors’ benefits – over 5 million people under 18 receive survivors’ insurance under Social Security – the result would be devastating. The National Urban League concluded that an African- American male who died in his 30s would only have enough in his private account to cover less than 2 percent of the benefits that Social Security now provides his wife and children.

The $2 trillion hole

But privatization faces some major obstacles, some practical and some political. On average, workers with private Social Security accounts would indeed stand some chance of accumulating a higher income in retirement than they would under the present system. But “on average” is the key term here: Many if not most – and most likely the ones who can least afford it – would come up short, especially if they’re unlucky enough to reach retirement age during a downturn in the investment cycle. By contrast, the current system provides a guaranteed payout, no matter how long the retired worker lives.

Another problem is that letting workers carve out individual investment accounts would reduce the revenues used to pay current retirees. How would the resulting “transition cost” – perhaps as large as $2 trillion – be made up? Over the past month, Bush aides have been making more and more explicit statements that Social Security “reform” will have to include benefits cuts.

But even that wouldn’t put enough in Washington’s coffers, long term, to float private accounts for as many as 154 million taxable workers. The solution White House aides are touting at the capital’s coffee klatches and cocktail parties is to float an enormous new debt issue – perhaps $2 trillion over 30 years. Already Republican supporters in Congress are proposing to move Social Security off the federal budget to camouflage this ploy. The markets would suck up the new debt without boosting interest rates, supporters argue, because it’s merely recognizing obligations toward retirees that are already assumed unofficially.

But the White House suffered a serious embarrassment last week with the leaking of Wehner’s memo, which admitted that borrowing $2 trillion “could easily cause an economic chainreaction: the markets go south, interest rates go up, and the economy stalls out.”

Back to reality

Bush critics couldn’t agree more. Peter Orszag, an economist at the Brookings Institution and co-author of a new book entitled Saving Social Security: A Balanced Approach, calculates that U.S. public debt would equal 100 percent of GDP – the conventional measure of the size of the economy – by 2030 under the debt-float scenario. And Alan Blinder, a former governor of the Federal Reserve System, said last month that when he mentioned to some New York bond traders that the Bushites believe the market would have no reaction to a trillion-dollarplus debt surge, their response was “guffaws.”

Another practical issue with cutting Social Security benefits – for workers, anyway – is that those benefits aren’t overly generous to begin with. In fact, they’re pretty modest.

“You need 70 percent of what you earned before retirement” to maintain roughly the same standard of living after you retire,” notes Orszag. “Social Security replaces about 30 percent of your income, so you have another 40 percent to replace. If they scale that 30 percent back to 20 percent or even less, that’s providing too thin a cushion for even middle class Americans.”

There’s plenty of evidence that private Social Security accounts will not make up the difference. It was recently reported that Senate Majority Leader Bill Frist, an ardent supporter of privatized Social Security, ran into trouble with the $750,000 he had left over after his successful reelection campaign in 2000. He parked it in a stock index fund – the sort of investment Wall Street typically urges for workers saving long-term for their retirement. He lost $460,000 of that money over the next two years. Many older workers who were planning to retire in those years found themselves suffering similarly – and having to put off retirement or go back to work as a result.

Other countries have tried going the private account route too, often with unhappy results. In the UK in the 1990s, workers were shocked to find that administrative charges were consuming up to 20 percent of the value of their yearly contributions to their private accounts, whereas the older government plan had cost about 1 percent. The whole privatized scheme was rocked by a “misselling” scandal in which workers were sold improper investments for their accounts.

Younger voters unconvinced

Bush faces a tough task selling his plan. Young people, who the Bush campaign team expected to be enthusiastic supporters, mostly voted for Kerry on Nov. 2, and in most surveys they placed Social Security reform far down their priority lists. So do most Americans, it turns out. In a Wall Street Journal/NBC News poll this month, 50 percent of respondents said letting workers invest their payroll taxes in the stock market is “a bad idea.” Only 38 percent favored it. And a majority said the election didn’t give Bush a mandate to pursue such a project.

That doesn’t mean he won’t try it or can’t succeed. For one thing, Republicans owe some debts to interest groups that are panting after the billions of dollars a year that private Social Security accounts would generate in management fees. The finance/insurance/real estate sector gave a total of $268.8 million to candidates in the last election cycle, its second largest total ever, according to the Center for Responsive Politics. Of that, 59 percent went to Republicans. Until 1996, when Social Security privatization first became a visible public issue, these industries gave to both parties in roughly equal proportions. Since then, they’ve favored Republicans decisively.

Washington watchers point out that unlike most incumbent presidents, Bush ran for his second term on an ideologically explicit platform, including changing Social Security. So voters had their chance to emphatically reject this idea – and didn’t. Yet congressional Republican leaders, many of whom have been burned by supporting privatization, are reluctant to do it again. In the House, 30 to 40 Republicans reportedly are eager for Bush to back off. And in the Senate, the Republicans have only 55 seats. That’s a majority, but not the 60 they need to stop a Democratic filibuster under the chamber’s rules.

The waverers

All eyes in Washington, then, are on a gaggle of centrist Dems who have indicated they are willing to discuss some action on Social Security. Key names are Connecticut’s Joe Lieberman, Indiana’s Evan Bayh, Arkansas’s Blanche Lincoln, and Nebraska’s Ben Nelson, all of whom like making deals when Democrats and Republicans are especially divided. Along with four other Democratic senators, Lincoln and Bayh are “advisors” to a new “Senate-focused progressive advocacy group” called Third Way.

Reportedly both Third Way and the conservative Democratic Leadership Council, angered by the Republicans’ relentless partisanship and disturbed by the burgeoning budget deficits, are planning to come out against Bush’s private accounts idea. Still, the lust to cut a deal is strong enough to make a lot of Social
Security defenders uneasy. Lincoln, Nelson, Lieberman, and Montana’s Max Baucus reportedly met with two Republican colleagues and agreed to meet again on Social Security later this month. Baucus, however, then disappointed his prospective partners by telling the New York Times he would not be “the linchpin”
the president is looking for.

“It’s a tempting thing if [lawmakers] don’t see any downside, because they’ll start getting campaign contributions from people they couldn’t talk to before,” says Roger Hickey, codirector of the Campaign for America’s Future (CAF), which for years has been instrumental in efforts to stop privatization.

Showdown

So Social Security’s traditional defenders are rallying their forces to oppose any slippage. Hickey says the CAF quadrupled its roster of activists during the presidential race and is working hard to shore up the congressional Dems. “We’re on our way to flooding their offices with emails and faxes saying don’t
do it,” he says.

AARP, the 35-million-member seniors organization, chastened by the criticism it took for backing Bush’s Medicare drug plan in 2003, is spending $5 million on a raft of TV commercials and other propaganda against privatization. The AFLCIO, among other things, sent a letter last month to 46 financial services companies – which do big business with union pension funds – asking them to swear off support for privatization. Meanwhile, the Club for Growth, a conservative Washington lobbying outfit, is reportedly asking its backers to fund a $15 million campaign to persuade the public that private accounts are a good thing.

In reality, however, it could only be a matter of weeks before we know whether Social Security is truly on the block in 2005. Bush must still work with his party’s lawmakers to develop a bill they’re both comfortable with, and that they can sell to at least five Senate Dems. They don’t have much time to do it. Keeping Social Security intact will depend on whether congressional Democrats maintain a united front – just as it has for the past 10 years. Eric Laursen, a New York-based journalist and activist, is writing a book, The People’s Pension: The Politics of Social Security Since 1980.

More Social Security, Not Less

Even after 30-plus years of indexing Social Security to wages, American retirees are still more likely to live in poverty than those in any other large industrialized country. Spouses and children of workers who die young, and retirees who spent their career at near-minimum-wage jobs need help too. Here are some ideas for improving the program and bolstering its finances:

> GIVE ’EM A RAISE Boost Social Security’s monthly benefit payments 5 percent, including for the disabled. That would help offset the Bush administration’s decision to raise monthly Medicare premiums 17.4 percent this year.

> MORE FOR SURVIVORS Benefits for surviving spouses now range from 50 to 67 percent of the combined husband and wife’s benefit – one reason elderly women are twice as likely as men to be poor. Boosting their payment to 75 percent would increase annual benefits for over 3 million widows and widowers by an average $1,000 apiece.

> MORE FOR LOW-INCOME WORKERS Creating a minimum 75 percent-of-income replacement rate would be a big boost for the 7 million retired Americans who worked at near-minimum-wage jobs throughout their careers. Or, create a minimum benefit for all retirees who get 75 percent or more of their income from Social Security.

> HELP LOWER-INCOME AMERICANS TO SAVE Former Clinton economic advisor Gene Sperling suggests creating a “universal 401(k)” savings plan: The government would match contributions by moderate to lowincome workers. This could be funded by partially reversing Bush’s phase-out of the estate tax.

> REPEAL THE BUSH TAX CUTS Concerned that Social Security will go broke as the working population ages? Sperling points out that over time, the nearly $100 billion a year that Bush lopped off the tax bills of the richest 1 percent of Americans could keep Social Security solvent for the next 75 years.

> REMOVE THE CAP The amount subject to payroll tax – the tax that pays for Social Security – will be capped at $90,000 of income for 2005. Removing the cap would cover most of the program’s 75-year projected shortfall.

> … OR, DO NOTHING Even the Social Security trustees say the program’s fiscal “deficit” will amount to just 0.7 percent of gross domestic product over the next 75 years. So why do anything drastic now?
—E.L.

Is there room for street-level theater in the fight against Social Security privatization?
Billionaires for Bush are going to try it on Jan. 20 – Bush Reinauguration Day – when they “auction off” Social Security. Time: 10 a.m. Place: the Franklin D. Roosevelt Monument, Ohio Drive SW between the Lincoln and Jefferson memorials, Washington, D.C.

Privatization has been a live conservative cause for 10 years. But activists fighting to preserve the traditional program have concentrated on lobbying Congress; writing research reports, books, and op-eds; and confronting privatizers at public forums and on the campaign trail. The Billionaires think some brazen satire is really needed.

“We’re reframers,” says “Ivan Tital,” chapter leader of the DC Billionaires. “Democrats lose debates because the Republicans spend a lot of time getting their message right and getting it out first. We’re going to counter that.” For instance, the term “privatize” tests too well in surveys, so the Billionaires talk instead about “corporatizing” the program in their mock campaign – “champagne,” actually – for the Bush plan, which kicks off with the Jan. 20 “auction.”

At the Billionaires’ national convergence in Washington the two days after the inaugural, one order of business will be to plan a long-term national mobilization around Social Security. Possibilities include more street action, aiming messages at Democratic “wobblies” in Congress who the Republicans might pressure to support the President, and even producing ads, direct mail, or a phone bank “champagne” in favor of corporatized Social Security. “We want to make headlines, forcing the story to be about the other side’s weaknesses,” says “Ivan Tital.”

To get the word out, he says the Billionaires are hoping to partner with a union or nonprofit that’s already working against the Republican agenda. —E.L.