Social Security

Eisenhower
 Dwight Eisenhower
zFacts agrees with President Eisenhower

The following is President Eisenhower's candid view of Social Security and those who seek to  abolish it. It is from a letter he wrote to his brother on 8 November 1954 (PDF, 79k).

"This is what I mean by my constant insistence upon "moderation" in government. Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt (you possibly know his background), a few other Texas oil millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid."

The current scheme to privatize Social Security is part of the "guerrilla warfare against both the current Social Security system and the coalition that supports it" proposed in a Cato Institute article in 1983. We don't think this fits with Ike's insistence on "moderation."

 

Is the Trust Fund Fake?  It contains $2+ trillion saved for our retirement from our paychecks (FICA) and by our employers. The White House says "There is no Trust Fund, just IOUs." It's just paper. But those papers are Treasury bonds. What gives? Who could steal this much hard earned money?

Are Private Accounts a Bonanza? No, as explained by a leading member of the President's commission, who is pro-private accounts. Moving money out of Social Security and into the stock market increases risk and works against the principle of diversification.

Is There a Crisis? Is Social Security really in trouble? From whom? The Trust Fund may run out in 2041 ... or 2025 with Private Accounts.

Who Started this Anyway?: In 1982 Heritage held a strategy conference and in the fall of 1983 the Cato Journal published a "Leninist Strategy" to "construct a coalition" for a "private Social Security system." The coalition was to include "the banks, insurance companies, and other institutions that will gain from providing such plans to the public."

Social Security Reform: Yes, it's needed. But there's no crisis and it's quite easy. Ask Bob Ball, the Commissioner of Social Security under Presidents Kennedy, Johnson, and Nixon.

Why Social Security Matters.  Social Security is insurance that protects Americans when they are most vulnerable: in old age, when disabled, and when children lose a parent. It is 100% paid for by workers and employers—not income tax. 

What is Bush's Private-Accouhnts Plan? Peter Wehner, President Bush's director of strategic initiatives, says "For the first time in six decades, the Social Security battle is one we can win." And what did we have 60 years ago? No Social Security.

 

Fake Trust?

Just the Facts: 
The national debt is borrowed from many sources and always has been. Once borrowed the money is spent—that's the point of it. But the U.S. government has always honored its debts and is still the safest investment. 

Is the national debt so big we can't pay it back? Compared to the size of our economy it's smaller than in World War II, and we paid it down after that. There is only one danger to social Security, and that's Congress.

Congress could decide not to let Social Security use its trust fund. Here's how. It could reduce Social Security benefits so much, that Social Security would never need the trust fund. But the Democrats have always supported Social Security, so that danger could only come from the Republicans.


The Whitehouse says:   There is no trust fund, just IOUs that I saw firsthand, that future generations will pay. –Bush, April 5, 2005     
• We take your payroll taxes; we pay out the benefits to the current retirees; and with the money left over, we pay -- pay for other programs. And there's nothing left but file cabinets with IOUs. –Bush, April 26, 2005     
• I went to West Virginia the other day to look at the filing cabinets, to make sure the IOUs were there — paper. And it's there. ... not a very encouraging sight. –Bush, April 18, 2005
• Now, about $1.7 trillion of that is in the so-called trust fund; that is, money -- that's money that's been collected that's not there as cash at this point. –Cheney, March 22, 2005

Hey, wait a minute!
 • What about the Federal Pension Trust Fund? It's just the same—all $800 billion of it. You mean there are no military pensions?!
 • What about the $280 billion in Medicare Trusts—are those fake?
 • And, the highway trust and all other government trusts? $3.1 trillion all told.

And what's their problem with "paper"? A thousand dollar bill is paper, the check I write, my stock certificate, my government bond—all paper. Did they expect the trust would be made of diamonds?

What of the millions of Americans who own Treasury bonds, all paper? Seven trillion dollars of national debt has been spent on government programs, and there is "nothing left." Has the US of A defrauded the world of $7 trillion?

When you put money in the bank you get paper, and they lend your money to someone who spends it. Your cash does not stay in the bank. Does Cheney really think the SSA should have a storeroom of cash? They're just trying to frighten the people.

There Is Only One Danger—Congressh
Congress could pass a law that Social Security Benefits will be cut in half from now on. TheSupreme Court ruled ruled that legal 40 years ago. If they did that, the SSA would never "need" it to pay benefits. So the contribution from all those millions of pay checks would be trapped in the Soc. Sec. Trust and never see the light of day—it may as well be stolen.

But What Congress Would Do That? Would the Democrats do that? Not on your life. Would the Republicans do that? Hmmm. They've always disliked Social Security. They are the ones saying the Trust is not real, it's just paper, it's just a burden, too bad it has to be paid back ...

Social Security has always had a Trust Fund, but in 1982 it was tiny, and Greenspan pushed for raising the low and middle-income payroll taxes which are putting billions into the Trust. Meanwhile Reagan and Bush have cut income taxes, mainly on the rich. The national debt goes up and they tell us—Hey, we're in debt, we can't afford to pay back that Trust fund.

Why rob Social Security?  That's where the money is !

 

Is It Safe?

Social Security has more than [#$2.5 trillion] in the "bank" for when Social Security first needs to withdraw funds.[#1] But the privatizers say that's when the trouble starts.

The CBO [under Bush] said the "bank" notes (really T-Bonds) might be "[#merely bookkeeping entries]" and the OMB says [#government trusts] aren't like private ones--they can change the rules on you.

Why would CBO and OMB be saying these things? Does someone want to stiff all of us who have been paying extra FICA tax for the past 20+ years?

It [#sounds like it], but would they [#renege] on Treasury bonds? No Republican president would dare, and no Democrat would want to. But they're talking about [#cutting benefits], and that works just as well.

See how the National Debt relates to Social Security.

Heritage Foundation's justification for raiding the Trust

On November 10, 2004, privatizers at the neoconservative Heritage Foundation confirmed the fears documented above in early 2004. The privatizers are counting on Congress and the President stealing the Trust Fund. In fact, that's just what they want.

"Some assert that the program’s trust fund will make up the shortfall, and therefore delay any tax increases or benefit cuts, until 2042. That is simply wrong. There is a trust fund, but it has no money in it -- and it never did. No money has ever been saved for future retirees. This means that the common myth that Congress and the president are raiding the trust fund is wrong also. As inventive as politicians are, even they can’t steal money that was never there in the first place."

—Brian Riedl and David John, Privatizers for the Heritage Fundation, in "Social Security’s Fictitious Trust Fund", November 10, 2004.

Consider What The Heritage Privatizers Said:

"money that was never there in the first place."
Our money certainly was "there in the first place." It came out of our pay checks and went to the SSA. They loaned it to the Feds and were given T-bonds in return. Just as if you bought a corporate bond.

"No money has ever been saved"
When you buy a corperate bond, what does the company do with that money? Save it? Never. The whole point of selling bonds is to spend the money. That's what corporations do!

"The trust fund will make up the shortfall ... That is simply wrong."
This means the government will, in effect, default on the T-bonds! Does Heritage think the government will default on the T-bonds sold to private investors? No. Do companies default on their bonds just because they spend the money? No. They either sell more bonds, earn some money, or sell stocks. But they have to pay it back.

Has the government ever paid back the Trust Fund before?
Yes. In many years before 1980 it did. Clinton, and all president from Truman through Carter reduced the National Debt compared to America's income, which makes it easy for the government to borrow again if it needed to in order to pay back Social Security.

So what's the big problem?
The problem is that under Reagan, Bush I, and Bush II, the government has been borrowing so fast that it knows it would be hard to borrow even more to pay back Social Security. The real cause of the problem is the Bush tax cuts, most of which went to the rich.

 

[#PopNotes Used Above]

[=$2.5 trillion]  Since the early 1980s, we've been paying extra to build up a surplus that will have over $3.5 trillion by 2012 and more in its peak year of 2022.  In 2018, the trust must withdraw the first dollar to help pay benefits.  But the privatizers say not to count on it (See quotes from the Trustee's report, 2003).
[=1] Baby boomers. Social Security is partly a pay-as-you-go and partly a save-for-the-future trust. As the baby-boomers retire, pay-as-you-go alone won't work because there will be fewer workers to pay in per retiree collecting.
[=merely bookkeeping entries] Are the T-bonds just 'paper'? The government has told generations that "promises made can and will be kept." But there's plenty of thinking about how to avoid it.  The trust surplus has been lent to the government in exchange for T-bonds (IOUs) and spent. Some point to the T-bonds and say we can treat them as "merely bookkeeping entries," or "paper transactions" with no real meaning.
[=government trusts] Is there a trust? Others point to the trust and say it's not really a trust that the government protects for Social Security.  It's just the government's money - and the government can do what it wants with it. the OMB has to say about trust funds.
[=renege] If the debt were re-paid. With the trust surplus, Social Security can continue to pay full benefits until 2042 (Page 2, The 2003 Annual Report of the Social Security Trustees).  
[=cutting benefits] In 2018, to pay 100% of promised benefits, the trust will need to cash in some T-bonds. If the government is short on funds, it can (1) renege on the T-bonds, or (2) cut benefits just enough so that the T-bonds aren't needed. Both methods have the same impact on Social Security checks. Method (1) is political suicide, so the plan is method (2), cutting benefits.
[=sounds like it] • There is no trust fund, just IOUs that I saw firsthand, that future generations will pay. –Bush, April 5, 2005    
• We take your payroll taxes; we pay out the benefits to the current retirees; and with the money left over, we pay -- pay for other programs. And there's nothing left but file cabinets with IOUs. –Bush, April 26, 2005    
• I went to West Virginia the other day to look at the filing cabinets, to make sure the IOUs were there — paper. And it's there. ... not a very encouraging sight. –Bush, April 18, 2005
• Now, about $1.7 trillion of that is in the so-called trust fund; that is, money -- that's money that's been collected that's not there as cash at this point. –Cheney, March 22, 2005
[=PopNotes Used Above] Just hover over links of this color to see them.

 

Quotes

Not a Real Trust Fund
Feb. 2000,
Office of Management and Budget (the White House)
"The Federal budget meaning of the term "trust," as applied to trust fund accounts, differs significantly from its private sector usage. In the private sector, the beneficiary of a trust usually owns the trust’s assets, which are managed by a trustee who must follow the stipulations of the trust. In contrast, the Federal Government owns the assets of most Federal trust funds, and it can raise or lower future trust fund collections and payments, or change the purposes for which the collections are used, by changing existing laws."
T-Bills Are Just Paper
Oct. 10, 2003
Congressional Budget Office (CBO)
"Computing the imbalance on the basis of "totals" implies that surpluses projected to occur early in the period will offset later deficits. But crediting surpluses to trust funds is simply a paper transaction."
Merely Bookkeeping Entries
Oct. 10, 2003
Congressional Budget Office (CBO)
"If those reserves merely represent bookkeeping entries, receipts for Social Security are projected to fall below the program's expenditures not in 2042 but in 2018; and for Hospital Insurance, in 2013 instead of 2026."
Worker's Savings Don't Earn Interest
Oct. 10, 2003
Congressional Budget Office (CBO)
"If, instead, those reserves and interest credits are viewed as spending authority and not as real resources (that is, as money that the government can draw on), the overall 75-year deficit--and the magnitude of the legislative change needed to eliminate it--will be considerably larger."h

Bonanza?

No, and here's why:
The Privatizer's logic fails the "are-you-diversified" test.
Every investment adviser will tell you to diversify, especially for retirement. That could mean 40% in Treasury bonds and 60% in stocks. Pick your own numbers, but let's say that's best for Joe, even though T-bonds only earn 4% and stocks earn 8%. That's because stocks are risky and Joe does not want to risk his whole retirment in the stock market.

Now along comes the privatizer man who says, "Hey Joe, vote for me and I'll help you make 4% more on a big piece of your retirement nest egg." Joe says, "Great you got my vote!"

Now the privatizer man tells Joe to cash in his T-bonds and put them in a private-account stock fund he made for Joe, and Joe does just that. Now he earns 8% on all that money he was only earning 4% on.

But one day, Joe sees his investment adviser who asks "Joe, are you diversified?" ... You get the picture. If diversification is good, as every investment adviser says, then cheating on the diversification rule might make you a lot of money, or it might lose you a lot, as we've seen since the Bush's privatizing days. That's not what saving for ritirement is about.

Who did I learn this from?
Olivia S. Mitchell, a member of Bush's privatizing commission!
That's right, back before she joined that commission, she wrote a really great, very technical, very well respected report that worked this out and she has never taken it back—because it's right. Here's what she said.

"Many advocates of social security privatization argue that rates of return under a defined contribution individual account system would be much higher for all than they are under the current social security system. This claim is false." —Olivia S. Mitchell (paper xlnk.gif)

How Much Social-Security Benefit Do I Lose When I Go Private?
Right now you would lose 6% interest. Here's how it works. At a [#White House] briefing on Feb. 3, 2005, a senior advisor stated that "the person comes out ahead if their personal account exceeds a 3 percent real rate of return." Now a "real rate of return" means above the rate of inflation, which is now 3% per year xlnk.gif. That means right now you have to earn more than 6% in the stock market to come out ahead.

You might make more in the stock market, but why is it that stocks pay more than bonds, and why does anyone ever buy a T-bond, let alone the $7 trillion of bonds that have been sold--maninly to big-time investors--to cover the national debt. Stocks have to pay more because they are risky and the extra they pay is called a "risk premium" because it just covers the cost of risk. People buy T-bonds because they want to diversify and partially protect themselve against the risky stock market.

[=White House] SR. ADMIN. OFFICIAL: The way that the election is put before the individual in a personal account structure of this type is that in return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system.

Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent real rate of return,which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase as a consequence of making that decision.

Q So he would only get a benefit to the extent that his portfolio performed in excess of 3 percent?

SR. ADMIN. OFFICIAL: Right. NY Times, Feb. 3, 2005 xlnk.gif

 
 

 

Crisis?

No, But the Privatizers Gave It Their Best Shot

First, how bad is the situation?

  • The Social Security Trust Fund has been around for about 70 years.
  • It's at an all-time high of over $2.5 trillion dollars.
  • Social Security has been tweaked many times to keep it in ballance.
  • If we do nothing the Trust Fund will run out in about 2035.
  • But Social Security would not be bankrupt.
  • Its continuing payroll contributions would still pay about 70% of legally required benefits.
  • In 1983, the Trust was a few months from running out of money when Greenspan fixed it.
  • That was 100 times closer to a crisis then now, and no one even remembers.
  • That fix was good for over 50 years, and we've got about 25 left to go.

What Would Bush's Privatization Plan Have Done?

  • It would have diverted almost half the Social Security payments into private accounts, starting immediately.
  • That would have forced Social Security to dip into the Trust Fund immediately
  • The Fund would have run out up to 20 years sooner.
  • And then when the Trust Fund ran out, with half the payments diverted to private accounts, payments to those under the old system would have been slashed something like 70%.
  • This really would have been a crisis.
  • With privatizers claiming there's a crisis for that last ten years, and proposing a plan that would cause one, it's pretty clear that a crisis is what they want.
  • But then, a lot of Republican have wanted to kill Social Security from it's inception.

Plotting to Privatize

Title: ACHIEVING A “LENINIST” STRATEGY  
Cato Journal, vol. 3, no.2 (Fall 1983) (700kB PDF) xlnk.gif. copyright © Cato Institute.

It began in 1982 at the "Rebuilding Social Security" Conference at the radical-right Heritage Foundation, but the plot against Social Security was fleshed out by Butler (a Cato director) and Germanis (an analyst at Heritage) in the Fall 1983 issue of Cato's journal, summarized through quotes here: [Emphasis added.]

"Lenin recognized that fundamental change is contingent upon ... its success in isolating and weakening its opponents. ... we would do well to draw a few lessons from the Leninist strategy. (p. 547)

"we must recognize that we need more than a manifesto ... we must ... construct ... a coalition that will ... reap benefits from the IRA-based private system Ferrara has proposed but also the banks, insurance companies, and other institutions that will gain from providing such plans to the public." (p. 548)

"By approaching the problem in this way, we may be ready for the next crisis in Social Security." (p. 548)

"From a purely political standpoint, it should be remembered that the elderly represent a very powerful and vocal interest group." (p. 549)

A Plan of Action 
"The first element consists of a campaign to achieve small legislative changes that embellish the present IRA system, making it in practice a small-scale private Social Security system. ... thenatural constituency for an enlarged IRA system must be ... welded into a coalition for political change." (p. 551)

"The second main element ... involves what one might crudely call guerrilla warfare against both the current Social Security system and the coalition that supports it." (p. 552)

Creating a Private Model  
"The reason for designing a “super IRA” law with these restrictions is purely political."  (p. 552)

"Social Security reform requires mobilizing the various coalitions that stand to benefit from the change, ... the business community, and financial institutions in particular ... "(p. 553)

"The banking industry and other business groups that can benefit from expanded IRAs ..."

"... the strategy must be to propose moving to a private Social Security system in such a way as to ... neutralize ... the coalition that supports the existing system." (p. 555)

"The next Social Security crisis may be further away than many people believe. ... it could be many years before the conditions are such that a radical reform of Social Security is possible. But then, as Lenin well knew, to be a successful revolutionary, one must also be patient and consistently plan for real reform." (Concluding paragraph, p. 556)

  
Privatizers admit there is no crisis.
Is the Social Security trust fake?

 

Security Reform

Reforming Social Security's finances.  With some minor adjustments, we could make Social Security solvent for the next 75 years.  Bob Ball, Commissioner of Social Security under Presidents Kennedy, Johnson and Nixon, says the anticipated shortfall in Social Security's finances can be fixed without benefit cuts or privatization.  Here's how his Social Security Protection Plan (pdf) would work:
 
Over the next 40 years, raise the earnings limit for payroll taxes ($94,200 in 2006) very gradually back up to its traditional level. The plan in 1983 was to tax 90% of all earning -- giving the richest 10% a pass on the earnings above the limit. But their earnings have grown so much faster than most of our incomes, that they top 17% of income is now given a pass (no payroll tax).
 
Dedicate estate taxes to Social Security.  The estate tax would be set at 2009 levels so only estates greater than $3.5 million ($7 million for a couple) would be taxed.  This new source of reve;nue partially repays Social Security for the deficit it incurred in its early years.  Social Security paid many generations of workers higher benefits than their contributions funded, and this tax recoups part of that debt owed by earlier generations.
 
Over the next 20 years, invest the trust fund in equities gradually up to a maximum of 20%.  Current law requires Trust assets to be invested in special U.S. government bonds.  But other federal programs (the Railroad Retirement program), other countries (Canada) and all similar public and private pension plans invest in stocks as well as bonds. This should increase Social Security's resources while protecting the benefits of individual workers from the risk of a market downturn at retirement.
 

Another approach to reforming Social Security.  Here's another plan,  Reforming Social Security: A Balanced Approach (pdf), by two noted economists:

First, some gradual reductions in benefits and adjustments to payroll taxes:

 
raise the earnings limit for payroll taxes back to its 20-year average level.
 
reduce benefits for the highest-paid 15% of workers slightly
 
include all state and local government workers
 
add a 3% payroll tax on currently untaxed earnings above about $90,000
 
reduce benefits and increase payroll taxes slightly beginning in 2023.
 

Next, some benefit improvements for the most needy:

 
increase benefits for minimum wage workers
 
improve widows' benefits.
 

What does this mean?  The disabled and children who have lost a parent and workers age 55 or older in 2004 receive the same benefits as they do today. Younger workers have minor benefit cuts. The payroll tax rises from 6.2% in 2005 gradually to 7.1% in 2055.  These modest changes extend Social Security's solvency from 2042 passed 2075 without the help of government funds or exposing benefits to stock-market risk. 

One independent analysis (pdf) says this plan would solve the problem without budgetary gimmicks or wishful assumptions.  

Reform or revolution for Social Security? But others propose drastic changes for Social Security.  Rather than fix Social Security's finances directly, they would cut current benefits greatly over time and hope that private accounts will make up the difference for individual workers at retirement.  They also would add government funding - not to bring Social Security's finances into balance, but only to pay the costs of setting up private accounts.

 

Why It Matters

Comparisons:  Unlike the private pension system, Social Security provides retirement income to almost all American workers. Here's what old age was like before before Social Security (Wall St. Journal).

Providing for the elderly.  Social Security provides most of the elderly with their major source of income, and is, for 20%, their only source of income. In 2001, Social Security income represented more than 41% of aggregate income for the elderly (see below graph). Without Social Security, more than one third of all elderly persons in the U.S. would be living below the poverty line, according to 2001 Census Bureau data (Graph).

Providing for children and the disabled. Social Security provides income for the disabled, and is the only source of long-term disability income for 72% of the private sector workforce. It also provides support for children who have lost a parent. And it provides all of these guaranteed benefits without any government funding and at minimal cost (about as low as the cheapest index fund - (0.6 basis points in 2003)). Here are some basic Social Security facts and beneficiary data from the Social Security Administration.  (more)

Pension Trouble

Who Benefits?  The pension system is like the girl with a curl in the middle of her forehead.  When it is good, it is very, very good, but when it is bad it is horrid. It's good for longer-term, higher-paid, better-educated workers at large companies but it is not so good for most other workers.  At any point in time, fewer than 50% of workers have access to a plan, and that figure hasn't improved in the last 25 years. And there are significant differences in pension coverage by gender and by race. 

According to a new government study (pdf), in 2003, only 27% of workers in small companies (less than 25 workers) had plans as compared to 50% at medium-sized companies (up to 99 workers) and 68% at larger companies (100 or more).  Black, Hispanic and other non-white workers were less likely than whites to have a plan, and less than 30% of the lowest-income workers has plans as compared to over 70% of the highest-income workers.  

The Changing Nature of the Retirement System.  Over the last 20 years, the number of traditional pension plans, paid for by employers, and the workers covered by them has fallen drastically.  Today, employers prefer to offer defined contribution plans, especially the popular "401k" plan. In a 401k plan, the responsibility for saving for retirement is placed on workers.  They decide how much, if anything, to save each year and most must save something before employers contribute anything.  They usually also have to decide how to invest their savings and bear all the risk of a market downturn or poor investment performance.

Saving for Retirement.  The good news is that, at the end of 2003, 401k plans held almost $2 trillion in assets on behalf of 42 million workers.  The bad news is that, given the trend to 401k plans in the workforce, not enough workers are saving for retirement and not enough are saving enough.  A recent survey found that 58% of workers say they are saving for retirement but their savings are low;  45% of all workers have less than $25,000 in assets outside their homes.  Despite this, most workers believe they will be able to retire comfortably.