Social Security
The Idiot's Guide to Securing Social Security
By Jerry Mazza and Dale Coberly
Online Journal Contributing Writers


Dec 17, 2004, 20:31

Since the New York Times reported on December 10 that "Bush Says He Won't Raise Taxes for Social Security Overhaul," we see the president posing once more as Protector of the People's Income. What a laugh!

The fact is the combined revenue loss from Bush's three tax bills (mostly for the rich) plus interest for fiscal year 2004 alone will equal $297 billion, or 2.6 percent of the Gross Domestic Product. Whereas a bearable raise in SS tax would be a relatively painless solution to the future SS shortfall and more: preserving the economic health of America and the people's most successful retirement plan ever.

Remember Bush's preference for expensive non-solutions also extends from Medicare non-coverage of prescription drugs for two million Americans in nursing homes to the wholesale slaughter of Iraqi citizens in his non-winnable war. And now, as an alternative to Social Security, he would create private stock accounts, which would lead the government to borrow billions to trillions of dollars to finance and drive the economy deeper into the crapper. Or as Paul Krugman, The New York Times� most astute political commentator and economist put it, "Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it? But the details make it considerably worse."

Krugman elaborates, "A system of personal accounts, though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from The Street's point of view that's a benefit, not a cost." And remember, Wall Street did a great job of stuffing Bush's campaign pockets. This is payback in perpetuity.

Krugman also gives us some historical perspective. "There is by the way, a precedent for Bush-style privatization. One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts�a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the state for Argentina's economic crisis.

�If Bush were to say in plain English that his plan to solve our fiscal problems is to borrow trillions, put the money into stocks and hope for the best, everyone would denounce that plan as the height of irresponsibility. The fact that this plan has an elaborate disguise, one that would add considerably to its costs, makes it worse."

And I might add it's why Alan Greenspan must think he's lost in the land of the economically deranged. And despite his hikes in interest, the devaluation of the dollar continues. Perhaps favorable for certain manufacturing and exporting segments and currency hedge funds, but disastrous to people living on fixed incomes. Given my thoughts, the assessment of Princeton Economics Professor Krugman and others like Dean Baker, I felt the need to help Bush with a kind of "Idiots Guide to Securing Social Security" before he wreaked havoc on still another mainstay of our financial life.

As I started it, my last article on "Bush's plan for Social Insecurity" drew a number of encouraging emails, including one from Dale Coberly of Oregon. He said, "I would suggest you break the arithmetic down and show that the 'looming deficit' works out, with no changes in SS at all, to a need to raise the payroll tax about fifteen dollars a week beginning in 2042. This might not turn out to be the solution people choose, but it at least shows them that the other side is lying about the scale of the 'crisis.'"

In fact, Dale disagreed with me about raising caps. "I am not in favor of raising the income ceiling reached by the payroll tax because the 'rich' are already convinced SS is a bad deal for them. Raising their tax will just make them vote against it." My answer is who cares what the rich think, even though they will squeal at having to pay it. We've been lining their pockets, at the expense of the middle class and neediest, long enough. Point made. Back to Dale . . .

�Not raising their tax means that the people who benefit from SS pay for it. In fact, It shouldn't even be called a tax. It's a mandatory insurance program. Mandatory for the same reason your car insurance is mandatory: experience teaches us that many people, and we can't tell in advance, will fail to provide for their own retirement. I'll stop here but if you need any help, let me know."

Stop here when someone offers help?  What a cliff-hanger.  I emailed Dale and asked what he did. He described himself as "an old school teacher who got paid to teach other people's children to be careful when they played with numbers." Well, that sounded fortuitous. So, Junior, listen up. We might learn something from the Oregon math teacher as well as Professor Krugman. Dale wrote . . .

"The Social Security Administration states that 'In 2042 Social Security will only be able to meet 73 percent of promised benefits.' The arithmetic: 1/0.73=1.37 shows that a 37 percent rise in the payroll tax would enable SS to pay ALL benefits. But this is 37 percent of 6.2 percent, or 2.3 percent of payroll. For the average worker currently making $30,000 per year, this would imply a raise in the payroll tax of $690 per year or $13.23 per week." That didn't sound like a bad deal to me. So I read on.

"If you want to deal with the objections, I think I can make a good case that my very simple analysis is much closer to the 'real cost of saving' Social Security than the "44 Trillion Dollar Unfunded Deficit!" (which Dean Baker deals with in his article). Basically he shows that that figure is arrived at by some dubious accounting assumptions including especially the assumption that the cost of Medicare will rise faster than GDP for the next 75 years. In any case using the same assumptions, he shows that the 44 trillion is still only about 6 percent of GDP. But note that the privatizers have baited and switched: they start out the paragraph talking about Social Security and then tell you the cost of 'entitlements.' Medical care is going to be a big problem, but first it is not Social Security, and second, it's a problem we are going to have to pay for, whether through Medicare or through private insurance. Much more on that if you are interested."

Well he was demystifying Social Security's math pretty well, so I decided to stick with that. Medicare�s already been mugged, at least for now. Dale went on . . .

"Couple of small points: the privatizers like to say that the cost of SS is not 6.2 percent but 12.4 percent of payroll. They are right, but the worker only 'sees' 6.2 percent. And while the privatizers like to say the 'employers share' is 'really' the employees money, when they are alone among themselves, they say that even the employees share is their money. After all it's their name on the check. It's an empty argument. It is worth noting that the employee and employer are a kind of partnership producing value added that amounts to about twice what the employee gets in pay. That is entirely reasonable, but it is also entirely reasonable that half the payroll tax comes out of the half of company income that the employee never sees.

�Second, by 2042 the average income will presumably be higher than $30,000, so the raise in payroll tax will be higher as well. I use the current dollars, current wage figure because it gives people an honest sense of the cost. In any case when you figure the higher tax on the higher income you will note that the payroll tax is a higher percent of income. But it is not unreasonable that people would choose to spend part of their new higher standard of living on longer retirements, because this is what the raise in payroll �tax� is needed for: six more years of life expectancy. It has nothing to do with the baby boomers who will mostly be dead by then.

�And it needs to be pointed out that the boomers have already paid for their retirement. The privatizers have managed to talk about the trust fund, and the deficit, as though it were an extra burden caused BY Social Security. The FACT is Social Security is currently paying for your tax cuts, and arguably paid for the Reagan arms buildup that the Republicans say won the Cold War. Not paying BACK the baby boomers the money the country borrowed from them is bad faith if not actual theft."

Bravo, Dale. Here we have a man who not only untangled the SS math, but has a conscience as well. He goes on to say . . .

"They keep changing their arguments to fit what they think they can get away with. There are reasons to think that by 2085 the cost of SS may reach something like 20 percent of payroll (of which the employee 'sees' 10 percent). I can deduce this from first principles, but the clever people have managed to come up with the same answer by laborious accounting projections. Back in the bad old days before SS, our grandparents thought that saving 10 percent of their income was a prudent way to prepare for retirement. They expected to live about ten years after they retired. Now we expect to live twenty years after we retire, so 20 percent does not seem like such an unreasonable burden.

�We are looking at a much higher standard of living to start with, so is it unreasonable that we would forgo the second BMW in order to pay for a much longer post retirement life? But you won't find these arguments even discussed in the mainstream press."

But you will find them here, Dale. In fact, it's you speaking. I'm just listening and learning, so go ahead.

"By the way, if SS continues to be wage indexed, the 'interest' on SS 'savings' is approximately what our grandparents got from their savings accounts. Only SS is protected against inflation as well as bank failure, not to mention bear markets and Enrons. The move to shift from wage indexing to the CPI is simply a dishonest way to cut benefits and to make SS even less 'competitive' with private markets." [The Consumer Price Index, by the way, is the program that produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.] "It [CPI indexing] simply cheats people out of their non-market contributions to a rising standard of living. At the same time, it essentially says that if you (for example) spent most of your working life in a society that did not yet have automobiles, you 'ought' to spend your retirement unable to afford a car in a society which has entirely adapted to everyone having a car."

Thus speaks the dedicated math teacher, who also describes himself as a curmudgeon, a grandfather, and one who would sit as the American Indians say with "the round bellies." I see him as the Northwesterner who speaks as clearly to the issue, with all due respect, as the Northeastern Princeton University professor.

And so, between the two, and my own humble interjections, Mr. President, perhaps this "Idiot's Guide," like the one that taught me how to use a computer, will give you the reasons to reconsider the financial cliff you're standing on right now. I ask you, not as an adviser seeking personal gain, but on behalf of all SS beneficiaries, not to leap into the economic void. It's not a pleasant way to end a career, with a market crash and/or drowning in a swamp of debt. It's not a pleasant place to take the nation that both God and perhaps the public have "mandated" you to steward.

And so, from the macro to the micro viewpoints, from east and west, from man to man, I petition you simply to stay on the money. Don't give it away. Keep Social Security with the provisions for fairly raising the premiums for this great retirement program. Still the best bet for the average American working person. And let the stock market make its money the old-fashioned way, as John Houseman used to say in his Smith Barney ads. Let them "earn it," not inherit it through government giveaways that will impoverish our seniors.