Social Security
An alternative to the destruction of social security
By William John Cox
Online Journal Contributing Writer


Mar 9, 2005, 21:44

�This law represents a cornerstone in a structure which is being built but is by no means completed�a structure intended to lessen the force of possible future depressions, to act as a protection to future administrations of the Government against the necessity of going deeply into debt to furnish relief to the needy�a law to flatten out the peaks and valleys of deflation and of inflation�in other words, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness."�Franklin D. Roosevelt (August 14, 1935)

George W. Bush has just launched an aggressive propaganda campaign in his battle to destroy Social Security, the only compensation many of us can ever expect to count upon when we are no longer able to work.

The elimination of Social Security threatens all of us, both those who will be left without the means of survival in old age and those who will have to support them. Is there anything we can do to stop this runaway train before it jumps the tracks?

An Alternative

On August 14, 1935, in the midst of the Great Depression, the American people entered into a contract with our government in which we collectively bartered a percentage of our wages to pay for an insurance policy ensuring that none of us become destitute when we are no longer able to work.

The Depression was brought on by the 1929 crash of the stock market, when it suddenly lost 40 percent of its value and more than $26 billion in wealth disappeared from our economy. It took 25 years for the market to regain its value. In the meantime total wages fell by almost half, and millions of workers were unemployed and without any income.

By 1935, over half of the elderly in America were dependent on others for support, and although a majority of the states had some form of old-age pensions, only 3 percent of the elderly received any benefits, which averaged only 65 cents a day.

Social Security immediately began to take care of us, and with the addition of disability insurance in 1954, Medicare in 1965, and Supplemental Security Income (SSI) in 1972, we have contributed $4.5 trillion from our wages and have received more than $4.1 trillion back in benefits.

We have kept our side of the bargain, and each time we receive our paychecks most of us see that 6.2 percent of our wages has been withheld and turned over to the Social Security Trust Fund. Our employer is required by law to match our contribution with another 6.2 percent. Thus, were it not for the Federal Insurance Contributions Act (FICA) taxes, we could receive an additional 12.4 percent in our salary. However, our employers might not be so generous in the absence of legal coercion, and we might not be so faithful in putting aside the increase for hard times.

It has been a good bargain, a win-win situation. For the oversight of our contributions, we only pay one-quarter of the amount paid by private pension funds to their money managers. Overall, more than 99 percent of our premiums go to benefits and less than one percent is spent on overhead.

Our trust funds have been wisely and conservatively invested in the interest-bearing obligations of federal government bonds (as required by law), which has benefited the overall operation of our government. While we may have missed out a little bit on the booming stock market of the 1990s, we didn�t see our trust funds reduced or wiped out by the current financial recession.

Today, more than 90 percent of all employees and the self-employed are covered by Social Security, and one in seven Americans, or more than 44 million of us, are receiving a benefit. Most beneficiaries are receiving a return on their contributions that is far greater than they would have received if they had invested the same funds in the private financial markets.

The Problem. All, however, is not rosy. While a one-earner couple retiring in 1980 generated Social Security benefits equal to a 7.7 percent (adjusted for inflation) return on their investment, the same couple retiring in 2010 may only earn a 3.6 return. The reduction in return is due to the aging of the population (the Baby Boomers), the increase in benefits, and the requirement that the trust funds be invested conservatively.

So, why doesn�t the government just sell bonds at a low interest rate and invest the proceeds in the stock market? The reason is because higher returns are necessarily associated with higher risks, and if we are to count on having money to retire on and to avoid being dependent upon others, we have to minimize the risk of loss. This is why we have always wisely invested our Social Security trust funds in very conservative interest-bearing government bonds.

Since benefits are primarily paid out of current contributions and since the population is aging, there is a predicted shortfall of $3.5 trillion at some distant point in the future. However, there is a present surplus, and, even using the president�s figures, there are sufficient assets to pay 100 percent of benefits until 2042. Even then, without any further increases, the fund could pay more than 70 percent of benefits for many decades after that. Other estimates, including that of the Congressional Budget Office, allow for sufficient existing reserves to pay full benefits through 2052, if not the 2080s.

Bush�s Scheme. Three solutions have been proposed to reform Social Security. We can raise contributions, reduce benefits, or engage in a more risky investment strategy. The current administration favors the last two options by calling for steep reductions in future benefits; by allowing workers to gamble up to 4 percent of their 6.2 percent FICA taxes with personal investments; and by trusting that their loss of their Social Security benefits will be offset by the higher returns they will receive from their investment wagers.

It is not difficult to understand why Bush is pursuing such a risky plan. It frees his corporate constituency from having to match up to four percent of the diverted funds; his Wall Street supporters will suck millions from the private investment funds for their �management;� and diversion is the first step in the neocon�s long term goal to eliminate Social Security altogether. (The most radical members of Congress want to divert 6 percent of earnings, virtually the entire FICA tax, essentially eliminating employers� contribution towards their workers� retirements. They hope that a 12 percent diversion of contributions would slash the amount of Social Security Trust Funds available to purchase the bonds issued by the federal government to finance its deficit spending and would result in substantial reductions in all government benefits and programs.)

The evidence against Bush�s plan is abundant: (1) Since most benefits are paid out of current contributions, the government will have to borrow trillions of dollars over the next 40 year to replace the contributions avoided by employers and those diverted by individuals to risky private investments; (2) benefits for individuals will be reduced by the amount diverted plus three percent above inflation, resulting in less money at retirement for most individuals; and (3) retirees will have to use the bulk of their private accounts to purchase lifetime annuities from the government, the principal of which cannot be passed to their heirs.

Britain�s experience with privatization has resulted in the fraudulent sale of badly designed retirement plans on false pretenses and exorbitant fees being paid to managers, which have eaten up 20 to 30 percent of the investments they controlled. Presently, at least 75 percent of those with private investment accounts do not have sufficient savings to guarantee adequate pensions.

There has been a similar experience in Chile (lauded by Bush as a �great example� for emulation), where privatization has primarily benefited the upper-income minority and has excluded one-third of the workforce, including the poor and self-employed. Six Chilean pension administration companies �manage� to earn profits of more than 50 percent per year on the assets they �manage.� Half of all participants will be unable to fund even the minimum pension of $100 per month. Is this what Bush really wants for us? Perhaps so, but we don�t have to buy it.

Increase Contributions to Protect Social Security. Should we increase our contributions to ensure the long-term solvency of the current Social Security system? One way to balance the Trust Fund beyond 2042 (or 2052, or 2082) is to simply raise or eliminate the annual cap on earnings, which is scheduled to increase to $90,000 in 2005.

Currently, because of the cap, lower- and middle-income workers pay a higher FICA tax rate than those who earn over $90,000. Since only 83 percent of all wages paid are subject to social security taxes, elimination of the cap would increase annual social security revenues 20 percent, or roughly $100 billion per year, more than enough to take care of any future �shortfall.�

Perhaps the law should be changed to establish the cap at the president�s salary. Shouldn�t we all share the burden to �save� Social Security?

An Alternative Investment Plan. Other opportunities already exist for interested U.S. workers who are willing to increase their contributions and to take some additional risks, such as 401(k) plans and Investment Retirement Accounts (IRAs). However, there is a way to extend the �ownership� of private retirement plans in a way that is beneficial to society and is even more secure for workers.

If allowed to vote in a National Policy Referendum, we might decide to embark on an alternative personal investment plan as a supplement to traditional Social Security, whereby employees make additional tax-free contributions to personal accounts in a National Bond Fund that invests its assets in the obligations of local and state governments, rather than the federal government.

Employers could agree to match Bond Fund contributions as a job benefit; employees could take their accounts with them from job to job; workers could negotiate the level of each subsequent employer�s contribution; retirees could decide for themselves whether to invest their savings in a lifetime annuity at retirement; or they could choose to spend their entire nest egg as they please, or they could leave it to their heirs.

The stability of investments in state and local bonds would require minimal management costs, increase the rate of returns, and would allow the principal placed in personal accounts (which could be withdrawn at any time to meet emergencies) to be guaranteed by the federal government just as it does for bank deposits.

Bond Fund accounts could be established by parents at the birth of their children and grow throughout an individual�s lifetime until they choose to retire. There could be survivor benefits similar to those provided by traditional Social Security, and the personal accounts could mature as early as age 55, allowing workers to transition to other, and perhaps more interesting secondary careers.

America would benefit as a whole from an alternative personal savings plan by having a readily available, domestic source of investment funds to restore and improve its state and local infrastructure and public facilities.

Many of us will never have the sophistication, discipline, or excess capital to consistently make good investments in a personal portfolio. For most workers, the bargain we made with our government back in 1935 remains the best deal we can hope for when we retire or should we become disabled. We do not have to worry that our retirement or a serious accident will coincide with an economic recession, when the stock market is in decline, or that we will outlive the value of our private investments. Quite simply, we are secure in our society.

Conclusion

Unquestionably, the lives of millions of American workers and our families will be devastated in the future by the thoughtless and selfish actions of our representatives if Bush succeeds in his cockamamie attack on Social Security. It is dangerous to assume that they care more for us than for their wealthy friends, corporate sponsors and Wall Street conspirators, who are the only ones guaranteed to benefit from Bush�s nutty scheme to privatize Social Security.

There is a great risk that our Congress, presently controlled by the wealthy and large corporations, will enact changes by a simple majority vote that will abrogate the contract we made with our government 70 years ago and which we have faithfully kept. Undoubtedly, Bush will happily sign off on the legislation. He and his family have accumulated a substantial fortune during their years of public service, and he will never have to worry about paying for food, shelter or health care.

We the people, the ones most affected, have the right to directly vote on any risky gamble with our money and future well-being. No other question is more amenable to a policy vote during a National Policy Referendum.

Let us dream of a society in which we are able to prosper and enjoy the full fruits of our labor. Let us dream of a society in which we can retire in comfort and security without worrying about shelter, food and medicine, or that we will become a burden on our families or communities. We can make these dreams come true. We only have to trust that we collectively have the common sense to make them happen.

The time has come for us to peacefully engage in a political evolution, rather than a violent revolution. We must demand to vote in a National Policy Referendum about our Social Security policy, and each of us must take a moment to carefully write in the name of the person we select as president to carry out the policies we decide upon.