Social Security - Part 10: Scaring Us Into Submission

[EDITOR’S NOTE] Generally, I don’t like web memes, but Jeanne at Cook Sister made an offer I couldn’t refuse – a music meme. Social Security – as important as it is - can get tedious and everyone needs a little joy to lighten the load of the times we live in. So check out Jeanne’s answers to the meme, here - and mine are in the first Comment.

In the interests of remaining calm enough for a good night’s sleep, Crabby Old Lady sat out the State of Union. But she read the transcript the next day.

The Speech
Mr. Bush, who devoted the most time in his speech to Social Security, once again – as with the war in Iraq - used his powerful bully pulpit to try to scare everyone into submission.

Let Crabby be very clear about this: there is no “crisis.” Social Security is not going “bankrupt.” And we do not need to fix Social Security “permanently,” as the president stated. More importantly, no one can do that. No one predicted the stock market crash in 1929. No one predicted other, more recent recessions. No predicted the internet bubble. And no one predicted its puncture.

No one knows the future. Not even the president.

What we can do – and Crabby is waiting with baited breath for the Democrats to come up with their counter-plan – is make some tweaks and changes that will take up the slack for the foreseeable future, and let future Congresses tweak again as necessary.

That said, here is what a New York Times editorial correctly labeled Mr. Bush’s “vague and glossy” plan:

The President’s Social Security Plan
His basic idea is to allow workers younger than 55, starting in 2009, to voluntarily invest up to four percent of their Social Security payroll taxes (to an annual cap of $1,000) in private investment accounts. Gazing into his crystal ball, he predicted, “Your money will grow, over time, at a greater rate than anything the current system can deliver.”

He listed some “principles” for development of the plan:

• A conservative mix of bonds and stock funds


• Earnings not eaten up by hidden Wall Street fees


• Protection of investments from sudden market swings on even of retirement


• To be paid out over time as an addition to traditional Social Security benefits

He said all ideas to accomplish this are “on the table” except: “We must not jeopardize our economic strength by increasing payroll taxes.”

That’s the plan as Mr. Bush outlined it on Wednesday evening. Everything else he said, at length, is spin and propaganda, outright lies and lies by omission.

What the President Left Out
The biggest omission the president did not tell the country is that Social Security benefits will be reduced for workers who adopt the private account plan. He made it sound like that money would be paid out at retirement in addition to normal Social Security payments.

Crabby was surprised at the percentage the president would allow to be siphoned off into private accounts – four percent, twice what experts were guessing leading up to this speech, and nearly a third of the total payroll tax. That means, which Mr. Bush did not mention, even more borrowing will be needed to pay current benefits to retirees; even more added to our already astonomically high national debt.

Worse, the president’s plan will do absolutely nothing to solve the shortfall in Social Security, which at least presidential aides admit. Reporters spoke with White House officials about the plan prior to the speech:

“…asked Wednesday whether it would be fair to describe the proposed accounts as having ‘no effect whatsoever on the solvency’ of Social Security, a senior administration official said, ‘That’s a fair inference.’

- Los Angeles Times, 3 February 2005

So as Crabby understands it, the president’s plan is to raid Social Security of nearly one-third of its revenue with no idea as to how he would make up the difference to ensure its future solvency. Maybe it’s hard for a person who’s never had to wonder where next month’s rent is coming from to concern himself with fiscal details.

Another big omission is the protection of the 23 percent of Social Security beneficiaries who are not retirees:

“There was no mention of what would happen to workers who become disabled, currerntly 16 percent of Social Security beneficiaries, or the minor children of workers who die, now 7 percent of beneficiaries…Nor was there discussion of whether spouses would have access to private accounts or what would happen in the case of divorce.”

- The New York Times, 3 February 2005

The president did present one definitive detail, his idée fixe from the get-go of this issue: raising payroll taxes is off the table. And that’s just crazy or, more to the point, it’s reverse Robin Hood-ism – robbing the poor to pay the rich:

Crabby has said this before, but to reiterate: The current salary cap on which Social Security payroll taxes are levied is $90,000. Low- and middle-income workers, who never earn that much money, have always been taxed on all their salary. There is no reason not to remove the cap entirely. To do so is fair, equitable and would help avoid at least some of the otherwise required borrowing.

Dean Baker, co-director of the Center for Economic and Policy Research, understated the basic truth about Social Security privatization when he said,

“They hope people will think they will take on these accounts and after 40 years, they’ll have this huge windfall, but that won’t happen. I think they’re trying to confuse people.”

- Washington Post, 3 February 2005

This president fooled us once by scaring us into Iraq. Don’t let him do it a second time by scaring us out of Social Security.

Tell the president and your Washington legislators what you want. You can do that at this website. Do it today and do it often. There is power in numbers.

...to be continued...

Social Security Privatization Series Index

Comments

[Cop Car]

"He made it sound like that money would be paid out at retirement in addition to normal Social Security payments."

Crabby--It's true, it's true, the money WILL be paid out in addition to normal SS payments. BUT--the "normal" payments will have been re-calculated to be less than what people would otherwise have received.

And while we are at it: the amount allowed to be put into the "private account" should be stated as a percentage of the whole SSA withholding--not as a percentage of SSA taxable income. The 4% figure is actually a bit over 26% of the "normal" SSA withholding. Does this mean that the "normal" SS payments will be reduced by 26%+ or is there another magic number out there that I missed?

That little nit covered: has anyone figured out who is going to do all the bookkeeping and administration of the millions of "private accounts", what those functions will cost, and how they will be funded and paid?

[Ronni Bennett]

I was in a hurry when I wrote this and was not as clear as I should have been. But I'm confused about your paragraph three, Cop Car, particularly "...should be stated as a percentage of the whole SSA withholding - not as a percentage of SSA taxable income."

My figure, which SHOULD have been that four percent is 32.8 percent of the 12.4 percent that is levied for Social Security - half by the worker, half by the employer, calculated on gross income.

Please do clarify this further if I'm wrong.

Meanwhile, Paul Krugman, on the Op-Ed page of The New York Times today, has an very clear explanation based on a "briefing" given to reporters on Wednesday of details the president neglected to tell the public in his speech:

"Before President Bush's big speech, a background briefing by a 'senior administration official' made it clear that the plan calls for exactly the "borrow, speculate and hope" strategy I described - not just for the system as a whole, but for each individual.

"Here's the money quote: 'In return for the opportunity to get the benefits from the personal account, the person forgoes 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 rate of return' - after inflation - '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 rate of return.'

"Translation: If you put part of your payroll taxes into a personal account, your future benefits will be reduced by an amount equivalent to the amount you would have had to repay if you had borrowed the money at a real interest rate of 3 percent."

[Cop Car]

I, too, was hurried and inadvertently included the Medicare withholding in my calculation. Sorry about the confusion. Using only the SS employer+employee withholding of 12.4% of salary, I get: 100(4/12.4) = 32.258%. ("They" must have come up with 4% as having the virtues of being approximately 1/3 of the total, and being a whole number.) Wanna arm wrestle, or am I wrong, again?! Thanks for catching my error.

Thanks, too, for putting up with us readers's who give our interpretations or elucidations. You're very tolerant.

[Claude]

Have you read this on the subject?

[Tom Cunliffe]

You've really studied this!
Over here in UK we've had huge problems through privatisation of pensions - rather than employers running their own schemes, workers usually now have to invest in private schemes. This has been running for about 10 years now and people are realising how little they actually get back from the system and how vulnerable their life savings are to the vagaries of the markets. Really, on things as important as SS and pensions, the State needs to at least provide guarantees to top up the schemes when things go wrong.