Money on My Mind
by Arlene Winkler

If it ain’t broke, why are they trying to fix it?

“The first step… is for members of Congress to realize we have a problem. Without any changes, Social Security would begin paying more in benefits than it takes in by 2018.” —CNN coverage of December 19, 2004 presidential press conference Fact: President Bush never named any dates in that press conference —the year 2018 was added by a reporter.

Fact: In 2018, the Social Security system will have all of the assets it has been accumulating since 1983, specifically for meeting the needs of retiring baby boomers. By that time the Social Security Trust Funds will have grown to some $6.5 trillion. The interest alone on that much money will be enough to meet forecast needs until 2028. After that, Social Security will have to start using its assets and by 2042, according to Social Security Trustee forecasts, or 2052, according to Congressional Budget Office forecasts, the system may be down to some 73 percent of the resources it needs to pay benefits.

So what’s the big hurry?

Fact: Our duly-elected president is determined to change the Social Security system.

Why? The Social Security System is that rare exception, a government agency that really works. Furthermore, it works better than any other retirement plan, paying out more than 99% of contributions in benefits.

Fact: With privatization, workers will have to pay fees much greater than 1% to investment companies. Not only will these fees come out of our social security pocket, they’ll cut into the returns on our accounts. But don’t take my word for it, look at the experience of countries that have tried it. The Century Foundation, at tcf.org, provides a wide range of links.

The down and dirty, the world-wide skinny: in countries that have tried privatization, such as Brazil and Chile, many retirees are left in poverty. Management fees in Chile are about 20 times higher than a system like ours. In Britain, which has been privatized since the days of Margaret Thatcher, the government had to legislate a cap on the fees charged by greedy investment companies. Even so, they continue to take a large bite out of British retirement savings.  

A realistic projection is that the real rate of return on privatized personal accounts in the U.S. is probably 4% or less. When you add in a big increase in risk, and deep cuts in guaranteed benefits, you’re looking at a “reform” that hurts everyone—except the investment industry.The administration insists that a privatized U.S. system can reduce expenses. It’s true that costs will go down if investments are restricted to low-overhead index funds-but only if government officials, not individuals, are the ones who make the investment decisions. If that’s how the system works, it’s misleading to tell us that individuals will control their own money.

Then there’s the issue of poverty among the elderly. 20 years after the Chilean system was created, it has yet to reduce government spending. The government is still pouring in money, according to a Federal Reserve study, because the Chilean government must “provide subsidies for workers failing to accumulate enough capital to provide a minimum pension.”

Last month, the New York Times printed an article by José Piñera, Augusto Pinochet’s former labor minister, urging the U.S. to copy Chile’s Social Security system. Strangely enough, Piñera didn’t refer to a recent report from the World Bank, which stated:

“In Chile and other privatized Latin American countries, more than half of all workers are excluded from even a semblance of a safety net during their old age.”

“Investment accounts of retirees are much smaller than originally predicted—so low that 41 percent of those eligible to collect pensions must continue to work.”

“Commissions and other administrative costs have swallowed up large shares of those accounts. The total average return on worker contributions between 1982 and 1999 was a mere 5.1%, nowhere near the 11% calculated by the superintendent of pension funds.”
“The average worker would have done better simply by placing their pension fund contributions in a passbook savings account.”

In Britain a lot of additional government spending will also be necessary to avoid the return of widespread poverty among the elderly—which is directly relevant to the Bush administration’s plans. Although they claim that by reducing guaranteed Social Security benefits, we will be able to save money in the future, my guess is 20 years from now, it will take major additional government spending to avert a surge in poverty among retirees.So why would the Bush administration want to scrap a retirement system that 1) works and 2) can be made financially sound with modest reforms…in order to imitate systems that are proven failures in other countries.

I think, (notice the absence of the word “Fact”) it’s to keep us from noticing the real initiatives to cut guaranteed Social Security benefits in the future. For instance, the President’s Commission to Strengthen Social Security, wants to introduce a small adjustment to the way starting benefits are calculated, by replacing wage indexation with price indexation. In other words, instead of raising benefits in line with rising average wages, as Social Security has always done, benefits would be raised in line with cost of living.
One way to think about this, is to imagine where today’s retirees would be if Social Security had guaranteed the standard of living the year Social Security started. In 1935, there were less than half as many cars per 1000 people as there are today, less than 40 percent of families had telephones, a third of families had no radio, half had no refrigerator, and 40 percent lacked flush toilets.

The transition of flush toilets and automobiles, from luxury to necessity was due to a rising standard of living, driven by rising real wages. If the purchasing power of retirees had been held at 1935 levels, cars and telephones and indoor plumbing would be too costly for the typical retiree. In other words, a proposal to substitute price indexation for wage indexation is really a proposal to lock future retirees into yesterday’s standard of living. We must not let this happen.

Now it’s your turn: This is not about politics, it’s about survival. It behooves all of us, Republicans, Democrats and anarchists, to light a match under our duly elected representatives and remind them that the only reason they’re employed is to protect our interests:

The Honorable Charles H. Taylor/339 Cannon/Washington, D.C. 20515 (202) 225-6401

Senator Elizabeth Dole/120 Russell/Senate Office Building/Washington DC 202 224 6342

Senator Richard Burr/United States Senate/Washington DC, 20510/202 224-3154

President George W. Bush/The White House/1600 Pennsylvania Ave NW/Washington DC 20500/202 456-1111President George W. Bush: president @whitehouse.gov

 

Arlene Winkler is a semi-retired financial writer who receives $605 from Social Security each month .