Tuesday, July 12, 2011
Why Social Security Privatization Remains a Terrible Idea
In 2005, after Shrubya was elected to a second term (by what many of us still believe was due to black voter suppression and Diebold machine hanky-panky in Ohio), Social Security became a target for privatization as Bush believed he'd collected the "political capital" to go forward on it. Along the way we were bombarded with propaganda from the Wall Street crowd and slavering Bushies proclaiming, oh, how it'll miraculously transform many seniors into affluent and happy retirees, and by the way..."save Social Security" for future generations too.
All irredeemable codswallop, and in retrospect, we were fortunate that a vast constellation of opposition was mounted to squelch it. As I will show, it remains as bad an idea now, as it was then!
Granted that Social Security was never set up to cover all one's retirement expenses, but it wasn't set up as an investment vehicle either. It was designed to be a social insurance net, which meant a baseline of income one could depend on if all else failed! Republicans and many conservatives never seem to be able to process that, or don't want to.
What I am going to base my comments on, is the original privatization scheme as conceived by former Dem. Sen. Daniel Moynihan - and its subsequent modification by the Bushies.
For starters, take the "base pension". Once PSAs (personal security accounts) are established, the base pension would be the maximum monthly allotment one can receive in the absence of any other investment. It's estimated to be roughly $410 a month. ('It's About Ideology - Not Finance', Theodore R. Marmor and Jerry L. Marshaw, The Baltimore Sun, p. 6F, Jan. 5, 1997).
The problem is that this amount - which would have been applicable to most retirees in the past three years in the aftermath of a 'bear' market- is even lower than the poverty threshold. This despite the fact that 40% of Social Security recipients depend on that income alone to keep them out of poverty (cf. 'Social Security- It'll Be There For Us', Jane Bryant Quinn, The Baltimore Sun, Jan. 20, 1997, p. 11C)
Another little item that was ignored amidst the 2005 hype was the cost of carving personal accounts from the existing system. Contrary to the hoopla, this is a zero sum financial game. Thus, to make money available for the PSA system, money must be removed from the traditional system funding current retirees. (Since current FICA revenue pays current beneficiaries).
Even a 2% reduction in current revenues to set up personal accounts would mightily accelerate the downfall of the traditional system (conservative estimates indicate $1 trillion drained from Social Security over ten years) it would make that traditional system insolvent ....and widows, children dependent on it would suffer. This is why no less than Daniel Moynihan and Richard Parsons - who were members of the Bush Commission on Social Security Privatization - called for benefits cuts ranging from 25 percent to 40 percent to partly compensate for the reduced revenue available. (Other Commission members, following in the footsteps of dubious corporate accounting schemes, insist the $1 trillion isn't a loss at all, but rather an "investment" to "strengthen the program"!)
Rep. Robert Matsui - then Ranking Member of the Social Security Subcommittee of the U.S. House of Representatives - warned in a letter to The Wall Street Journal on Aug. 14, 2002:
"Current workers' Social Security contributions finance current retirees' benefits. This is the reason one cannot simply divert money out of Social Security and into private accounts without placing current beneficiaries in jeopardy. Simple mathematics dictates that privatization will - by definition - cut benefits."
This may be why Bush's own Commission on Privatization - in addition to the standard benefits cuts- also recommended: slicing disability benefits by 20 percent or more, eliminating the spousal benefit, raising the minimal retirement age to 70, and possible means testing for higher income retirees.
Meanwhile, the ideological Bushies continued their misinformation that "no benefits cuts are needed." They did this because they were aware that telling the truth would amount to political suicide. The only way they can touch the "third rail" with impunity is if they dissemble and spin the public into mass confusion by misinformation. Using the corporate media as their willing allies.
Unfortunately for the Bushies and their S.S. privatization lackeys, the truth did get out. First slowly, then like an avalanche!
Just how much would lower wage earners benefit from this scheme? Given the fact the traditional system is progressive, and assures lower earning workers gain MORE from Social Security. Some of them, however, are deluded into believing if they just had that payroll tax money for their own...they would do batter and make a killing in the markets. They are totally living in a fool's paradise (as I noted in many other blogs, the stock market is the biggest Ponzi scheme in existence!)
To fix ideas, the privatized system advocated would allow every worker to create a personal account financed by returning anywhere from two to five percentage points of the payroll (FICA) taxes taken from each paycheck.
Let's say the worker (age 20 at entry) is earning $8 an hour. And project that for a period of fifty years, to a retirement at 70. We won't consider job enhancement, promotions etc. since that flies in the face of all current and projected trends - which is to say further downsizing and downgrading of work- including possible pay cuts- until it is nearly all low-pay service sector by 2030. Except for an over-remunerated 'Overclass' that seems to be entrenched. (Who don't pay any payroll taxes anyway).
In terms of my calculations, however, I'll allow some compensation for possible underestimates by projecting the hypothetical worker remains employed at the same rate for the duration. No lulls, no prolonged periods out of work.
I will also assume the 5 % (rather than 2%) pay-in, amounting to $16 a week. That would be $832 a year. Over fifty years, that would provide the worker with $41,600 in his personal account- not including any investment gains. This would provide the worker with just over ten years of retirement income - at the base pension rate of $410 a month. Compare this scenario with traditional Social Security, and it's clear our low wage hypothetical worker is getting rooked.
The lessons of Bush's Texas - 'Galveston Plan'- already disclosed that lower income earners and families were the biggest losers in privatization. (See, e.g. 'Plan Offers Lessons in Privatization', The Baltimore Sun, May 17, 2000, p. 1A.)
As The Sun article also noted, the real cost of administering the standard Social Security system is 0.8% of taxable income, but would easily be 16-18% outside it. Since an entirely independent system has to be set up to the new specifications of Wall Street firms and brokerages that would presumably be handling the 'personal accounts' - as opposed to the Social Security Administration. This almost certainly mandates added expenses, fees to support the new administration that would certainly eat away any investment gains.
Speaking of that, what about the investments of our low wage worker? Those will make money for him and ADD mucho fat to that paltry base pension, no? Not really. Apart from higher fees and expenses I showed in many previous blogs that Wall street investments amount to a pyramid scam based on fleecing the mass investor. "Analysts" or some other useful shills on TV hype the investments. Susceptible people motivated more by greed than common sense buy into them- sending the share prices soaring - then the savvy insiders sell off using 'code words' to each other. The later (or mass) buyers are left holding mostly penny stocks, savaged mutual funds or dead air.
Don't believe it? Look again, and without the obfuscation from the slick- haired financial mavens only interested in grabbing your money. Of particular interest is The Wall Street Journal article of Nov. 27 (p. D1), headlined:
A Harsh Truth: Most of Your Investments Won't Make Money- Even in the Long Term.
The article already noted that taxes (capital gains), fees, commissions and other expenses will essentially eat up any gains from most investments. And that is in a GOOD YEAR! Over time, even a long haul, the average gains are barely over 2% when taxes and expenses have been deducted.
In a down market, such as we saw over 2008-09, the losses are even more horrendous - since the charges and expenses are still taken out while one's investments are tanking. Thus, the ONLY reason that a privatized system would be offered at all - knowing this- would be to shamelessly feed the coffers of the sharks on Wall Street, who made such generous donations to the Bushies in 2000 in return for the promise of privatizing Social Security.
But that's not all. In an article ('The Street's Dark Side') appearing on page C1 of its Dec. 23rd issue, The Journal noted the "disdain" with which Wall Street firms held the common man or woman investing in the market. The particular passage in question noted how the 'Street' couldn't help but perceive the men and women of Main Street as "chickens to be plucked". Their overall "naivete" coupled with investment ineptitude were major factors in this. The piece goes on to note the term used by Wall Street brokers and traders for incoming average investor money: "dumb order flow".
Now imagine millions of oldsters, faced with "investing" for the first time in order to get an adequate retirement income via "personal accounts". Many of whom couldn't tell an expense ratio from a P-E ratio. Just how much tea and sympathy do you think the shysters on Wall Street will extend to Joe and Mary Smith in Peoria?
To underscore the point that small fry investors are like minnows in a shark pool, there's the eye-opening book 'License To Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor'(1999), by Timothy Harper. Of particular note is his Chapter 22: 'Crossing, Churning and Parking'. This describes some of the primary methods and strategies by which small investors are fleeced - and as he notes - the Street's brokers especially relish plundering from those who think or believe they are "too smart" or "too informed". The churning aspect readers may recall from a 1997 case that was invoked against Merrill-Lynch, i.e. churning accounts to generates higher fees and expenses for their clients.
With no assurance of any oversight, can anyone guarantee such mischief wouldn't occur with personal accounts? (Let's also bear in mind here that the 1995 Private Securities Reform Act - which has yet to be modified in the wake of the corporate accounting scandals- exempts corporate and other managers from misleading statements, say to hype certain investments or inflate their potential returns).
What about limiting personal account investments to bonds? That is also no guarantee.
In the bond markets many investors are blissfully unaware of - having bought into the malarkey that 'bonds are safe'. Now, while U.S Treasury bonds are backed by the full faith and credit of the U.S. government - bond FUNDS are not. The reason is that assorted high risk financial toxins are planted in thelatter to juice up yields and lure people in. (Along these lines, people also ought to know that money market FUNDS are not insured or totally safe. In 1990 several fund houses, indeed, had to pour money from their own pockets to maintain a $1.00 NAV. They only did this because they didn't want investors fleeing to other funds.).
Some of the effluent in bond funds: 'interest-only-strips' or IOs, and "inverse floaters", as well as CMOs (collateralized mortgage obligations") also known in the bond trader parlance as "toxic waste". Oh, and derivatives lurk about every corner, often unregulated, or "regulated" in the manner of the foxes guarding the henhouse.
Jane Bryant Quinn observes (ibid.), that Social Security is "probably the U.S. government's greatest success". And if that's the case, why on Earth should anyone want to accelerate its demise based on the recycled fantasies of besting the sharks on Wall Street? Guys who salivate night and day at the prospect of more "dumb money" making its way into their coffers.
The zealous would-be destroyers of Social Security blast it as a "Ponzi scheme" but the real Ponzi Scheme has always been the rigged casino-insider Pyramid of Wall Street. The only 'winners' in this disreputable, bare-faced political hijacking of the nation's social insurance system are Wall Street's shifty-eyed moneymen. Who already have their scam game perfected to a tee - to the point they can blithely dismiss ordinary Main Street folk as "chickens to be plucked".
They will make out like bandits in economical fair weather or foul. They will cream billions off the top each year in commissions, 'management fees' and any other 'expenses' they can dream up. And these will be paid to them whether or not seniors' personal account investments tank. The so-called 'beneficiaries' will be lucky if they can break even.
Seniors who opt in - and end up with only the $410 basic monthly pension (as is most probable) may be forced back to work, perhaps two jobs or more or end up living in a cardboard box in an alley someplace, eating cat food. Is this the dignity they deserve after slaving most of their lives for wages?
A last point to note, New Zealand (in 1999) to its credit saw through this scam at the last minute and dodged a bullet. That nation's pensions are now sound. Barbados - to its credit- has also resisted privatizing its pension system, despite pressure from the IMF to partake of the U.S. capitalist "shareholder culture" rather than the "welfare state".
Some bloggers who get histrionic about those of us on the left who "complain," insist we ought to "shut up" if we have "ours" already! They miss the point, which is tragic. We rail and fight (and browbeat our elected reps) not because we have ours already, but because we don't wish the less fortunate to LOSE theirs! As Keith Olbermann put it last night in his special comment, as humans we are meant to SHARE and not merely in the immediate family! We are supposed to also do more for the less fortunate and this necessarily involves assuring government delivers the resources to sustain those safety nets already in existence - such as Social Security and Medicare. Charity can never fill all the gaps of need or be sufficient to cover more than a minor sector of the populace, since it is too contingent on personal changes in fortune. We saw that in the year after the financial collapse as people across the board pulled back on donations, leaving food banks (to feed the poor) almost empty of wares. Without a much needed extension of food stamps (thanks to Obama's first stimulus) many families would have starved or have been forced to beg on the streets. This is NO America I wish to live in, now or ever!
As for solutions, there are plenty which don't involve destroying the programs we're trying to save. I've already gone through them til blue in the face for Medicare, including eliminating the private Medicare Advantage plans (specifically designed to bleed the standard program into insolvency by spending more than it does each year) as well as allowing Medicare to bargain for lowest drug prices like the VA.
In the case of Social Security one simple fix: an expansion of the payroll tax cap up to the level of $1 million earners, would fix 95% of the cash inflow -outflow problems and leave it viable to the end of this century. Of course, this would have to be in tandem with the enforcement of The Budget Enforcement Act of 1991, which forbids congress from raiding Social Security monies, say to make the deficits appear smaller!
Will the demagogues agree to this, or come up with more codswallop, say like demanding an irrational "bible-based economics" (pure gibberish since economics didn't exist other than simple barter back then - the Jews didn't even have interest!). My reading of the Bible (which I DO occasionally resort to from time to time) shows the ONLY relief then available to the poor and dispossessed was alms giving. But this is nothing on which to base any kind of modern economics, in terms of the modern state and globalized (and interlinked ) systems with more than 1 BILLION workers competing for jobs, benefits and pay! Only a dreamer or zealot would even consider such a thing as a workable "solution"! (Though I suppose if one accepts a 6,000 year old universe, that dinos lived with humans and guys could live inside whale's bellies...anything is possible!)
In the meantime, those of us based in the reality community know what we must do: that is to inveigh always against the powers trying to cut back on the concept of national sharing or resources Keith Olbermann so well described!