Revised Edition

Expanded from a report to the National Board of the Communist Party, USA, January 6, 2005. References are incomplete and will be revised.

Abstract

The debate around Social Security is broad. In this report, the following five areas are addressed.

1. The phony crisis — Financially, social security is sound for the indefinite future, and it would even be possible to increase benefits.

2. The real crisis — the federal government may face multiple budget and fiscal crises in the next decade. The ruling class will try to resolve these crises by imposing harsh austerity programs on the working class, including attacking social security.

3. The economic and ideological stakes — The attack on social security is a ruling class attempt to realize immediate and long-term profits, and also to shift the ideological climate decisively to the right.

4. Private investment accounts — these would greatly undermine both the retirement security of the working class and the financial health of the nation.

5. Secure the future by securing the present — A program to meet the immediate needs of the people — education, housing, healthcare, energy, environment — will lay the best material base to guarantee retirement security in the future.

Section 1 — The Phony Crisis

The social security debate is full of important dates and numbers. Most of the numbers used in almost all articles on Social Security come from the annual reports of the Trustees of the Social Security Trust Fund (SSTF). The majority of the Trustees are political appointees of President Bush [1.1] and the assumptions on which they base their projections are quite conservative. [1.2] This means that Social Security is probably in better shape than the projections. Four of these projections are:

1. This year (2005), Social security is running a large surplus of $170 billion. [1.3] The surplus is going to buy government bonds. The government sells bonds to the Social Security Trust Fund (SSTF), just as it sells bonds to private individuals, private pension funds, foreign investors, and foreign governments (including Japan and China).

2. Payroll taxes will exceed benefits paid until 2018. Even then, the SSTF will be running a surplus, because it will be collecting interest on $5.6 trillion in bonds. [1.4]

3. In 2028, the social security surplus will disappear. Payroll taxes plus interest on bonds will no longer be enough to cover all benefits. At this point, the SSTF will hold $6.6 trillion in bonds, which the Fund will start selling in order to pay full benefits. [1.5]

4. In 2042 or 2052 or later, (depending on who you believe), all the SSTF’s reserves will be exhausted. Payroll taxes will still be enough to cover 70% or 80% of the promised benefits. Even at the 70% level, benefits in real terms will be higher than they are today. [1.6]

Even then, in 2042 or 2052, there will be no crisis. By that time, standard economic projections show productivity about double today’s level. This would allow a modest increase in the payroll tax to fund continued payment of full benefits without reducing workers’ living standards — just as was done in the 50s, 60s, 70s, and 80s. [1.7]

In fact, benefits should be increased. One-third of older Americans rely on social security for at least 90% of their income; another 1/3 for at least half of their income. [1.8]. With the growing failure of private pension plans, these proportions are likely to increase. Yet the typical $1,000/month benefit, while it might allow bare survival, is not nearly enough for a decent life. In the 1990s, the Communist Party called for doubling benefits. Three years ago, at the Socialist Scholars Conference, Fred Gaboury called for an average 50% increase in benefits, with a minimum benefit of 150% of poverty, and showed how it could be financed[1.9]. The Century Foundation, in an issue brief last year, calls for increasing minimum benefits to the poverty level, which would help about 10% of all elderly, but over 20% of Black and Hispanic elderly, and 40%-50% of Black and Hispanic elderly women[1.10]. Dennis Kucinich, in his presidential campaign, called for restoring the retirement age from 67 to 65 for future retirees. [top]

Section 2 — The real crisis

Bush has greatly accelerated the trend of cutting corporate and wealthy income taxes to their lowest levels since the 1930s, while boosting spending on world conquest. As a result, the government owes trillions of dollars to its bondholders, which include domestic and foreign individuals and pension funds, foreign governments, and the SSTF. This debt is increasing rapidly, both absolutely and as a pct of GDP. Over the next 75 years, the long-term cost of the Bush tax cuts is 5 times greater than the estimated social security shortfall Long before 2028, when the government has to start redeeming the SSTF’s bonds, there will be a budget crunch in which the federal government will have trouble repaying its other bondholders. This will certainly be a government fiscal crisis, but it is not a social security crisis. If the US government is unable to pay its debts, a future social security shortfall will be the least of our worries.

These facts are simple, clear, and well-established. Paul Krugman in the NYT[2.1] and Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research[2.2], are only two of the many excellent sources. And of course, Vic Perlo exposed the whole fraud a decade ago when the libertarian right dreamed up the idea of a social security crisis.

Unfortunately, even the few media outlets that sometimes express liberal views, such as the New York Times (NYT) and NPR/PBS, often start news reports on the subject by repeating the ‘fact’ that social security faces a funding crisis. Even while admitting the facts outlined above, the NYT editorial page (4/4/2004) accepts that a possible shortfall 35 years hence is a problem that needs to be addressed now, and does not rule out increasing the retirement age, reducing COLA, or reducing initial benefit levels. (They also consider one good proposal — increasing the cap). The AARP, in an otherwise excellent ad opposing RSAs, also accepts that social security must be strengthened. [2.3][2.4]

These approaches must be rejected! The danger to social security is political, not financial. We should ask, why are you obsessed with fixing a relatively minor problem that won’t even show up for several decades, while crises in financing health care, education, and state and local governments are confronting us right now. There is a real danger that even while defeating private accounts, a ‘bipartisan compromise’ can be reached to ‘fix’ social security by raising the retirement age (again) and cutting benefits.
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Section 3 — Economic and Ideological Stakes of privatization

The administration campaign against Social Security and for privatization is being conducted for many reasons. I will discuss only some of them.

• Wall Street profits from private accounts
  Billions of dollars will flow into Wall Street. The biggest investment houses will profit, and hundreds 6-figure salaries and 7-figure bonuses will be paid out of the administrative fees of these accounts. Very roughly, $150 billion per year extra will be invested in financial markets, about half in stocks.[3.1] That will be a huge transfer of wealth from the working class (who will be buying) to the wealthiest 1% who now own most of the stocks.
• Divide and Conquer and Divide
  The privatizers tell young workers they are being taxed to finance the retirement of the greedy baby boomers, and there will be nothing left for them. The privatizers also argue that African Americans are ripped off by social security because of their shorter lifespans, as are women for other reasons. They hope to divide the working class to win privatization. [3.2] And if they succeed, private accounts would, in turn, help to maintain divisions in the working class.
• Advance the ideology of the ownership society
  Since 1936, the right has attacked social security on principle — it is just evil for people to design a collective solution to social problems, instead of leaving each individual to fend for themselves. This is the essence of Bush’s ownership society — we will each ‘own’ a retirement account, a health savings account, an education savings account, and when we can’t afford healthcare, education and retirement it will be our failure and our responsibility. And we should not underestimate the ideological effect on workers of receiving a monthly statement of their accumulated investment accounts. A private investment account, even if it is totally inadequate for retirement needs, can still look impressive, and lead workers to think that what’s good for the stock market is good for them.
• Work till you drop.
  ‘Workers over age 55 have accounted for 83.5% of the growth in employment over the last four years — driven by soaring health costs and plunging 401(k)s.’ [3.3]. Under most of the plans being duiscussed, the retirement age will be raised even further, current and future benefits will be cut, and seniors, even more than today, will be forced to work until they drop, often in low-wage, part-time jobs. The ruling class can staff its Walmart’s with impoverished seniors, while avoiding the expense of educating the majority of working class youth.
  
• The magician’s trick
  While public attention is focused on social security, the Bush administration can try to quietly enact other elements of their program, and distract us from the very serious economic problems facing the country, to which they have no solutions.
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Section 4 — Retirement Savings Accounts

Individual investment accounts would greatly undermine both the retirement security of the working class and the financial health of the nation. Private accounts would be particularly bad for low-income people. This has been well documented in many recent articles and reports, [4.1] and is confirmed by the experience of England, Chile, Argentina and other countries that have tried similar schemes. [4.2]
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Section 5 — Secure the Future by Securing the Present

Let me double back and discuss one of the arguments that claims Social Security faces a crisis. This is the demographic argument. It goes like this: In 1960, there were 5.1 workers per retiree. Today there are 3.3, and after from 2040 until 2060, there will be about 2 workers for each retiree [5.1]. Taxes from those 2 working people, according to this argument, will not be enough to provide benefits to each retiree.

This argument, coming from the right, implicitly recognizes the labor theory of value. It points out, correctly, that all value comes from active workers. But if we really face a demographic time bomb, privatizing social security will not solve the problem. With or without private accounts, we will still have the same ratio of retirees to workers.

But the whole demographic argument is hogwash, as shown by economist Doug Orr in the latest issue of Dollars and Sense.[5.1] ‘It’s the overall dependency ratio (the number of workers relative to all non-workers, including the aged, the young, the disabled, and those choosing not to work) that determines whether society can ‘afford’ the baby boomers’ retirement years. In the 1960’s, we had 1.05 worker for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon. No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly. In 2030, we will have 1.27 workers per dependent While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living.’ Orr points out that real productivity per worker roughly doubles every 36 years, so that workers and retirees should be able to enjoy a higher living standard in 2040 than today, despite the increase in the senior population. [5.2]

The demographic changes are real. Orr asks, ‘Where will the [goods and services] that baby boomers are going to consume in retirement come from?’ He says, use today’s social security surplus to invest in health infrastructure that seniors will need, along with training doctors and nurses.

I agree with Orr, but think his vision is too narrow. The U.S. needs massive investment in the social and physical infrastructure to enable young workers today, and the next generation of workers, to lead fulfilling and productive lives. This means building schools and training enough teachers and aides so that every child graduates ready to be a productive member of society. It means closing prisons and funding every young person with the talent and ability to go to college. It means ending imperial military ventures around the world, and devoting those funds, and the energy of young people, to the hundreds of billions of dollars in backlogged rail, public transport, water supply, and environmental projects. It means solving the growing crisis of state and local government funding. Carrying out this program would also create millions of new jobs, with additional billions in payroll taxes going into the SSTF, making the program even stronger financially.

Of course, a program like this is in the immediate interests of all American workers, as well as the in the long-term interests of future retirees. It indicates that the fight around social security should not be carried out to the exclusion of other economic struggles, but rather should be integrated with them. Particularly, the fight to save social security is linked with young people’s fight to earn, learn and live.
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References and Notes

[1.1] – "Four of the six trustees are political appointees of the president (the secretaries of Labor, Health and Human Services, Treasury, and the Social Security Commissioner)" – Dean Baker, Economic Reporting Review (ERR), January 24, 2005, at www.cepr.net.

[1.2] – The Trustees’ provide three projections – "low cost", "intermediate", and "high cost", based on different assumptions about the growth of the economy and other factors. The "intermediate" model is the one almost universally cited. Under the "low cost" projection, full benefits could be paid for the indefinite future. The wide divergence between these projections, based on minor differences in economic assumptions, shows the foolishness of making policy decisions today based on possible problems 40 years from now. The widely-cited "intermediate" projections (which are also used in this report) are quite conservative. According to the Social Security Reporting Review (SSRR), January 24, 2005, (Center for Economic and Policy Research, www.cepr.net), real wage annual growth is projected at 1.1% for the next 75 years, compared with 1.5% for the last 60. Immigration is projected to be much lower in 2020 than today.

[1.3] – 2004 OASDI Trustees’Annual Report, available at www.ssa.gov.

[1.4] – Jason Furman, Does Social Security face a crisis in 2018, Center for Budget and Policy Priorities, (www.cbpp.org), January 11, 2005. Based on SSTF Trustees projections.

[1.5] ibid

[1.6] to be added

[1.7] – explanation

[1.8] – EPI snapshot (date?)

[1.9] – reference for Fred Gaboury paper.

[1.10] – Century Fund reference

[2.1] – Krugman’s article in NYT (1/4/2005) discusses this issue very effectively. See also his column ‘Inventing a crisis’ in the NYT 12/7/2004.

[2.2] – www.cepr.net (note: this is different from www.cepr.org).

[2.3] – CEPR issues a weekly Social Security Reporting Review (SSRR) that reviews Social Security reporting in the major media. You can subscribe at www.cepr.org.

[2.4] – One example of media misreporting – Tim Russert’s interview (1/23/2005) of House Ways and Means Chair Bill Thomas. Russert: ‘2018, the surplus keeps growing until that date, and then we start using it down.’ Thomas, who ought to know better, agreed. (This item comes from Greg Anrig Jr. at the Century Foundation, and also cites other inaccuracies by Russert). See item 2 under section 1 of this report for the correct explanation.

[3.1] Private communication from Dean Baker, of CEPR — but this is consistent with other estimates, based on the probable Bush plan to invest 4% of payroll up to $1,000 per year per worker.

[3.2] For example, President Bush’s recent claims that Social Security discriminates African Americans and private accounts would be better. Other arguments are used to try to convince young people, women, and other sections of the working class that they have a particular stake in privatization.

[3.3] Dean Baker, Economic Reporting Review, 1/3/2005, at www.cepr.net.

[4.1] Paul Krugman, The Free Lunch Bunch, NYT 1/21/2005 is a good, readable exposure of the "voodoo economics" behind the privatization proposal. See also Dean Baker and David Rosnick, Basic Facts on Social Security and Proposed Benefit Cuts/Privatization, 11/16/2004 at www.cepr.net. This, along with other writings by Dean Baker, show the absurdity of the inflated claims about huge returns from private accounts. It also shows the high administrative costs of private accounts.

[4.2] For example, on Chile, see Larry Rohter, Chile’s Retirees Find Shortfall in Private Plan, NYT 1/27/2005. (other references).

[5.1] Social Security Trustee’s Report 2004, available at www.ssa.gov.

[5.1] Doug Orr, Social Security Isn’t Broken, Dollars and Sense Magazine, Nov-Dec, 2004, http://www.dollarsandsense.org/1104orr.html. [5.2] The following example is from Orr’s article. Suppose each of three workers today produces $1,000 per week and one retiree is allocated $500 (half of his final salary) then each worker gets $833. In 2040, two such workers will produce $2,000 per week each (after adjusting for inflation). If each retiree gets $1,000, each worker still gets $1,500. The incomes of both workers and retirees go up. Thus, paying for the baby boomers’ retirement need not decrease their children’s standard of living

Additional References:

A primary source of facts and analysis is Center for Economic and Policy Research (Dean Baker and Mark Weisbrot) including clear proof in economists’ language that private accounts will not yield greater returns than the SSTF. — www.cepr.net

Paul Krugman has written excellent op-eds in the NYT, especially on the theme that any future crisis is not a social security crisis but a federal budget crisis. A longer piece of his pulls all his arguments together — http://www.bepress.com/ev/vol2/iss1/art1.

The November-December issue of Dollars and Sense has a number of good articles on social security. See http://www.dollarsandsense.org/current.html. The article by Doug Orr includes arguments that are rarely made elsewhere (quoted in this report).

Finally, my article on Greenspan provides background on how we ended up with a big surplus in the trust fund. I like the article, but perhaps I am biased. http://www.pww.org/article/articleview/5102/1/211

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