SOCIAL SECURITY
SOCIAL SECURITY
Massive Benefit Cuts
The real impact of President Bush's Social Security privatization scheme: massive cuts in promised benefits. The White House is expected to propose a new system of calculating Social Security benefits called "price indexing." The technical change would mean "cutting promised benefits by nearly a third in the coming decades" – with even deeper cuts in the future. For example, if the "price indexing" change is made, "a retiree in 2075 would receive 54 percent of the benefits now promised." David C. John, a Social Security expert at the conservative Heritage Foundation called the proposal "very much like sticking your hand in a wasp nest."
WHAT IS PRICE INDEXING?: The current method of calculating Social Security benefits is adjusted to reflect the standard of living when a person retires. That means when your benefits are calculated based on your average earnings, the salary you made 25 years ago is adjusted upwards to reflect the overall rise in wages (wage growth) since that time. The "price indexing" plan, expected to be proposed by Bush, would make that adjustment based on the rise of consumer prices – essentially the inflation rate. Since wages rise much faster than inflation, that means your newly adjusted salary will be lower. The end result is far lower benefits for every new generation of retirees. If this system had been in place since Social Security's inception, people today would be retiring with a benefit tied to the living standard of the 1930s, when 40 percent of households lacked indoor plumbing.
THE DIRTY LITTLE SECRET OF PRIVATIZATION: Bush's plan for private accounts is being sold as a plan for younger workers to benefit from the higher returns of the stock market. Don't believe the hype. The private accounts are actually a mechanism for younger workers to recover a small fraction of the money they lose from price indexing. For example, if price indexing is adopted "a 20-year-old just entering the labor force would lose 34 percent of his or her expected benefits. This would amount to almost $134,000 over a lifetime of retirement. But the private accounts proposed by Bush would give that 20-year-old "a chance to gain back, on average, about $47,000." That is assuming the market doesn't go south (as it just did from 2000-2002). So the question for younger workers is not whether they want private accounts. It's whether they want a huge cut in guaranteed benefits in exchange for a chance to gain back a fraction in the stock market.
THE TRUTH ABOUT THE TRUST FUND: With all the clamoring about Social Security, a simple fact has been obscured: the Social Security budget is currently running a surplus; "as a result, Social Security has a large and growing trust fund." Die-hard privatizers dismiss this trust fund as "meaningless i.o.u's." In today's New York Times, however, Paul Krugman points out this distorts how the Social Security budget – which is legally separate from the rest of the budget – works. Krugman explains: "The bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund." According to the non-partisan Congressional Budget Office, with no changes whatsoever in the current system, the trust fund is in good shape until at least 2052. To put that in perspective, in 2052, Paris Hilton will be 70 years old. In other words, there is no real crisis. (For more on Social Security's financial future, see this American Progress report by Christian Weller and Terri Shaw.)
THE COST OF PRIVATIZATION: President Bush and his right-wing allies are trying to mislead the public about the cost of privatization. Funding private accounts costs $2 trillion because the government has to replace the money that is diverted from the trust fund into individual accounts to pay benefits for current retirees. White House Press Secretary Scott McClellan claims, "The cost is $10 trillion if we do nothing. So what you're talking about would be a significant savings over those costs." There are two problems with this argument. First, the $10 trillion figure grossly distorts the modest long-range deficit of the Social Security program by projecting that shortfall over eternity. (There is no shortfall at all until 2052. Projections beyond 2052, obviously, are extremely unreliable.) Second, and more fundamentally, "borrowing $2 trillion to fund individual accounts does nothing to reduce Social Security's long-term deficit." Under the Bush plan the long-term deficit is reduced exclusively through deep benefit cuts.
Massive Benefit Cuts
The real impact of President Bush's Social Security privatization scheme: massive cuts in promised benefits. The White House is expected to propose a new system of calculating Social Security benefits called "price indexing." The technical change would mean "cutting promised benefits by nearly a third in the coming decades" – with even deeper cuts in the future. For example, if the "price indexing" change is made, "a retiree in 2075 would receive 54 percent of the benefits now promised." David C. John, a Social Security expert at the conservative Heritage Foundation called the proposal "very much like sticking your hand in a wasp nest."
WHAT IS PRICE INDEXING?: The current method of calculating Social Security benefits is adjusted to reflect the standard of living when a person retires. That means when your benefits are calculated based on your average earnings, the salary you made 25 years ago is adjusted upwards to reflect the overall rise in wages (wage growth) since that time. The "price indexing" plan, expected to be proposed by Bush, would make that adjustment based on the rise of consumer prices – essentially the inflation rate. Since wages rise much faster than inflation, that means your newly adjusted salary will be lower. The end result is far lower benefits for every new generation of retirees. If this system had been in place since Social Security's inception, people today would be retiring with a benefit tied to the living standard of the 1930s, when 40 percent of households lacked indoor plumbing.
THE DIRTY LITTLE SECRET OF PRIVATIZATION: Bush's plan for private accounts is being sold as a plan for younger workers to benefit from the higher returns of the stock market. Don't believe the hype. The private accounts are actually a mechanism for younger workers to recover a small fraction of the money they lose from price indexing. For example, if price indexing is adopted "a 20-year-old just entering the labor force would lose 34 percent of his or her expected benefits. This would amount to almost $134,000 over a lifetime of retirement. But the private accounts proposed by Bush would give that 20-year-old "a chance to gain back, on average, about $47,000." That is assuming the market doesn't go south (as it just did from 2000-2002). So the question for younger workers is not whether they want private accounts. It's whether they want a huge cut in guaranteed benefits in exchange for a chance to gain back a fraction in the stock market.
THE TRUTH ABOUT THE TRUST FUND: With all the clamoring about Social Security, a simple fact has been obscured: the Social Security budget is currently running a surplus; "as a result, Social Security has a large and growing trust fund." Die-hard privatizers dismiss this trust fund as "meaningless i.o.u's." In today's New York Times, however, Paul Krugman points out this distorts how the Social Security budget – which is legally separate from the rest of the budget – works. Krugman explains: "The bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund." According to the non-partisan Congressional Budget Office, with no changes whatsoever in the current system, the trust fund is in good shape until at least 2052. To put that in perspective, in 2052, Paris Hilton will be 70 years old. In other words, there is no real crisis. (For more on Social Security's financial future, see this American Progress report by Christian Weller and Terri Shaw.)
THE COST OF PRIVATIZATION: President Bush and his right-wing allies are trying to mislead the public about the cost of privatization. Funding private accounts costs $2 trillion because the government has to replace the money that is diverted from the trust fund into individual accounts to pay benefits for current retirees. White House Press Secretary Scott McClellan claims, "The cost is $10 trillion if we do nothing. So what you're talking about would be a significant savings over those costs." There are two problems with this argument. First, the $10 trillion figure grossly distorts the modest long-range deficit of the Social Security program by projecting that shortfall over eternity. (There is no shortfall at all until 2052. Projections beyond 2052, obviously, are extremely unreliable.) Second, and more fundamentally, "borrowing $2 trillion to fund individual accounts does nothing to reduce Social Security's long-term deficit." Under the Bush plan the long-term deficit is reduced exclusively through deep benefit cuts.
posted by T. Scott Brineman at 8:39 AM
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