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In our last installment, "Social Security Reform: The
Latest" (ACCESS PRESS September 1998), we said that Rod Grams seemed
"pretty excited about Social Security reform." That was an understatement.
On October 6th, Senator Grams introduced in the Senate a bill that would
almost entirely privatize the Social Security system, and he has promised
to hold meetings in each and every county in Minnesota over the next
five months to discuss his plan. Then on October 24th, President Clinton
announced the first-ever White House Conference on Social Security,
to be held on December 8th and 9th and that is intended to lead to a
"bipartisan solution early next year."
So it looks like some sort of "solution" may be on the
way. Unfortunately, all of the solutions put forth so far from either
party accept the market as the ultimate solution. That is bad news for
people with disabilities and for the majority of workers in the United
States. This article will help you make sense of the debate so you can
talk to Minnesota's junior Senator when he comes to your county.
Impact on people with disabilities
Senator Grams' bill is known as S. 2552, the "Personal
Security and Wealth in Retirement Act of 1998." He refers to his plan
as a "market-based personalized retirement system." We'll call it "privatization,"
since it essentially would privatize the entire system. That is likely
why he uses the term "Personal Security" rather than "Social Security."
By further labeling it "Wealth in Retirement," it makes one suspect
that the interests of survivors and people with disabilities are a low
priority in his bill. A closer look shows that to indeed be the case.
The Social Security program is officially called the OASDI
or "Old Age, Survivors, and Disability Insurance" Program. "Old Age"
is the retirement part. But almost 4 in 10 Social Security recipients
each year are disabled workers or the dependents or survivors of disabled
or deceased workers; that's the "SDI" in the OASDI program. No privatization
plan provides good death or disability protection, and there's a reason
for that: Workers who die or become disabled at a young age haven't
had time to save enough in their personal accounts to support themselves
or their dependents.
In 1996, over 20% of people newly awarded disability benefits
were under age 40. We all know that bad luck can change any of us from
taxpayer to recipient in a heartbeat. That's why our current system
of social insurance is universal; by including everyone in the system,
both the costs and the risks are spread among the largest possible number
of people. And, since everyone pays in and everyone is protected, there
is no way to "shift costs" or "skim off" the lowest risk individuals,
as private insurance companies and HMOs often do.
A system of private accounts is not the same at all. Senator
Grams' plan calls for the managers of the private accounts to use the
balance in those accounts to purchase disability insurance for each
account holder. But private disability insurance is expensive, and it's
complicated to administer. A study done on this subject this past July
by the National Academy of Social Insurance had this to say on the subject:
"If purchased privately, the design of [disability insurance] could
not match the social insurance features [of the public Social Security
system] that pay different amounts to otherwise similarly situated workers
based on whether they had small children or a spouse."
It's true that Senator Grams' plan requires that the
private fund manager purchase disability insurance sufficient "to at
least match the promised Social Security survivors and disability benefits"
of the current system. But he indirectly acknowledges the unreliability
of the market when he says, "If a worker dies or becomes disabled and
his or her [private account] doesn't accumulate sufficient funds in
order to provide the minimum survivor and disability benefits, the Government
would match those shortfalls." [emphasis added] And it would match them
using funds from the U.S. Treasury.
So, oddly enough, Senator Grams "privatization" plan would
need to draw funds from the Treasury, presumably increasing the federal
deficit, in order to guarantee the same level of benefits that the current
system already provides. And the current system has never had a deficit.
Under the privatized Social Security system in Chile, a system admired
by Senator Grams, similar government guarantees are putting serious
strains on the federal budget.
One thing seems almost certain: The high costs of purchasing
the required disability insurance in the private market will eat up
a large percentage of everyone's retirement account, resulting in a
very much reduced pension benefit for all non-disabled retirees. Thus,
such a plan may needlessly create a perception of competition for funds
between people with disabilities and retirees, where none exists today.
The Economics of Social Security
Reform
"There is no doubt that a market-based retirement system
will generate much better returns than the traditional Social Security
system we have today," says Senator Grams. Actually, there is a lot
of doubt on this point, but the main thing to remember in this regard
is that Social Security is a system of insurance, not investment. Therefore,
people who focus on "return on investment" display either a fundamental
misunderstanding of the system, or have an intent to mislead. Having
said that, here are some facts that cast doubt on these "higher returns."
As I explained in the September ACCESS PRESS, over the
long haul the market cannot do better than the overall economy. This
means that the bleak projections for the overall economy which give
rise to talk of a Social Security funding "crisis" are the same projections
that give the lie to promises for high market returns over the same
period. In other words, if the market does well, so does the Social
Security system. And if there really is a problem with Social Security
funding, then the market has the same problem, because they're both
based on the performance of the underlying economy. That's all you need
to know about the"higher rate of return" argument. But there are many
other problems as well. For example:
- Overhead. Of every dollar in Social Security taxes you pay,
over 99 cents goes to pay benefits, meaning that the administrative
overhead for the public system is less than one percent. For a private
system, costs are much higher. Why? Unlike the public system, any
private system would include commissions, fees, transaction costs,
and profit. So, while privatizers promise market returns of about
7 percent, and more realistic projections say that 4or 5 percent is
likely, the return that you would actually receive after costs are
deducted would be substantially lower than that. Maybe in the 2 to
3 percent range. Also, since many of these fees are charged at a set
rate, the smaller accounts held by low-wage earners will pay proportionally
more in fees than those with larger accounts, reducing those returns
still further.
- Fraud. On October 19th, the chairman of the Securities and
Exchange Commission, which is the federal commission in charge of
regulating financial markets, had this to say about private Social
Security accounts: "If we are to have self-directed individual accounts,
we must be ready to undertake an unprecedented level of broad-scale
policing of the equity [i.e. stocks and bonds] markets. Without such
policies, fraud and sales practice abuses may be perpetrated against
an army of novice investors. And many of those novice investors are
our society's most vulnerable citizens." Who knows how much this would
cost? (There has been no significant fraud in over 60 years with the
current system.)
- Oversight. Unlike traditional Social Security, each account
holder in an individual system would want (and need) to monitor the
performance of their portfolio. That means that millions of people
who don't have to think about their Social Security income under the
current system would have to educate themselves about the market and
then spend many hours managing their accounts. Assuming that these
hours could be productively spent doing something else, that would
be a large, if hidden, cost that could add the equivalent of billions
of dollars per year to the costs of the system.
- Insurance. Senator Grams' legislation requires fund managers
to guarantee some minimum return on accounts. This would probably
be done through insurance, and that costs money. Our current system
doesn't need to buy insurance - it is insurance.
You may have noticed that there are two categories of
costs and risks involved in a system of social security. One is the
risk that each individual faces in setting aside money for a rainy day.
Market downturns, fraud, errors, inexperience, bad luck all of these
are risks to be faced by the majority of individual Americans who would
be "novice investors."
But the other category is entirely different. These are
the costs and risks shared by the society as a whole. These costs and
risks are often not seen by the "average" person, but they are very
real. The costs of regulation referred to by the SEC chairman, as well
as the costs of insurance, marketing, sales, and other costs associated
with a competitive private system are costs that you wouldn't necessarily
be aware of, but which would nonetheless drain funds from the system.
In the private market, industries often can increase their
profits by getting somebody else to pay a part of the costs involved
in doing business. For example, the petroleum industry increases its
profits by getting the government to pay for part of the costs of cleaning
up after major spills such as the Exxon Valdez. This is called "externalizing"
costs. What does this have to do with Social Security reform? Everything.
Markets and Societies
If we were to suddenly replace the current pay-as-you-go
public system with a private system, and the underlying economy performed
as expected, then the overall costs to the system would be higher, as
explained above. More money within the system would thus be going to
something other than paying benefits. So, overall, we'd be worse off.
Yet privatizers often claim that the average return on investment would
be higher under a private system. How could the system as a whole be
worse off and the average return be higher? Simple, if you understand
the difference between a market and a society.
First of all, a key word is "average." If most people
are worse off but a few people are much better off, the overall average
may well be higher. That's how a market is. It has winners and it has
losers. A society does, too, but with one key difference: In a market,
the losers simply go away, and the money that they have lost goes to
the winners. In a society, there is nowhere for the losers to go.
A "market-based personalized retirement system," such
as Senator Grams and many others envision, would "externalize" as many
costs as possible. The costs of regulation and the costs to each household
of overseeing their investments, for example, would be invisible within
this system. Most crucially, the system would externalize the costs
of supporting its inevitable losers. But who will pay the costs of supporting
them if the Social Security system doesn't? As Senator Grams said, "The
Government would match those shortfalls." That is, they would fall back
on some sort of public assistance, or welfare. Look again at Chile,
where many thousands of such marketplace "losers" are falling back on
the government for support. When confronted with this problem, the architect
of that system said, "That's not a pension issue. That's a welfare issue."
True enough, but it still means higher taxes or bigger deficits in either
case. Just like it would here in the United States.
More, not less
Senator Grams claims that his plan would increase benefits
without raising taxes or increasing the deficit. Does that sound too
good to be true? It is. And the sad truth is that the "liberal alternatives"
to privatization all call for reducing the current none-too-generous
benefits through raising the retirement age, reducing cost-of-living
adjustments, or other technical changes.
The reality is that the value of Americans' personal savings
and private pensions, both of which are supposed to supplement Social
Security's minimal benefits, are going down. What we should be doing
is expanding and strengthening the Social Security system to address
this problem, not cutting it back or replacing it with some pie-in-the-sky
plan. But the rhetoric about a false crisis has made it all but impossible
to talk about anything but cut and slash.
It would not be that hard to maintain current benefit
levels for the next century. To do so, we would have to raise taxes
gradually, for a total increase of about 1 percentage point each for
workers and their employers. Can we afford that? If overall wages continue
to go up at even a very modest level of 1% per year, such a tax increase
will still leave take-home wages in the year 2030 more than 25% higher
in real terms than they are today. That sounds affordable.
What is not affordable is to put our most vulnerable workers
at the mercy of the market, and S. 2552 is the most extreme version
of this solution yet put forward. A strong, public system of Social
Security is the best hope for people with disabilities, and for the
majority of American workers and their families. Let's not create a
real crisis because we are afraid of a false one.
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