This Week:

Quote of the Week

Website(s) of the Week

The Power of Business (includes bonus “Quote” of the Week)

The Debate That Could Dominate the Presidential Campaign: Social Security Reform 2000

Greetings,

After a long silence, this week I break down and talk once again about Social Security. It’s a huge subject about which I have written extensively over the past few years. I haven’t said much about it lately, since I didn’t think it would be “on the agenda” during the presidential campaign. My thinking was that, since it is the most popular program in the history of the United States, talking about destroying it might be verboten for the mainstream candidates. Wrong. I once again underestimated how far to the right this country has shifted. So this week I publish the first of what I imagine will be a few articles during the coming weeks about Social Security “reform.”

Speaking of drifting far to the right, I haven’t even mentioned the legislation being pushed by Minnesota’s own Senator Rod Grams, which ranks as one of the most extreme proposals going. That deserves its own special issue of the Notes, and I will get to that in the next few weeks also.

Please do not get the impression that I fully support the Social Security system as it is. I don’t. It is a very limited and inadequate system. It’s just that most of the ideas for “saving” it would make it so much worse! For my vision of the sort of system we should have, readers may want to peruse my article in the April 1999 issue of Z Magazine. Or visit the Nygaard Notes website and check out issues 6 and 11.

For now I will limit my focus to the Social Security issue as it comes to us through the major media. This is, after all, where most people get their (often cockeyed and/or wacky) ideas about the issue, so it seems like a good place to start.

In solidarity,

Nygaard

"Quote" of the Week:

“Social Security is the single most successful government program in American history.”

- George Bush, announcing his plan to begin dismantling the program.

Website of the Week:

Are you concerned about the fact that our children can identify many more corporate logos than native plant species? Then you may want to visit the website of a very interesting group called The Center for Commercial-Free Public Education. It’s a good site for educating yourself on the insidious invasion of corporate power into the supposedly public spaces that are our schools, giving information on the nature of the beast, and specific ideas for action that YOU can take to turn things around. It’s a membership organization, so you can join up and help them with their good work. For some morale-boosting reading about successes from Oklahoma to New York, check out their section called “News and Achievements in the Fight for Commercial-Free Schools.” This site should be of interest to you if you are a student, if you have kids, if you ever were a student, or if you care about the generations coming up who are going to eventually run your life. (Does that cover everybody?) Check them out at http://www.commercialfree.org/index.html.

Thanks to Spokane reader R. Olson for tipping me off to this site.

The Power of Business

I salute the Star Tribune (Newspaper of the Twin Cities!) for running an excellent, if profoundly sad, story on the front page of the May 25th edition. The headline read, “Town Is Losing the Reason It Was Born,” and told the story of the closing of the iron mine that had supplied 1,400 jobs in town of Hoyt Lakes Minnesota, which has a total population of only 2,300 people. The article gave a glimpse of the devastation that a corporate decision can have on an entire community. In this case, the corporation is the multinational LTV Steel Company, with assets of $5 billion and operations on five continents.

“In a nutshell, this is the most devastating thing to ever happen to this town,” said Doris Kopp, who works at a local grocery store. Paul Maki, an 18-year employee at the plant, spoke of his hopes that some other company might buy the plant and keep it running. “I’d like to stay here,” he said. “I’d like to think that someone could do something to retain 1,400 jobs. You’d think they’d do everything possible to save that.” Paul Thies, a 12-year veteran worker, said, “Somewhere along the line, I would think the state or somebody would intercept it. I can’t believe it will actually shut down.”

I have been accused of being in favor of “big government” at times, because I speak in support of such things as Social Security, welfare, and even the paying of taxes. What I am really in favor of is that “somebody” to which Thies referred. In my vision, we would develop an economy that is profoundly democratic, and focused on the well-being of the people who live in communities like Hoyt Lakes. In that world, the “somebodies” making the decisions would be the people affected by them, and not the “somebody” in the LTV office in Cleveland who made the decision to tear the heart out of Maki and Thies and everyone else in Hoyt Lakes. That “somebody” is responsible only to the stock market.

Also on May 25th, the Star Trib ran an article on the LTV plant closing in the Business section. This article was speaking, as the Business pages usually do, of the simple economic rationale for corporate behavior. If you were to read all the way to paragraph number 28 (out of 30) you would find our bonus “Quote” of the Week. Referring to LTV’s decision to throw an entire community onto the unemployment rolls, the report pointed out why the decision was made and why it will not be changed:

“...Wall Street analysts considered the announcement positive news for LTV...”

That’s the power of business.

The Debate That Could Dominate the Presidential Campaign: Social Security Reform 2000

Last week George W. Bush brought up the issue of Social Security reform. His speech lacked sufficient detail to be called a “plan” but, whatever it was, the Star Tribune (Newspaper of the Twin Cities!) said that it “began a debate that could dominate the presidential campaign.” So I figured I should say a word or two about it.

Before I even mention what Mr. Bush said, it is important to briefly state what the Social Security program aims to be and what it is. Only with this information can we evaluate what it is that Mr. Bush wants it to be, which is something quite different. A warning: The “conventional wisdom” about Social Security reform is so different from the facts that my stating of the facts may make me seem to some like a madman. But facts they are, so damn the torpedoes and full speed ahead.

What is Social Security?

Social Security pays monthly benefits that replace, in part, income from wages lost when a worker retires, becomes disabled, or dies. Benefits are paid to the worker and to family members who relied on the lost earnings. Nearly 1 in four American households receives income from Social Security. Beneficiaries include: 28 million retired workers; 5 million widows and widowers; 5 million disabled workers; 3/4 of a million adult children of deceased, retired, or disabled workers; and 3 million kids whose parents have died, become disabled, or retired. For all but the highest 20 percent of the elderly, Social Security is the largest single source of income, and it provides more than half of all the income received by 2 out of 3 beneficiaries.

My SS payroll taxes this year go to pay for benefits to people this year. The benefits I receive later will be paid by workers who will be working at that time. This is called a “pay-as-you-go” system, and it is pretty standard for an insurance program, which is what the Social Security program was intended to be, and more or less is. Insurance companies do not hold on to your premiums and then give them back to you when you need them; they invest your, and everyone’s, premiums and only pay out claims when someone needs it. Just like Social Security.

An insurance program is fundamentally different from a pension program, where everyone who pays in gets something back. Pension programs are much more similar to bank accounts than to a pay-as-you-go insurance system. In the typical pension system, money is set aside for an individual until that individual draws out that money (plus interest or other accumulations) upon retirement.

Understanding the distinction between insurance systems and pension systems is crucial to understanding the current debate.

The Baby Boomers

In anticipation of the retirement of the famous “baby boomers” the SS program began in the mid-1980s to collect more money than it needed to collect for payment of current benefits, thus adding a “pension-like” aspect to what had been a purely pay-as-you-go system. The plan was to store up enough extra money that it could be invested and later used to help pay the increased costs of the boomers’ retirement. This created what is now known as the “Trust Fund.” The law requires that this Trust Fund money be invested in the safest place in the world, since so many millions are counting on it being there when they need it. The safest investment in the world, as any investor will tell you, is U.S. Treasury Bonds, so that’s where the funds are invested. About 20% of our current SS payroll taxes are set aside in the Trust Fund, with about 80% still going to pay current benefits.

Keep in mind that Social Security is still largely a pay-as-you-go insurance program paid for with current payroll taxes, with the Trust Fund being a relatively small part of the program, set up to deal with special circumstances.

Current SS benefits are still entirely paid for by current payroll taxes, but starting in 2015 the system will start using the interest on the T-Bonds to pay some of the benefits. This will go on until 2022 or so, then the bonds themselves will be redeemed and this will keep the program fully solvent until 2037. (Since the youngest baby boomer will have been retired for several years by 2037, the plan to use the Trust Fund to cover the retirement of the Boomers seems to be close to accomplishing what it was set up to do.) After 2037 we will fall back on the payroll taxes being paid at that time, which will only be enough to pay roughly 72% of benefits. This is not “bankruptcy,” as is often claimed, but it would certainly be a problem if we were to allow it to happen.

But why would we allow it to happen? Many adjustments have been made to the program over the years; that’s why the Social Security Trustees do such absurdly long (75 year) projections. So if we wanted to fully fund the program for the entire 75 years by doing nothing but raising the tax rates, we could simply raise the payroll tax by 1.89 percentage points, from 12.4 percent to 14.29 percent.

The idea of maintaining the system by raising payroll taxes is out of the question for “respectable” leaders, however; they say that such a tax would be an unbearable “burden” on future workers. But, as economist Dean Baker told me in a personal communication, if we take into account even the pessimistic projections of future wage levels for American workers used by the Trustees, “the average before-tax wage in 2030 will be 34.8 percent higher than it is now.” As Baker further points out, what this means is that “even after raising taxes by enough to fully fund the program for seventy five years workers [in 2030] would still enjoy an after-tax real wage that is more than 30 percent higher, on average, than workers get at present.” That sounds like my kind of “burden.”

The Trust Fund

Before we go any further, I should say a word about the Trust Fund. Many people say “There is no money in the Trust Fund; it’s just I.O.U.s from the government!” That is quite true. Every bond is, by definition, an “I.O.U.” including Treasury Bonds. The United States government sells T-Bonds and spends the money on a variety of things. But that has nothing to do with Social Security, unless you think the U.S. Government is going to default on its loans, which no serious person does.

I hate to be the one to break it to people, but if you are lucky enough to have a private pension there is no “money” there, either. Nor in your mutual fund, nor, for that matter, in your checking account. You’ll notice that in all these cases, you have no actual “cash.” All you have is “assets.” If everybody tried to withdraw their money at the same time, we would discover that the “money” isn’t there. Where is it? It’s being used for something else. Banks loan out your money in order to earn interest, pension funds invest your money all over the place, and that money you have invested in the stock market is not just sitting in a big box somewhere. It’s being used by somebody to do something (maybe to buy the CEO a summer home in Bermuda).

What Mr. Bush is proposing is the first step in transforming the universal social insurance plan that we now have into a pre-funded personal pension plan. This would be a big change. Would it be an improvement over our current system? For some people, yes, it would. For others it would not. When we look at who those “some people” are, we discover a familiar pattern. That’s what I’ll talk about in the coming weeks.