The Fate of Social Security
By Michael Eisenscher & Peter Donohue
It was a slow news day, just before a major holidaya good time to release politically sensitive or potentially embarrassing news. Buried in the innards of the December 30 national edition of the New York Times (p. A-9), was a report by Leslie Wayne entitled "Interest Groups Prepare for Huge Fight on Social Security." It paints a troubling picture of the prospects for defending the Social Security system against the greedy ambitions of Wall Street bankers, insurance executives, and securities firms. The report begins by proclaiming there is a "broad consensus that the Social Security system needs reform..." and marks the center of the debate not just over whether Social Security should be privatized (the article all but assumes it), but over the degree and manner of privatization.
The Cato Institute, a libertarian "think tank" in Washington, has a $2 million war chest provided by business donors to fund a 3-year campaign to dismantle the present Social Security system. They hope to panic people with much talk about a looming "crisis" in the Social Security trust fund, while pushing their "free market" solutions. Apparently they calculate that the new Congress and Clinton can be relied on to deliver the goods if enough noise can be made, misinformation generated, and popular confusion created. Cato advocates that all the Social Security funds be made available for each individual worker to invest in the stock and bond market as she or he determines. According to the Times report, this would provide $400 billion annually (the value of annual SSA payroll taxes)$2 trillion if the whole fund is investedfor market speculation.
Is there a "crisis"? Not hardly. The Social Security trust fund currently runs a surplus of over $60 billion per year. Based on current projections there are sufficient reserves in the trust fund to cover all retirees until 2029. In 2012, as the baby boomers begin to retire, benefit payouts will start to exceed taxes collected. This means that the Social Security Administration will have to draw on interest earned on the fund to cover benefits. In 2019 benefit payments will exceed taxes collected and the fund will have to start drawing down its reserves. By 2029 the trust fund would be depleted, at which point FICA taxes collected would only cover about 77 percent of benefits due. Dean Baker, an economist and policy analyst at the Economic Policy Institute (EPI), cautions that inaccurate assumptions about demographic changes, productivity, inflation, and wages can produce unrealistic and overly pessimistic projections about the viability of the trust fund.
Social Security fund trustees report that the gap over the next 70-plus years amounts to 2.2 percent of the taxable U.S. payroll. Linda Stern, commenting in Modern Maturity, observes that covering that shortfall entirely today would mean raising the present FICA employee/employer tax from 12.4 percent to 14.6 percent, or reducing benefits by 15 percent. But we dont have to cover it all immediately, and there are many other ways to generate revenues to assure the adequacy of funds in the next century. Even by the most pessimistic scenarios, a FICA tax increase on employees and employers of just 0.05 percent each per year between 2010 and 2046 (total of 3.6 percentage points) would be sufficient to maintain current benefits into the foreseeable future. The growth rate of the U.S. economy over the past 20 years averaged 2.8 percent per year; it is conservatively projected to be 1.8 percent over the next 20 years and then drop to 1.4 percent or less. A slightly more optimistic projection would require an even smaller FICA tax adjustment.
An Advisory Council on Social Security was named by Clinton in 1994, composed of 13 members, including: Robert Ball, a former commissioner of Social Security; Sylvester Schieber, from Watson Wyatt Worldwide, a benefits consulting firm; Fidel Vargas, described as a California policy analyst, appointed purportedly to represent "Generation-Xers;" and chair Edward Gramlich, professor of economics at the University of Michigan. Ball, Gramlich, and Schieber each have proposed their own set of reforms, which have become the focus of the Councils deliberations. The Council went public with its proposals (none of which mustered a majority) on January 6.
The prospect of gaining access to the trust funds has Wall Street practically delirious. The mutual fund industry, and such venerable brokerage houses as Merrill Lynch, have teamed up with the National Association of Manufacturers and other corporate interests to steamroll the privatization initiative, with differences between them only over the details of privatization. On one point they seem to concurthey want to keep the federal Government from having any influence over how Social Security funds are invested. At present, the funds are invested exclusively in interest-bearing government securities (usually held to maturity), backed by the "full faith and credit" of the federal government.
With such powerful capitalist forces eager to take a whack at the program that has represented a sacred covenant between government and the American people for six decades, one would expect that the AFL-CIO would be mobilizing its troops for a determined defense of what has been the last relatively unscathed remnant of the New Deal system. Well, not quite.
While it opposes conversion of the Social Security trust fund into a forced savings plan in what amounts to individual retirement or 401(k) accounts managed by each worker, the AFL-CIO declared its readiness to accept investment of up to 40 percent of the trust fund in publicly traded stocks and bonds (the Ball plan). This from no less prominent a voice than Gerald Shea, director of the Governmental Affairs Department of the AFL-CIO, lieutenant to John Sweeney, and one of the three labor members of the Advisory Council. Shea promises a major labor campaign to prevent full privatization, but he concedes a large chunk of the political argument in advance by describing the battle as between "those who see that Government has a role in Social Security and those who believe it should have none." This neatly side-steps the fact that the government, for six decades, has had the role, not just a role, and the AFL-CIO seems prepared to give that ground without even a struggle.
The Cato gang argues that they dont want government determining where Social Security funds ought to be invested because it would give the government influence over the decisions and practices of private corporations. It is conceivable that government could end up owning as much as 10 percent of the shares of major corporations, making the public the largest single stockholder and enabling government to potentially exercise significant influence over corporate policies. Gerald Shea points out that this could have a potentially "good effect on how corporate America operates." One argument for allowing investment of some portion of the trust fund in the market is that government could then exert significant influence on how corporations do business, requiring them to be more socially responsible. This, of course, drives the Cato clique and their corporate cronies right up a wall. But Shea abandons the advantages of constructive government influence by accepting the proposition that government should have only a passive investment role.
Assuming, for sake of argument, that the federal government could (through public pressure campaigns) be induced to exercise its investment clout to oppose the rapacious practices of corporations in matters such as capital flight, disinvestment, export of capital and jobs, technological change, environmental and occupational health practices, sustainable development, and other corporate decisions, that opportunity is foreclosed if the government only invests in passive stock-index funds, regardless of how many shares the government holds. So that argument in favor of government-directed partial privatization goes right out the window. Much like ESOPs in which employees are pressed to make concessions in return for stock but are barred from exercising stockholder rights to influence their employers policies, the government would become a passive (second class) investorproviding the money but gaining none of the influence other major shareholders exert. The Social Security trust fund would become Wall Streets piggy bank, no strings attached. There would be no restriction on how corporations use these funds.
Absent such accountability controls on how government funds are invested, newly available investment capital could easily be used to finance the next wave of overseas investment, mergers, buyouts, and acquisitions, leading to closures, further down-sizing, job-displacing and deskilling automation, and other job-killing and environment-destroying practices (as well as providing additional resources in capitals battle against unions). That would amount to a "free ride" for capital. Unrestricted by any requirements for socially responsible investing (however one understands that), workers could find their Social Security taxes being invested against their own interests.
At present the Social Security system has an administrative cost that is just 0.7 percent of benefits paid out. EPI notes, by contrast, the operating costs of the life insurance industry exceed 40 percent. The operating cost of Chiles privatized retirement system (held up as an example by the free marketeers) runs close to 15 percent. Aside from added risk, investment of even 40 percent of the trust fund in stocks and bonds would subject the fund to a much larger administrative cost, while rewarding Wall Street traders with a bonanza of fees and commissions. Little wonder the investment firms are so eager to push these reforms.
In The "Long Run," Were Dead
Some argue that, over the long haul, the stock market consistently outperforms Treasury bonds, and that it makes no sense for the Social Security trust fund to forego the opportunities for a greater potential return that could be secured through investment in the market. For those who buy this "over the long run" argument about higher market returns, imagine yourself in the 1920s during a boom market that seemed to go endlessly up and ask yourself: What good was the "long run" to those who retired in the 1930s? Are you ready to accept the odds that the market will perform in the next 75 years as well as it has in the last 75?
According to EPIs analysis, given that future growth is unlikely to replicate higher past growth, the only way for the stock market to maintain its past record of about 7 percent inflation-adjusted return on investment is if the price-to-earnings (P/E) ratio of stocks soars to unprecedented levels. (The P/E is the ratio of the price of a stock to the amount of corporate earnings per share, a common measure of stock values.) They note, "If the growth projections used for Social Security are accurate, then to generate 7 percent returns the P/E ratio in the stock market will have to rise to over 60 to 1 by 2030. It will have to rise to 460 to 1 by the end of the planning period in 2070. By comparison, the P/E ratio now stands at 22 to 1, a record high."
By most accounts we are at or near the top of the market, a time when share prices are artificially inflated by speculation. Privatizing Social Security now means buying into the market at its highest prices on the assumption it will continue to rise. A wise investor buys cheap and sells dear, but the privatizers would turn that advice inside out, allowing Wall Street to reap a sweet reward at the expense of working people. The volatility of the market is one indicator that it may not take much to burst the speculative bubble.
Dumping billions of dollars into the market has yet another effect. Removing 40 percent of the SSI trust fund from the federal debt market (government securities) would have the same effect as if the trust fund dumped Treasury bonds. Their prices would be depressed, pushing interest rates up. Treasury bonds are widely held, especially by banks and other lending institutions, as part of their required reserves. The result would be to depress the value of those reserves, reducing their ability to make loans, pushing interest rates up as borrowers bid for increasingly scarce loanable funds. As interest rates climb the cost of servicing the Federal debt will also rise. Municipalities needing to raise capital for local improvements or infrastructure development (roads, schools, sports stadiums, water treatment plants) would be forced to pay higher interest rates and accept lower prices for their tax-exempt municipal bonds. Where do you suppose funds will be obtained to meet the higher cost of debt service?
Was there a quid pro quo obtained by the AFL-CIO in return for its support of the 40 percent privatization option? During Clintons first term the Federation banked on the Dunlop Commission for major worker-friendly reforms of the laws governing the right to organize, bargain, and strike. What it got was a tepid report that waltzed around the central issuethe enduring animosity of employers to worker self-organization in autonomous democratic unions. It recommended Band-Aids where surgery was needed, and offered in the bargain proposals to dramatically weaken one of the few remaining protections of the original Wagner Act, the Section 8(a)(2) ban on company-dominated labor organizations (in the name of flexibility, efficiency, and productivity, naturally). This provided aid and encouragement to a mounting employer offensive to repeal 8(a)(2) that surfaced in the form of the TEAM Act, saved from enactment only by Clintons veto. No one seriously believes there is any hope a deal can be cut for meaningful labor law reform from this Congress (whether to protect strikers or help workers organize). Any confidence that a deal to privatize Social Security in return for a pledge of future action to meaningfully strengthen union and worker rights is a form of serious delusion. Furthermore, in a deal gone sour, who would trust lame-duck Clinton (a president who never met a corporate donor he did not like) to veto Wall Streets privatization scheme?
If all the potential pitfalls outlined above could be somehow dealt with, and if government were allowed to exercise its influence over investments to induce more responsible worker/environment-friendly corporate practices, and if the labor movement and its allies were able to force government to actually exert that influence in their behalf, an argument might be made that partial market investment is not inherently a bad thing and is a reasonable way to solve the 21st century funding problem. Well, thats a lot of "ifs."
Local unions, labor councils, state federations, workers rights advocates, the Labor Party, seniors organizations, and anyone else concerned with the fate of Social Security should express their opposition to the Federations readiness to accept passive private investment, as well as the even more extreme individual investment proposals, as a solution to Social Securitys expected shortfall (which is not projected to occur before 2019). We should demand that the AFL-CIO defend the Social Security system.
The American Association of Retired Persons (AARP), with millions of members and a formidable lobbying operation, has taken a position in defense of the current Social Security System. AARP argues that there is no present crisis and that any deficiencies in funding in the next century can be addressed without converting the trust fund into individual investment accounts or having the government invest speculatively in the stock market. (AARPs position is explained in the January-February issue of Modern Maturity, the organizations magazine.)
If, as is argued, the trust fund needs fixing, the fix should be consistent with its essential missionto provide a safe and secure retirement income and safety net for the nations workers and their families. The AFL-CIO ought to be arguing that any new money needed should come from capital, not through speculation at the expense of workers security.
One does not have to be an economist to come up with ideas for beefing up the fund that dont put workers benefits at risk. For example, at present FICA taxes apply only to the first $65,400 of income on which the employee and employer each pay 6.2 percent. Why not tax all income? High income wage earners could be allowed to invest that portion of their FICA taxes contributed on incomes above $100,000 in stocks and bonds as they see fit. If they want to gamble and lose, the trust fund is not put at risk. Only their own accounts would be affected, and even then only that portion accrued from taxes on high earnings. Additional revenue could also be derived if other forms of income received by the wealthy, like dividends and interest, were subject to an additional tax to support the SS trust fund.
Labor Needs Own Program
The point is that the AFL-CIO should be putting together its own program of reforms, a worker/senior-friendly set of alternative proposals. It could join with AARP in appointing their own "blue ribbon" committee, inviting friendly academics and other specialists to help labor design a truly progressive set of reforms that become the centerpiece of a massive national campaign. Working with groups that share labors concerns, a powerful voice could be created that Congress and the President would have a hard time ignoring. There should be little doubt that an effective campaign could be mounted, particularly if organized labor really mobilizes its members rather than relying on traditional lobbying methods. Clinton himself saw the potency of the issue and was able to win substantial popular support distinguishing himself from the Republicans during his reelection campaign after he spoke out clearly in defense of Social Security and Medicare. By offering effective leadership, the labor movement could rally the American people to its position, provided that position is not so compromised that workers see it as just another variant of the "free market" privatization scheme. If organized labor acts more like a popular social movement and less like an inside-the-beltway special interest it can beat the right on this issueand establish itself in the minds of organized and unorganized workers alike as a partisan advocate for their interests. Not only will it win this battle, but it will cause unorganized workers to look upon unions in a more favorable light, which can only be a good thing for labors efforts to rebuild its membership, political influence, and bargaining clout.
Michael Eisenscher is a consultant to unions and community organizations, and a doctoral candidate in Public Policy at the University of Massachusetts-Boston; Peter Donohue has a PhD in economics and is a consulting economist who works exclusively with unions and community groups. He has extensive experience in the labor movement and as a labor educator.