Worse Than You Thought: Bush's Budget and the Gutting of Social Security
Levinson, Mark
THE ECONOMIC consequences of the worst government in U.S. history are starting to emerge. The number of people living in poverty has increased three years in a row; the share of total income...
...If America's much smaller economy could sustain such a large share of non-workers then, the retirement of the baby boomers is manageable...
...Once the crisis has been established, doubters can be intimidated, and extreme measures, such as cutting guaranteed benefits, can be justified because they can no longer be guaranteed anyway...
...Such levels of debt increase the likelihood of a collapse in financial-market confidence in the government (which many think is already likely even without trillions of dollars of added debt due to needless privatization of Social Security...
...Social Security is not going bankrupt...
...Although the president claimed that beneficiaries with private accounts would be able to bequeath some portion of the accounts to their heirs, this would not be an option for a large number...
...Social Security As outrageous as the budget is, the defining issue of Bush's second term is Social Security...
...They will still enjoy a higher standard of living than we do today, and Social Security will provide a larger real annual benefit for a longer retirement when it is their turn to retire...
...the share of total income that goes to the bottom two-fifths of households has fallen to one of its lowest levels since the end of the Second World War...
...A common claim of doomsayers is that when the baby boomers retire there won't be enough people left working to pay their Social Security benefits...
...There will be smaller future returns...
...Bush originally stated that he would not raise taxes...
...This gap is sufficient to cause federal debt to rise more rapidly than GDP itself, generating a rising debt burden...
...But in each of those years, the expected cost will be relatively modest...
...It also provides disability protection and life insurance...
...For example, no one has explained how Bush's plan would cover disabled workers or surviving family members of deceased workers...
...the person is worse off if the debt grows faster than the investment...
...On top of this, the budget fails to report well-known costs of commitments made by the administration—the borrowing to finance the private accounts in the Social Security scheme, the military missions in Iraq and Afghanistan, plans to build a missile defense system, the upward adjustment ($1.4 trillion) of the costs of the unfunded Medicare prescription drug benefit, and likely cuts in the alternative minimum tax...
...Jobtraining funds are cut by a half-billion dollars...
...The budget calls for $214 billion in reductions over five years in domestic programs outside of Homeland Security...
...The Environmental Protection Agency's efforts to maintain and improve clean water are curtailed...
...For example, how the benefits are calculate, for example, is on the table...
...The vision embodied in Social Security clashes with this view...
...Social Security's survivor benefit is equivalent to a $403,000 life insurance policy...
...The gap, according to the CBO, is only one-half of the tax cut Bush provided the richest 2 percent of families...
...This volatility of investment markets means that it matters a great deal whether one retires during an upswing or downturn...
...George W. Bush has argued that Social Security's problem will begin in 2018, when, Social Security's trustees project, payroll taxes will no longer exceed that year's benefit obligations...
...But as I write in early March, Bush's plan has generated little public support...
...In twenty-five of the years since 1900, the Standard and Poor's Index has declined by more than 10 percent...
...Treasury securities are considered the safest, most reliable investment in the world...
...The Center on Budget and Policy Priorities calculates that in 2025, for example, the difference between Social Security's benefit costs and its non-interest revenues will be less than 10 percent of the projected federal deficit...
...Some $196 billion in domestic cuts—all of the reductions in years 2007 through 2010—are left unidentified...
...Risk will be greater...
...To pay for the new accounts while providing currently promised benefits to individuals ages fifty-five and over would require enormous levels of new federal borrowing...
...Two visions are in conflict here...
...34 DISSENT / Spring 2005...
...It does not indicate how specific programs within these program areas would fare...
...Investing in the stock market carries administrative and management costs that far exceed the current expenses associated with maintaining the Social Security system...
...But few take this seriously...
...Diverting up to 4 percent of payroll taxes to private accounts, as Bush proposes, will mean that the trust funds would likely be depleted by 2031 rather than 2053...
...It is made palatable by the fantasy that the sum of selfishness will, through the sleight of the invisible hand, come out as the public good...
...In this kind of society, Social Security has no place...
...MARK LEVINSON is chief economist at UNITE HERE...
...The main reason, of course, is the tax cuts...
...Privatization At one of his town meetings to promote his Social Security privatization plan Bush was asked to explain his proposal for private accounts...
...Social Security is our most successful social program...
...Social Security takes in much more revenue than it pays out in benefits...
...For example, a worker who invested his or her retirement fund in a stock portfolio that matched the Standard & Poor's 500 Index and cashed out upon retirement in March 2000 would have retirement income almost a third larger than someone who retired just a year later using the exact same investment strategy, because the stock market plunged over those twelve months...
...Social Security is based on the socialization of concern, the vision of society as a community, which even if not based on truly egalitarian principles, at least modulates the heartlessness of "rugged individualism...
...whether or not benefits rise based 32 DISSENT / Spring 2005 GUTTING OF SOCIAL SECURITY upon wage increases or price increases...
...The amount of money needed to pay full scheduled benefits through the program's seventy-five year planning period pales in comparison to the cost of Bush's tax cuts...
...For an average worker with a spouse and two children, the disability benefit provided by Social Security is equivalent to a $353,000 policy in the private sector...
...Twothirds of retired beneficiaries rely on Social Security for 50 percent or more of their income...
...The administration's strategy, as Roger Hickey, from the Campaign for America's Future, has pointed out, appears to be similar to that used in the run-up to the Iraq War: manufacture a sense of crisis and then accuse critics of irresponsibility in exposing Americans to danger...
...These cuts are so severe that by 2010 domestic discretion30 DISSENT / Spring 2005 GUTTING OF SOCIAL SECURITY ary spending as a share of the economy would fall by more than one-fourth, reaching its lowest level as a share of the economy since 1962, which was before the federal government began to make significant investments in K-12 education or environmental protection...
...Under a private-account system, individuals would be required to bear investment risk on their own, and depending on market conditions and timing, different retirees would end up with wildly different benefits from private accounts...
...Indeed, the trust funds will still grow another 25 percent from 2018 to 2028, reaching about $6.6 trillion because of the interest earned on those securities...
...If that is true, then the only way to fix the program's long-term balance is to reduce benefits...
...And if, several decades from now, workers who will be earning much more in inflation-adjusted dollars then they are today have to pay 1 percent or 2 percent more of their income in taxes— as they have done in the past—they are not likely to mind...
...Almost half of African American and DISSENT / Spring 2005 31 GUTTING OF SOCIAL SECURITY Hispanic senior households rely on Social Security for 90 percent or more of their income in retirement...
...and the world's largest economy, not to mention preeminent military power, is also the world's largest debtor...
...It is true that more than 20 percent of all Americans will be elderly after the year 2030—more than ever before...
...Even if the president doesn't quite grasp his own proposal, the administration has explained how his plan would work...
...But the elderly are not the only non-workers...
...Rather than reassess any of the tax cuts that have caused the deficits and the redistribution of wealth upward, the administration has proposed new tax cuts ($1.4 trillion over ten years), substantial cuts in domestic programs, and increased defense spending...
...At the same time, total outlays are more than 20 percent of GDP...
...Similar retirement and disability insurance policies in the marketplace would be very expensive...
...Annuities would prevent retirees from outliving their entire savings...
...This benefit is payable until the death of the survivor and adjusted annually for inflation...
...Bush's plan will lead to severe benefit reductions...
...In 1965, there were 96.5 dependents to 100 workers...
...According to the trustees of Social Security, the economy is projected to grow at a slower rate in the future than it has in the past...
...All funding for Amtrak is eliminated...
...Federal debt would explode...
...By 2010, these cuts would reach 16 percent...
...Thereafter, 80 percent of promised benefits could be covered...
...Even though there will be seventy-nine dependents (retirees and children) for every one hundred workers in 2030, compared to seventy-one dependents per one hundred workers in 1995, the ratio was much higher forty years ago...
...Private accounts create a crisis in Social Security finances because they take so much money out of the system...
...The budget only provides information on cuts for the major program areas...
...Private accounts make perfect sense...
...Everyone will be better off in the ownership society...
...The problems with this proposal are legion: Private accounts will weaken Social Security's long-term stability...
...If economic growth declines, we can expect more modest stock market growth as well, with reduced potential returns...
...Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming...
...It is more than a pension plan...
...Because annuities expire when beneficiaries die, no assets would be available to pass on...
...But without those high returns, the arithmetic of their schemes collapses...
...Many veterans will face a doubling of the co-payment for prescription drugs...
...This time the danger will not be weapons of mass destruction but the equally mythical claim that Social Security will soon go bankrupt...
...All of this will be made worse by the Bush budget, which is callous in its severe cuts for programs serving the middle class and poor, dishonest in its hiding the full extent of its budget reductions, stunning in its outright redistribution of wealth upward, manipulative in its not including the costs of the wars in Iraq and Afghanistan and the $4.5 trillion the president proposes to borrow in order to privatize Social Security, and catastrophic in its economic effect on the country The Center on Budget and Policy Priorities has documented how the cuts affect a broad array of public services, such as education, environmental protection, transportation, veterans' health care, medical research, law enforcement, and food- and drug-safety inspection...
...It is like a loan...
...Bush explained his proposal this way: Because the all which is on the table begins to address the big cost drivers...
...If we can defend that vision, we could do more than stop George W. Bush's attempt to kill America's most important social program...
...It provides monthly benefits to forty-seven million retired or disabled workers and to surviving family members of deceased workers...
...Under the plan, workers opting to divert payroll taxes into an account today would pay back those funds, plus interest, through reductions in Social Security benefits at retirement...
...government, U.S...
...A five-year freeze on child care funding will result in cutting the number of low-income children receiving child care assistance...
...In 2006, the budget would cut domestic discretionary programs outside of homeland security by 5 percent...
...Treasury securities...
...The budget fails to reveal funding levels for individual programs for the years after 2005...
...Workers who open accounts would keep only investment returns that exceed the returns that the money would have accrued in the traditional system...
...And when you couple that, those different cost drivers, affecting those changing those with personal accounts, the idea is to get what has been promised more likely to be or closer delivered to what has been promised...
...Someone who borrows money to make an investment benefits if the assets purchased with the borrowed funds grow faster than the debt...
...Because of the tax cuts for the rich, federal revenues are at their lowest level since the 1950s—below 17 percent of the gross domestic product...
...Social Security provides elderly widows and widowers who have not earned substantial benefits on their own with a survivor benefit equal to 100 percent of their deceased spouse's benefit...
...Without Social Security, 42 percent of the elderly would be poor...
...Many retirees will not be able to pass their accounts to their heirs...
...But the whole reason why the trust funds are building up assets is to guarantee that benefits will be paid in full when payroll taxes do not fully cover the system's expenses...
...According to the nonpartisan Congressional Budget Office (CBO), the program can pay all benefits through 2053 with no changes whatsoever...
...Thus, despite massive domestic spending cuts, the budget increases rather than decreases the deficit over the next five years...
...As we have come to expect from this administration, it tries to hide the implications of its policies...
...This is supposed to be the Republicans' strong point...
...Backed by the full faith and credit of the U.S...
...Although investing in the stock market may result in greater returns, it also carries far greater risk...
...When the Bush tax cuts are fully in effect, their annual cost will exceed everything the federal government spends each year on housing and urban development, food assistance, national parks, environmental protection, transportation, veterans' programs, agriculture, and the Department of State and the Department of Homeland Security combined...
...We could set back the radical right-wing agenda and maybe, just maybe, launch a new era of progressive politics...
...This vision is based on an ideology of, "Screw you Jack, I've got mine...
...Bush's privatization proposal would allow individuals to divert some of their contributions to Social Security into private accounts...
...This means huge, double-digit percentage cuts in veterans' programs, spending on the environment, agriculture, education, assistance for dislocated workers, income security programs (such as the Special Supplemental Nutrition Program for Women, Infants, and Children), and health programs...
...Faced with such criticism, Bush said he would consider the possibility of raising the cap on the payroll tax...
...As Dean Baker of the Center for Economic Policy Research has pointed out, the gloomy predictions about the demise of Social Security are premised on a twenty-first century of anemic economic growth, while the claims for private accounts are based on a twenty-first century of robust economic growth...
...One of the defining features of social-insurance programs such as Social Security is that risk is shifted from individuals onto the federal government...
...Remember that the trust funds will amount to about $5.3 trillion at that time...
...the budget deficit has climbed to $427 billion (this during an economic recovery...
...Just the interest on the trust fund's Treasury securities will be more than sufficient to finance payments fully for another ten years...
...The alternative minimum tax was originally enacted to ensure that high-income taxpayers pay some tax...
...And one-third count on it for all of their income...
...At some point, it is certainly not necessary now, the country will have to increase taxes if future generations choose to enjoy more of their longer life spans in retirement...
...The benefit cuts would be huge...
...Administrative costs for DISSENT / Spring 2005 33 GUTTING OF SOCIAL SECURITY Social Security are less than 1 percent of benefits compared with 10 percent to 15 percent for most private pension plans...
...According to the Center on Budget and Policy Priorities, the first ten years would require $1 trillion in federal borrowing, and more than $3.5 trillion during their second decade...
...That means that upon retirement workers would be given only money above 3 percent inflation-adjusted return...
...One sees a society in which individuals look solely after themselves...
...Because of Social Security, nearly 90 percent of all older Americans have incomes above the poverty line...
...According to Peter Orszag from the Brookings Institution, "for a young average earner benefits could decline dramatically—instead of replacing more than a third of the worker's previous wages, Social Security's defined benefits would replace well under a tenth...
...There remain many missing details...
...It was a maneuver designed to get Democrats to the negotiating table...
...People at risk of falling below the poverty line (currently 42 percent of the retired population) would be required to convert their accounts into an annuity, which makes monthly payments over the duration of a beneficiary's life...
...The press has been far too quiet about the lack of detail about the cuts...
...The budget also proposes to reduce Medicaid funding by at least $45 billion over ten years—a proposal that will push hard-pressed states to eliminate coverage for a substantial number of low-income people, increasing the ranks of the uninsured and the underinsured...
...The potential for greater returns must be balanced against the fact that a far greater portion of worker's contributions will go to private investment firms...
...Social Security is a mechanism for sharing the cost of providing for the disabled and the elderly...
...These funds, which now amount to $1.5 trillion and are expected to grow to $5.3 trillion by 2018, are invested in U.S...
...wages for most workers are stagnant or falling...
...One in every six Americans—including three million children under the age of eighteen—receives a benefit under the program...
...But in that case, we don't need to worry about Social Security's future: If the economy grows fast enough to generate a rate of return that makes privatization work it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come...
...As Robert Ball, former commissioner of Social Security put it, "Through Social Security we recognize that we're all in this together...
...There's a series of parts of the formula that are being considered...
...Essential government programs are endangered not just by the Bush spending cuts but also by the sheer lunacy or, more politely, the unsustainability of Bush's policies...
...This is the first time in fifteen years that an administration's budget has lacked this type of information...
...Is There a Social Security Crisis...
...The administration provides details on how it will achieve only the first $18 billion of cuts, the reductions that would occur in 2006...
...From the standpoint of the federal budget, after 2018, some general revenues will be needed to pay for the difference between each year's payroll taxes and guaranteed benefits as part of the interest owed on the trust fund's Treasury securities...
...This translates into food-stamp cuts that will eliminate benefits for approximately three hundred thousand people primarily in low-income working families...
...Does this make any sense to you...
...It was done in every decade from the 1950s through the 1980s...
...Paul Krugman nicely captures the contradiction in the argument for privatization: They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth...
...More than seven million survivors of deceased workers receive Social Security benefits...
...the number of people lacking health insurance is at a record forty-five million...
...The fight over Bush's budget and his proposal to privatize Social Security is a conflict over moral values...
...Proponents of private accounts often predict benefits based on past stock market performance...
...This will be nothing new...
...Management costs will be high...
...It currently affects about 3 percent of taxpayers but will vastly expand its reach into the middle class in coming years and undoubtedly provoke outrage...
...By comparison, the Bush administration's tax cuts, if made permanent, and the new prescriptiondrug benefit for Medicare will cost five times as much in that year...
...Social Security provides survivor benefits for the families of workers who die young...
Vol. 52 • April 2005 • No. 2
