Social Security Privatization: Who Wins, Who Loses?

President Bush is out to privatize Social Security. Is Social Security really about to go bankrupt? Who stands to gain—and who stands to lose—from the proposed reforms? As politicians turn up the rhetoric, Convoy Dispatch gives you the facts.

Q. Is the Social Security fund going bankrupt?

A. Social Security is clearly not going bankrupt and although there is a problem, the system is not about to collapse. According to the Social Security Administration, it has an accumulated surplus of over $1.5 trillion. By 2013, the figure will be over $3.5 trillion, more than four times the amount needed to pay benefits that year. If nothing is changed, payments will begin to exceed revenues in 2018, but current benefit levels could be maintained until 2042, when payments would fall short but still be 73 percent of what would be owed. Projections from the Congressional Budget Office look even better—full benefits could be paid through 2052 and then revenue would cover 80 percent of payments.

Q. How bad is the Social Security shortfall?

A. The projected shortfall for the next 75 years is smaller than shortfalls covered by adjustments in the 1950s, ‘60s, ‘70s, and ‘80s. It is also about one-third the size of the tax cuts enacted during the Bush Administration.

Q. Would private accounts save Social Security?

A. Privatization actually would increase Social Security’s funding gap, and would move up the date of shortfall from 2042 to 2031, because money moved into private accounts would be unavailable to pay current benefits. The plan proposed by President Bush would cause an almost immediate cash-flow problem for Social Security.

Q. Would private accounts provide greater benefits to retirees?

A. The president’s plan relies on the assumption that stocks will yield a high annual rate of return, about 6.5 to 7 percent per year, over and above inflation. If that doesn’t happen, the president’s promises don’t hold up. The president’s plan needs economic growth to average 3.5 percent per year over the next 75 years, while Social Security’s actuaries estimate the figure is more like 1.9 percent. Furthermore, if the economy actually did grow at the 3.5 percent per year needed to make private accounts attractive, then income from payroll taxes would increase enough that Social Security would be in fine shape for generations to come without any changes.

Q. Would young workers receive a higher rate of return?

A. According to the Congressional Budget Office, the costs of transition to privatization would reduce the rate of return for today’s younger workers to a level lower than that provided under the current Social Security system.

Q. If it wouldn’t benefit retirees, who would benefit from the president’s proposed changes?

Financial services firms could earn over $1 trillion ($1,000 billion!) according to Princeton economist Paul Krugman. This explains why the Security Industry Association is a major supporter of privatization. As a vice president of TowerGroup, a financial research company, says, “Financial firms would be crazy not to look at this as a new business opportunity. It’s a huge potential revenue stream over the long term.” Bush’s proposed accounts would require about ten times the administrative costs of the current system. That would cut into benefits for workers, but line the pockets of investment bankers.

Q. How much does Bush’s plan cost?

A. Current estimates are around $2 trillion over the next ten years, a massive addition to the national deficit.

Q. What would it cost to fix the current system?

A. For the next 75 years, it would take about $3.7 trillion to fix the current system, while private accounts will increase the national debt by nearly $5 trillion in the first 20 years of implementation. There are many ways to pay for fixing the current system besides general tax increases. One thing that would help would be to remove the cap on income that is taxed—currently income over $90,000 per year is exempt from Social Security taxes. This proposal has been advanced by various economists and supported by the labor movement.

Q. What is the opposition doing to stop the changes?

A. Many organizations, including the AFL-CIO, AARP, NAACP, NOW, the Alliance for Retired Americans, and disability rights groups, are mounting a major offensive against privatization. Under pressure from the AFL-CIO and others, two major investment firms, Edward Jones and Waddell & Reed, have left the organization that is lobbying for privatization. Other targets include Charles Schwab and Wachovia Corp. The AFL-CIO held a demonstration on Jan. 26 in front of the offices of Charles Schwab in San Francisco andBoston.

Q. Where can I get more information?

A. There is a lot of material out there, but two good places to start are the Center for Economic Policy Research at http://www.cepr.net/ and the AFL-CIO site at www.wallstreetgreed.org; Or contact your local AFL-CIO Central Labor Council.

Q. How Can We Stop Privatization?

  • Contact your Senators Representatives and. Let them know you are opposed to private Social Security accounts.
  • Download and circulate the petition against privatization available at www.wallstreetgreed.org.
  • Pass motions in your union local against privatization and send them to your elected officials.
  • If you have an investment firm, ask them if they are a member of an organization backing privatization.
  • Find out how the Security Industry Association serves as a front group for Social Security Privatization.
  • Write letters to the editor of your local newspapers. Check their editorial pages or websites for addresses and length restrictions. Write about the issue of Social Security privatization in general or respond to a specific article or commentary in your newspaper
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