The Goldman-Sachs "US Economics Analyst" Global Economic Research Bulletin for December 17, 2004 has
published a detailed analysis of the most likely Bush Social Security proposals. It shows the Bush program
to be fraud -- but a clever fraud.
Before summarizing the Goldman-Sachs analysis, it is worth reviewing some basics about Social Security:
1. Social Security is basically a pay-as-you-go program, enacted as part of the New Deal under Franklin
Roosevelt in 1935-1936. Payments workers make into the fund through the Social Security payroll tax are paid
directly to current retirees. It is NOT a savings or investment account. Payments to workers are indexed on
their WAGES, not inflation--as we shall see, a very important point. The amount of benefits you receive is
roughly based on your last 5 years of EARNINGS.
2. Based on payroll tax increases drafted by Alan Greenspan and others in the 1980's (the last time there
was a "Social Security Crisis") there is currently a
surplus of payments over receipts. This surplus is put into the Social Security Trust Fund, and invested by
the government. Federal spending has also been
borrowing from this trust fund.
3. The current "Social Security Crisis" is based on projections that the Trust
Fund will go from surplus to deficit at some point 20-40 years from now depending on
which economic model is employed. The fundamental underlying reason for the change is that workers are
living longer and the ratio of working to retired persons is decreasing in favor of the latter. HOW much
longer they are living strongly reflects the sharp racial and class divisions in US society. Nevertheless,
this deficit, when and if it occurs, will have to be
paid by:
a) increasing the social security payroll tax;
b) increasing general revenues;
c) reducing benefits;
or
d) extending the retirement age.
The retirement age has already been extended once.
As Paul Krugman has noted the entire issue could be disposed of by a modest increase in the social security
payroll tax -- merely a fraction of what Bush already spent in his massive tax cut for the rich in 2001. So
in a sense the entire "crisis" is of Bush's making.
However that is not the Bush plan. The Goldman, Sachs analysis reveals the following:
The leading reform proposal of the Bush team -- "Reform Model 2" proposed by the Presidential
Commission on Social Security in 2001--would establish
personal savings accounts by diverting a portion of the social security payroll taxes that fund the current
system. --Benefits would be cut sharply relative to
current law; --The budget deficit would climb during a long transitional phase as payroll tax receipts fell
sharply; --The new system would make Social Security
retirement benefits partially dependent upon the performance of stock and bond markets.
A. Workers less than 55 could voluntarily redirect 4 percentage points of their payroll taxes up to $1000
annually (indexed for INFLATION) into a personal
savings account (PSA). Upon retirement the funds in these accounts would generally be converted into an
INFLATION-indexed monthly annuity payment.
B. Traditional Social Security benefits would be cut at a rate equivalent to the worker's PSA contributions
PLUS a 2% compound interest rate -- referred to as the "clawback". This system would be INDEXED TO PRICES BEGINNING SEVEN YEARS AFTER THE REFORM PLAN IS
IMPLEMENTED!! Even if not a single person opted to establish a PSA in the next 75
years, the 48% cut in benefits from the switch to price from wage indexing ALONE would "restore the Social
Security Trust Fund to solvency". Even if EVERY single person chose to divert monies into PSAs -- and NEVER
TOUCHED THE ACCOUNTS -- there would still be an average 27% cut in benefits at the end of the same 75 year
window. Of course a big portion of PSA funds would be absorbed as investment firm profits and administrative
fees. Goldman, Sachs estimates these fees at 10%. However experience in some Latin America countries
(e.g. Chile) where privatization of social security has been showcased suggest it will be much higher.
D. A new welfare-style change in Social Security would be added establishing a minimum benefit for long-term
low wage workers at 120% of the poverty line. Benefits for widows would be similarly "protected".
E. Proponents of the Bush plan assert that the PSA's would earn on average about 4.6% per year after
deducting "administrative" fees--BROKER PROFITS. This they claim is 1.5% higher than current long-term
Treasuries, and thus there might be a net national savings gain. However Goldman, Sachs disputes this
guess, estimating the gain at around .5%. Both estimates are probably wrong, and high. Any worker
making less than 50K per year, and many making more than that, will be under tremendous pressure to cash
out their PSA's every time there is a layoff, especially in the absence of universal health care. In
addition financial asset returns are volatile. For example a 50% decline in stock prices -- what occurred
in 2000--would cut benefits payments for PSAs by 15%-25%.
Why does Bush want to cure the "crisis" -- which does not really exist -- by privatizing?
1. Since the entire so-called "crisis" is averted by the slashing of benefits from the change in indexing
alone, the PSAs will generate a windfall for Wall Street brokers and investment firms.
2. Eliminate or weaken a key economic base of the Democratic Party.
3. Bankrupt the federal government through huge deficits as the principle means of eliminating
entitlements. The latter being the key impediment to a more perfect market-dominated allocation of resources.
The Republicans seem ideologically committed to this position, despite the huge risks it poses for the US
global economic position. Look for the first round of
this whip-sawing to begin in Bush's 2005 budget proposals coming up soon.
4. Get ready to hear the Bush propagandists jump through hoops to HIDE and DISGUISE the indexing change.
Expect much hoopla over the welfare-izing of the low- wage worker benefits which will be heralded as an
INCREASE when it is really a CUT.
In other words, get ready for the fight of your lives!
