AFL-CIO and the Fate of Social Security

The Road to SSI Privatization

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. (Chalk another one up for Adam Smith.) The Cato Institute, a libertarian "think tank" in Washington, has a $2 million war chest provided by business donors to fund a three 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 upon to deliver the goods if enough noise can be made, disinformation generated, and popular confusion created. (Recall the fate of single payer healthcare.) 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 invested -- for market speculation.

Talk of "Crisis" is Overblown

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. Not before 2029 would the trust fund be depleted, at which point FICA taxes collected would only cover about 77% 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.

SS fund trustees report that the gap over the next 70-plus years amounts to 2.2% 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% to 14.6%, or reducing benefits by 15%. But we don't 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% 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 twenty years averaged 2.8% per year; it is conservatively projected to be 1.8% over the next twenty years and then drop to 1.4% or less. A slightly more optimistic projection would require an even smaller FICA tax adjustment. (For more details, see Note at conclusion of this article which identifies the sources from which much of the data that appears in this commentary was obtained.)

Advisory Council Considers 3 Plans

An Advisory Council on Social Security was named by Clinton in 1994, composed of thirteen members: three from labor; three corporate members; 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 Chairman 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 Council's deliberations. The Council went public with its proposals (none of which mustered a majority) on January 6.

Ball Plan: 40% In Market, Government Managed Investments

Ball proposes Social Security be gradually invested in the private market for stocks, bonds and other securities (up to 40%) and that management of those investments be by government appointed trustees or fund managers. Under his plan, investments would be in passively managed index funds (mutual funds that track the stock market).

Gramlich Plan: Individual Investments

Gramlich proposes that 1.6% of each worker's taxable income be set aside as an additional tax payment (over and above the current employee contribution)into a mandatory government-supervised retirement plan, similar to a 401(k) savings plan. Workers would be offered choices as to how their accounts were invested. Upon retirement, benefits would be paid out in an annuity.

Schieber Plan:Individual Investments & Two-Tiered Retirement Risk

Schieber goes the furthest. He proposes to split Social Security into a two-tiered plan. The first tier would offer a basic monthly benefit of up to $410 (in today's dollars). The second tier would set aside 5% (or about 40%) from the payroll tax contribution to invest tax-free for retirement. Each worker would manage her/his own investments.

All three proposals include some number from among these additional changes: increased payroll taxes, taxing benefits that exceed contributions, shifting the Medicare portion of the tax on Social Security benefits into the trust fund, increasing the computation period from 35 to 38 work years, bringing in presently uncovered state and local public employees, cutting future benefits by changing the percentage of income on which benefits are calculated, raising the normal retirement age to 69 and pegging it to life expectancy tables, and cutting spousal benefits from 50% to 33%. Many if not most of these changes work to the detriment of most workers. The three plans would have different impacts on different income groups.

Wall Street Pushes Privatization

The prospect of gaining access to the trust funds has Wall St. 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 steam-roll the privatization initiative, with differences between them only over the details of privatization. On one point they seem to concur -- they want to keep the Federal Government from having any influence over how SS 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.

AFL-CIO Falls in Line With Ball

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 manning the ramparts and mobilizing its troops for a determined defense of the 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% 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 Federation seems prepared to give that ground without even a token struggle.

Government As An Investor

The Cato gang argues that they don't want government determining where SS 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% of the shares of major corporations, making the public the largest single stockholder and enabling Government to potentially exercise significant influence over corporate policies. 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 employer's policies, the Government would become a passive (second class) investor -- providing the money but gaining none of the influence other major shareholders exert. The Social Security trust fund would become Wall Street's 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 capital's 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.

Costs, Now Low, Would Rise

At present the SS system has an administrative cost that is just 0.7% of benefits paid out. EPI notes, by contrast, the operating costs of the life insurance industry exceed 40%. The operating cost of Chile's privatized retirement system (held up as an example by the free marketeers) runs close to 15%. Aside from added risk, investment of even 40% of the trust fund in stocks and bonds would subject the fund to a much larger administrative cost, while rewarding Wall St. traders with a bonanza of fees and commissions. Little wonder the investment firms are so eager to push these reforms.

In the "Long Run" We're 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? Now consider whether you are prepared to bet your Social Security benefits that the present market will continue to climb right through the 2020s? Remember what happened to those folks who put their funds into stock of firms like Eastern Airlines? A lot of small investors lost everything while the largest and wealthiest investors got out relatively unscathed (some even made money). Remember -- over the long run we are all dead (but the inheritances of the wealthy seem to live forever). Are you willing to gamble that investment managers can consistently avoid the losers and pick the winners? Do you think most individual workers could do that?

Get Real About Assumptions

According to EPI's 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% 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% 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."

Wall St. Fox Guarding Social Security Chicks?

But even if that were achievable, do you trust your retirement security to the buyout bandits, merger maniacs, derivative speculators, down-sizers, deindustrializers, and take-back artists who have brought workers and the labor movement to their present sorry state? Would you be content to learn that your own Social Security funds were invested in the corporation that just closed your workplace and laid you off in the name of efficiency, profitability, and global competitiveness after using newly available SS fund investments to build a new plant in Chile or Malaysia,? No thanks!

Buying in at Top of Market?

Still not convinced? 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 St. 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.

Impact on Government Debt

Dumping billions of dollars into the market has yet another effect. Removing 40% 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 scares 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? Rest assured it won't come out of the pockets of the rich. The prospects for a tax increase are slim, particularly any increase aimed at the wealthy. On whose backs will the budget- balancing bozos in Congress balance the budget? Additional domestic spending programs will be put on the block in the name of fiscal and budgetary responsibility.

What Will Labor Get In Return?

Was there a quid pro quo obtained by the AFL-CIO in return for its support of the 40% privatization option? During Clinton's 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 issue -- the 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 Clinton's 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 St.'s privatization scheme?

Assumptions Aren't Promises; Promises Aren't Guarantees

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, that's a lot of "ifs." We should be mindful that prior to NAFTA's passage its proponents made comparable claims for all the positive consequences that would flow from enactment of the treaty. Labor did not buy the argument then, why should it be so quick to buy into all these assumptions about Social Security now? And even if one sees real value in the potential influence of government presence in the market, a government friendly to labor and subject to its influence is a long way off.

Don't Bargain With Yourself

When I first learned about collective bargaining I was introduced to a fundamental principle -- never bargain with yourself. If you enter negotiations on the basis of what you think you will get, you bargain on the basis of what you think the other side will accept. You inevitably get even less. The only rational bargaining position is to start on the basis of what workers need and stick to that resolutely in order to get the other side to make offers designed to entice you into an agreement . If what you need cannot be compromised, you have to be prepared to go to the mat, draw blood, and raise the price of battle so that the other side retreats. It seems to me that the Federation has conceded even before the first bell has sounded. It has nowhere to go but backwards from its present position.

Social Security Can Be Secure Without Private Investment

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 Federation's readiness to accept passive private investment, as well as the even more extreme individual investment proposals, as a solution to Social Security's expected shortfall (which is not projected to occur before 2019). We should demand that the AFL-CIO defend the Social Security system against the bandits on Wall St. rather than accepting the inevitability of privatization of whatever variety. Unlike the Federation, the American Association of Retired Persons, 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. (AARP's position is explained in the January-February issue of Modern Maturity, the organization's magazine.)

Get It From Those Who've Got It

If, as is argued, the trust fund needs fixing, the fix should be consistent with its essential mission -- to provide a safe and secure retirement income and safety net for the nation's workers and their families. The AFL-CIO ought to be arguing that any new money needed ought to come from capital, not through speculation at the expense of workers' security. I make no pretense at expertise in Social Security, but one does not have to be an economist to come up with ideas for beefing up the fund that don't 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%. 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 labor's 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 issue -- and 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 labor's efforts to rebuild its membership, political influence, and bargaining clout.

Labor Struggled to Get Social Security - Now Must Defend It

There are many deficiencies in the present Social Security system. The prospect of reform ought to be seen as an opportunity for organized labor to build alliances with seniors, the disabled, widows, the poor, and other affected constituencies to develop a reform plan based on what working and poor people need, not what capital prefers or is willing to concede. Organized labor played a critical role in the struggle to establish the Social Security system. It must now play a leading role in the struggle to defend and improve it, not to turn it into yet another source of capital for speculation and profiteering. It surely will not be able to stem the rightward drift in American political life by trying to make the political initiatives of the right more palatable. It's time for labor to stop bargaining with itself.

NOTE ON SOURCES:

For an understandable and even- handed explanation of the pros and cons of the alternative plans considered by the Advisory Council on Social Security, see the article "Save Social Security?" by Linda Stern in the January-February issue of Modern Maturity published by AARP.

Another good source is "The Assumptions Are Too Pessimistic" by Dean Baker in the November-December issue of Challenge. Mark Weisbrot, Research Director of the Preamble Center for Public Policy, has prepared an analysis entitled "Unequal Sacrifice: The Impact of Changes Proposed by the Advisory Council on Social Security." Call 202-265- 3263 for information on ordering it.

The Economic Policy Institute issues many useful reports and studies. They have a Web site at http://www.epn.org/epi/ on which many are posted, including EPI Issue Brief #112, "Privatizing Social Security - The Wall Street Fix" by Dean Baker (http://www.epn.org/epi/epib112.html). This site is linked to the Economic Policy Network, which connects to a large number of progressive policy organization sites. EPN is at http://www.epn.org.

Michael Eisenscher 391 Adams Street Oakland, CA 94610 E-Mail: meisenscher@igc.apc.org

Michael Eisenscher is a consultant to unions and community organizations, a 25 year veteran union organizer, and a doctoral candidate in public policy at the University of Massachusetts- Boston.