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Privatization Revived in 2007 Budget
By Alex Baker, the Century Foundation
February 16, 2006
While this year's State of the Union looked too many like final proof of the death of Social Security privatization, you wouldn't know it from reading the FY 2007 budget released last week. The budget documents read like a Cliff's Notes to last year's debate, replete with cost estimates for a version of the plan floated and later abandoned by the White House. While the privatization components will likely just add further indignity to an already deeply unserious budget, there are smaller proposals which deserve scrutiny as well.
The private accounts proposed here are similar to the plan first suggested in last year's State of the Union address. Individuals would be allowed to divert up to four percentage points of taxable income (individuals currently contribute 6.2 percentage points) starting in 2010. Annual contributions would initially be capped at $1,100, and that cap would grow by $100 each year through 2016, the last year covered here. Over the next decade, the budget estimates a total cost of $712 billion for the accounts. Since Social Security is a pay-as-you-go system, the government would have to make up for private account contributions diverted from the system by directly funding current retirees' benefits-most likely by borrowing, given the current budget deficit.
The budget also reiterates the administration's "embrace" of progressive price-indexing, but remains vague on the details. Some form of benefit cut must accompany private accounts in order to restore solvency over the long run, since private accounts by themselves only make the system's finances worse. Progressive price-indexing would achieve this by pegging the growth of initial benefits for high and middle income earners to slower-growing inflation, instead of the rise in wages which is currently used. It is worth remembering that, while progressive price indexing implies that benefit growth would be slowed only for seniors who don't need Social Security (the "Bill Gates" argument) there are actually very few seniors who don't need Social Security. Among persons over 65 in 2003, even the highest earning fifth of the population relied on Social Security for 20 percent of their income. The fifth of earners below that relied on Social Security for half their income.
In addition to the privatization proposal, the budget puts forward a series of measures with promised savings of $6.3 billion over the next ten years. While the sums in question are negligible compared to the numbers bandied about in the privatization debate, the biggest proposals nevertheless represent very real benefit cuts, especially for low-income families. Instead of engaging in a real debate about strengthening the program's financial position, these proposal would inflict arbitrary pain in the interest of appearing to "get tough" on the program.
The largest proposal, dollar-wise, would eliminate the lump-sum death benefit, scheduled to cost around $2 billion over the next ten years. The lump-sum death benefit was the only form of survivors benefit in the original 1935 Social Security Act. When far more extensive monthly survivors benefits were added in 1939, the lump-sum benefit was retained in a reduced form to help families deal with the immediate costs of a beneficiary's death. As the maximum payment was capped at $255 back in 1954, the administration argues the $15 million it spends to administer the benefit each year is wasted on a monetarily worthless benefit.
As an "incentive to stay in school," the budget would also require that 16- and 17-year-old beneficiaries verify school enrollment in order to receive benefits, for an estimated ten-year savings of $1.5 billion. In 2005, these age groups represented almost 900,000 children of deceased, retired, or disabled workers. Under the current formula, school enrollment only becomes a factor in continuing benefits after 18. For such a small amount of savings, this seems like a considerable burden to put on families who are likely struggling with the loss of a breadwinner. Figures on how many children receiving benefits have dropped out of school are hard to pinpoint, yet revoking the income children and their families rely on for food and shelter seems like a harsh and indirect way to address school attendance.
Yet perhaps the most telling sign that last year's debate taught this administration little comes in the discussion of Social Security's projected funding shortfall. The budget insists that the "clearest way to see the imbalances" in mandatory spending programs is through "infinite horizon" projections, where projected shortfalls are extended from the typical 75-year forecast to eternity. Yet the large number that calculation returns ($12.8 trillion for Social Security) is a virtually useless exercise.
Over long periods of time, much less an eternity, small differences in the complicated mix of assumptions necessary to predict Social Security's finances render predictions meaningless.
The budget discussion also revives questions about whether Social Security's trust funds have value: "The fact that a special account or trust fund exists does not mean that the Government necessarily saved the money recorded there . . . the trust funds do not reduce the future burden of financing Social Security or Medicare benefits." Elsewhere, the budget refers to the current system's "empty promises." Yet the trust funds, which are held in U.S. Treasury securities, explicitly represent the taxes which workers have contributed specifically for Social Security. While the government will need to come up with the funds to paying off these obligations as it does when any of its debts come due, that obligation ought to be beyond question. The implied administration plan for Social Security, of either drastically lowering benefits, or somehow defaulting on the trust funds, would represent a deep breach of faith with taxpayers.
Considering the recent history of privatization, these proposals are unlikely to get very far. Yet they should serve as a stark reminder about how proposals to change the debate, such as the bipartisan commission the president proposed; remain highly disingenuous in the current climate.
Alex Baker is web content manager at The Century Foundation
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