Bush’s plan for privatizing Social Security would strip low-income Americans of a crucial safeguard against poverty.

Stoked by winning his bid for re-election, George Bush made no bones about the direction his "mandate" had given him. Top on his to-do list was a  make-over of the government retirement program. "Social Security was a great moral success of the 20th century, and we must honor its great purposes in this new century," he stated in his 2005 State of the Union address. "The system, however, on its current path, is headed toward bankruptcy." Bush's plan would see part of payroll taxes opened and made available to workers so they could use them to privately invest in stocks and bonds. From this great formerly untapped pristine wilderness of tax funds set aside to ensure Americans some sort of fiscal surety, Bush asserts Social Security can avoid bankruptcy. A slim majority of Americans, however, disagree with the Bush plan. A Harris poll taken in mid-March found that 58 percent of Americans disapprove of Bush's position on Social Security.

The State of Social Security
The first thing to understand is the numbers we hear echoing throughout the media and from the government are based largely on guesses. Common are sweeping statements like: "Social Security will have a projected shortfall by the year 2042," using the president's numbers, or by 2052 using congressional numbers. In truth, "Social Security is healthier than it's ever been in its history," said Mark Weisbrot, an economist at the nonpartisan Center for Economic and Policy Research and author of Social Security: The Phony Crisis, (2000). According to Weisbrot, who is listed on the "expert's page" of the Social Security Administration's Web site, the "projected shortfall" really translates to a guess based on pessimistic economic projections by the Social Security Administration Board of Trustees. The scenario projected by the trustees assumes only 1.9 annual percent growth of the economy—a smaller number than the one used by other arms of government, according to leading economists.

The Board of Trustees are a group of six: four are always the secretaries of the departments of Health and Human Services, Labor, Treasury; and the Social Security Commissioner. The other two are appointed by the president to four year terms. The board always weighs as many factors as possible when making projections, such as mortality, population growth, job productivity, birth rate, and immigration. According to the 2004 Trustees' report, over the next 75 years the shortfall is $3.7 trillion in 2004 dollars—0.7 percent of GDP over the same period. They have stated three guesses as to what will happen in the future of Social Security if nothing changes. The most optimistic example shows a healthy Social Security as far as the eye can see. Several economists agree there is more guesswork going on that includes pessimistic economic forecasts.

"As with any projection, it's exactly that," said Mark Lassiter, spokesman for the Social Security Administration. "Things won't occur exactly as projected, clearly, but it's their best guess." According to Lassiter, that projection, as well as the worst projection, is "very unlikely." The shortfall is based on the intermediate 1.9 annual projection of economic growth.

However, according to Weisbrot, the latest (June 2004) estimate from the non-partisan Congressional Budget Office projects that Social Security can pay all promised benefits, with no changes at all, until 2052. That's nearly half a century. This so-called problem is not large, explained Weisbrot. In fact, the projected shortfall for the whole 75-year planning period is less than what was fixed in each of the following decades: the 1950s, 1960s, 1970s, and 1980s. It is also about one-third the size of the tax cuts enacted during the Bush administration.

Jonathan Schwarz, an economist who used to work for the Center for Economic and Policy Research, said the guesses often change. "When you listen to the news it sounds like this 'shortfall' is something that definitely will happen at a definite date. But these numbers are not givens. They're best guesses about the future, guesses that can be wrong and have been wrong in the past."

Late in the Clinton administration the issue of solvency in Social Security also emerged. "When Clinton raised this issue in 1997, trustees said, 'By 2029, we're in trouble,'" said William Spriggs, a senior fellow at the nonpartisan Economic Policy Institute. "Now when Bush raises it, it's 2042. The only thing that has changed between 1997 and 2005 is we have more information. It's obvious it can't be all that precise if you can get 15 years of solvency just because you got more information."

But the word "guess" is one that might surprise many Americans, said Spriggs. "It astounds me when people take this with all this seriousness when the weather guy is talking about what's going to happen tomorrow and everybody laughs."

FDR & the New Deal
It's difficult to grasp the fiscal specifics of Social Security without understanding the system and its basic elements. While economically educated readers may already understand the complexities of the Social Security system, even the most intelligent, educated people—and likely the majority of average Americans, don't know how to answer when asked about what they actually know about Social Security, or how and when it began.

In 1935, toward the end of the Great Depression, Franklin D. Roosevelt signed into law a social insurance program for Americans. Many of the current features of the program stem from the original law that established the system as a nationwide, federally administered contributory system. A person could not opt out. Benefits were tied to past earnings, although weighted in favor of lower-income beneficiaries; the retirement age was set at 65. In 1939, one year before the first benefits were paid, benefits were weighted more heavily towards low-wage workers than they had been in the 1935 law; workers with dependents were also favored and benefits were increased.

In 1967, three Supreme Court cases challenged the program as unconstitutional but lost. The arguments against the program echo the current debate with a cry many of us have been hearing since we were old enough to watch the news: The demise of the program is imminent and inevitable. In the 1970s, cost of living adjustments (COLA) were made to Social Security; benefits were tied to the cost of living so that they would help workers maintain their standard of living.

The last major overhaul happened in 1983, when economists agreed Social Security faced serious threats due to the influx of baby boomers that would flood the system when they retired. When the Reagan administration and Congress couldn't agree on a plan to help the program, Alan Greenspan headed a nonpartisan committee that came up with much of the model we use today. The plan included increases in payroll tax and inclusion of workers previously outside the system (like members of Congress). Congress also decided to gradually raise the full retirement age from 65 to 67 (for those born after 1960), bringing the program into balance through the end of the typical 75-year projection period.

The compromise in 1983 raised payroll taxes beyond what was needed to pay immediate benefits; the excess is used to buy government bonds and build up the Social Security Trust Fund in preparation for the baby boomers. So when politicians say the system in place today is the same one that was administered in the 1930s, that's only partially true. Adjustments have been made along the way to accommodate population, growing life expectancy and other factors.

How it Works
Today, said Schwartz, the average retiree collects about $15,000 annually in benefits. Those benefits are protected against inflation as a result of COLA. To collect the money, the government takes 12.4 percent of every worker's paycheck in what are called "payroll taxes."

It works like this: Every worker pays 6.2 percent of their salary (up to the payroll cap, which is $90,000) in FICA taxes, named for the authorizing bill called the Federal Insurance Contributions Act. Their employers pay an equivalent 6.2 percent, for a total of 12.4 percent of the workers salary, which is withheld from workers' paychecks. If you're self-employed, you're responsible for paying the 12.4 percent yourself.

Then the Social Security Administration sends the money off to current retirees and other beneficiaries. The amount each retiree gets varies depending on income. On average, Social Security replaces about 40 percent of pre-retirement earnings—about 60 percent for low-wage earners and 20 percent for high-wage earners, Lassiter of the Social Security Administration explained: "It's actually progressive in the sense that lower-wage earners have a higher percentage of return. The idea behind that is lower wage earners have fewer opportunities for savings and retirement."

"An important thing to remember is that Social Security is an insurance program—its official name is Old Age, Survivors and Disability Insurance, or OASDI," said Schwarz. "So, it doesn't really make sense to ask what portion of payroll taxes translate into benefits later, because, like any form of insurance, it varies so widely from individual to individual." According to Schwartz, benefits paid are directly tied to how long a person lives. Someone who lives an average life span gets an average return on investment; someone who dies early gets "a bad deal" because they paid in and do not get much return, though survivors get survivors' benefits. "But this bad deal is comparable to someone who pays fire insurance premiums their whole life and never has their house burn down. Fire insurance is a bad deal for them, but that doesn't mean it was stupid for them to have fire insurance."

Spinning the Numbers
Besides the years 2042 and 2052, another number is circulating in Social Security discussions. It is said that in 2018, the trust fund is expected to begin drawing down its assets to pay benefits. Until then, payroll taxes will exceed outgoing benefits.

Berna Brannon, a Social Security analyst for the libertarian Cato Institute, which supports privatizing Social Security, said the government would have to implement another tax to afford to pay back bonds set aside for social security. But, according to Weisbrot, anytime money is loaned to the federal government in bonds, it is spent. The government pays interest and repays what it borrowed. "The same is true for the Social Security trust fund." The fund has been running at an annual surplus—now at $10 billion—since 1983, he said. The bonds have the faith and credit of the US government, which hasn't defaulted on its bonds in our entire history as a nation.

"It's not really the public's problem since that money was promised," Brannon counters, "but it would cost taxpayers in other areas."

However, the projected shortfall in Social Security is about one-third the size of the tax cuts enacted during the Bush Administration, economists say. "The government has to get enough money in general revenue to pay off the bonds," said the Economic Policy Institute's Spriggs. "It's confusing. The Bush Administration has gone around saying they're going to give all these tax cuts knowing they are going to owe this money."

The Cato Institute and Bush Administration maintain that the retirement of the baby boomers will bankrupt the program, but several economists contend that the foreseen shortfall was corrected by Alan Greenspan's committee in the 80s.

Economic Guesswork
Another argument for a failing program is the reduced number of workers paying into the program, in comparison to the number of people drawing on it. In its infant stages, about 13 workers paid into Social Security for each worker that got benefits. Now it's about 3.3 workers for each beneficiary. In 2035, the ratio will be about 2 to 1.

The main economic issue is not the number of workers-per-retirees but productivity, economists say, which is constantly increasing. Output-per-hour will grow by more than 70 percent by 2035. Workers are working longer hours, so fewer workers are doing more work than in the past. "There are fewer farmers now than there were 100 years ago, but is there less food?" said Weisbrot. "No. There's much much more." The same is true of the auto industry, echoed Spriggs. There are fewer factories now than in 1935, but more cars because productivity has improved; there is no way to predict productivity when it relies so heavily on technology and new inventions. But according to Brannon, economists for Social Security have taken future inventions and productivity into account. "These are the best economists in the world; they have thought of everything."

And yet Spriggs said it is impossible to fathom the future. "I know these are people with great skills looking at models that make sense. I just think in 1900 if someone made this type of projection and said, 'We need this government program because of what's going to happen in 1975, we would have laughed." For example, he explained, people in 1900 would have put a heavy economic emphasis on trains as the main mode of transportation. Since, air transportation has superseded train travel, increasing productivity beyond imagination in 1900. "Would they be able to look ahead in 1975 to see what we're doing on computers?"

"In his own budget, he [Bush] says the economy is going to do better than this 1.9 percent, but that's what the trustees are saying," said Spriggs. "I think it [the optimistic projection] is closer to what would play out as real. I think anyone who says they want to make a radical change to the program based on an enormous piece of speculation...is not being prudent. You would really want to get closer to the point in time, you would want more evidence that that's what productivity will really be."

Privatization
Privatization won't fix the problem of the projected shortfall in Social Security, Brannon and the White House have said. But it will give workers control of their own money, and enable them to pass it down to their children—unlike Social Security, in which a worker would have paid in more than she collected if she died in early retirement or earned higher wages.

Though details still haven't emerged, privatization would probably work like this: part of the 12.4 percent of each worker's salary that goes to Social Security now could be diverted to a private account in the worker's name. Bush will likely propose allowing up to 4 percent of a worker's salary, or about one-third of their Social Security payroll taxes. The funds would be collected by the government to cut down on administrative fees, and then turned over to a company operating in the stock market. Companies would bid on government contracts; companies would then invest the money at huge profits.

"This would provide incentive to [Social Security] benefit cuts," said Brannon. "Workers would have more control." Benefit cuts would be necessary to fix the shortfall, since private accounts would not supplement the fund. According to Weisbrot, the Bush plan would likely reduce benefits by about 34 percent.

"Note that currently, Bush seems to be pushing a plan that would offer a very small number of options and would be tightly controlled by the federal government," said economist Jonathan Schwarz. "This would be fairly low cost compared to most private plans now, although fees would still be much higher than with Social Security." Schwartz claims administrative costs would rise from .6 cents per dollar to several cents. "If you retire during a long bear market, you'd be screwed," much like workers who saw their 401(k) accounts plummet in recent years. Under the plan, workers would have very little control over investments. "You'd likely have a choice of three to five slightly different investment vehicles. You couldn't withdraw the money early. So it would be more like forced saving than actually giving you control of your money."

Who Stands to Gain?
Brannon asserts that everybody stands to gain from privatization since they would be responsible for their own funds and could opt not to invest in the private accounts. Other economists suspect the wealthy would gain.

"Social Security is a better deal for people who earned less money through their working lives, and a comparatively worse deal for people who earn more," said Schwarz. According to Spriggs, that's because the point of the insurance program is to ensure a family isn't devastated if the main worker is unable to work because she is too old or sick. "You cannot replicate that through individual accounts," because that changes the nature of the insurance program and gives workers back exactly what they put in, instead of higher benefits going to lower-income workers.

He added that companies that were awarded government contracts could also stand to gain. "Bush has decided that the federal government would take on tracking 100 million tiny accounts so companies won't have to. This is pretty much pure profit whatever [companies] charge. Essentially they would be given a lump of money and told, 'Here, manage this money,' so that's a big windfall."

Schwarz agreed with this assessment. "In the most direct sense, it will benefit Wall Street because the accounts will have to be managed by someone. These fees will go to Wall Street firms, and in other countries that have done this, the fees have been quite substantial."

In light of accounting scandals at Freddie Mac and Fannie Mae, Spriggs said it could be scary to trust this money in pseudo-government hands. "Will they behave themselves is the question? Not enough people have raised the question of mismanagement. What happens if the company that is managing this money does something similar [to Freddie Mac]? They actually want them to restate earnings and say they made 9 billion dollars less than they said."

Indeed, according to Spriggs, the Security and Exchange Commission is not in the position to head such a huge undertaking, and privatization could mean a new government agency would be required to oversee companies and watch how they are using Americans' retirement money. Aside from an administrative nightmare, it could also mean tipping the market. The price of a stock share could change because of the amount of money involved. "It would be very complicated for them not to fix the price they wanted to buy it at," he said. "We're talking about buying hundreds of thousands of shares. The problem is, how do you put that amount of money in the market without affecting price?"

Schwarz said privatization could also mean more subtle political leverage from Wall Street. "It could mean that companies argue against tougher environmental regulations, for example, because it will affect their productivity and hurt grandma. They could make people think their interests are aligned with corporate America, saying: 'Who's more important, the spotted owl or grandma?'"

Do we Dare to Wait?
There are really only a few ways a shortfall can be addressed, politicians and economists across the board agree. Those are to cut benefits, raise the payroll tax, increase the retirement age, raise the cap on taxable wages, or combine two or more of those options. Brannon recommends cutting benefits; Schwarz thinks waiting is best.

"If for stupid political reasons we have to do something, the only thing I personally would recommend at present is raising the payroll cap back to a level that covers 90 percent of wages," said Schwarz. Right now, the payroll cap is at 85 percent, or $90,000 for 2005, and it's wage-indexed, meaning it goes up every year the same percentage as the average wage rises. In 2004 it was $87,000, covering about 85 percent of all wages paid. Schwartz said that under the Greenspan compromise, the payroll cap would have covered 90 percent of wages. "It's dropped since then because people at the upper end of the income spectrum have seen higher wage increases than others. Just raising the payroll cap back to 90 percent would eliminate much of the projected shortfall in Social Security."

Weisbrot feels raising taxes a couple of percentage points would be worth it to keep the benefits aligned with wages and cost of living. And many think it makes sense to wait a bit before tampering with the program that has been viable for 65 years, even throughout cries that it was doomed.

"In the long run, the wealthy benefit from the Bush plan," said Spriggs. "Because the president wants to do what many of those in 1935 wanted to do, which is get rid of social insurance."