Social Security is broken

The Sell (Fantasy Land)

Another big buzzword coming from the PR/marketing machine that is the US government is the fact that the Social Security program needs to be “fixed”. In fact, you won’t believe it, but the panacea that has improved American life in so many other ways is also a perfect fit for Social Security: privatization.

What a tremendous deal: rescue a broken social program that has been run into the ground by touchy-feely, non-business-savvy liberals and bolster the US economy at the same time by investing it into America!

It’s like a miracle. Only a clear-sighted straight shooter could have led us to this golden moment in history.

How it really looks (Reality)

If it sounds too good to be true, then you have perhaps been burned by pyramid schemes in the past. Let’s ask the question that doesn’t enter into the mainstream discussion: Is Social Security broken?

Critics downplay Social Security problems (CNN) offers an overview. In typical fashion, it’s “critics” who don’t see the problems and that Medicare is “worse”. Both statements are defensibly true, but disengenuous because Social Security isn’t that broken and neither is Medicare. Sure sounds bad though, doesn’t it?

What does it mean to say that this program needs to be fixed? Opinions, naturally, differ. An “economist at the liberal Brookings Institution” says that “Social Security is like a car with a flat tire … [w]e need to fix the flat tire. But we don’t need to replace the car.” A “[s]enior analyst [at the] conservative Heritage Foundation” says that “[e]very day we delay raises the cost of a repair to Social Security”.

The program itself projected a shortfall of $3.7 Trillion over the next 75 years. For the statistically challenged, that averages to a deficit of about $5 Billion per year for the next 75 years. A resounding success for a social program that helps so many people. That’s how much tax money per year would need to be invested to keep the program running without cutting benifits. That’s peanuts in a day and age where we can spend $6 Billion per month invading Iraq. Why is it so much harder to justify money spent on helping people than killing them? Spare no expense when buying weapons, but count every penny for health care and education.*

The $10.4 trillion figure often bandied about by Bush and his administration (and which will be pounded into your skull throughout 2005) is the “ shortfall over the ‘infinite horizon’”, which is much farther out than even 75 years. Fascinating how they require Social Security to be solvent over an infinite period, but their Iraq war has unforeseen costs of billions and billions over the span of a month.

But let’s not waste time with the numbers Bush is using to frighten a public into supporting his big bucks giveaway (more on that later) … where does the real shortfall of a few billion per year come from?

“Social Security’s financial picture was little changed from last year. The system is expected to begin paying out more in benefits than it collects in taxes starting in 2018, with the trust fund money the government owes depleted by 2042.”

Though it looks like the fund is OK for almost 40 more years, it’s not. Social Security invests its extra money into a trust fund, generally in government bonds. The trust fund is not in a “lock box” (remember funny old Al Gore?), so it’s been regularly plundered by legislators promising to pay the money back before Social Security needs it. On top of that, redeeming government bonds requires the government to pay the money back … out of other tax money or by going further into debt. Whereas it’s ok to bump the debt ceiling for war, it’s unthinkable for the Social Security program to actually expect to redeem bonds that it owns.

Those problems reflect poorly on the entire system, not on Social Security specifically.

*A bumper sticker I recently purchased states “it will be a great day when our schools get all the money they need and the air force has to hold a bake sale to buy a bomber”

Bush’s plan (Corporate Welfare)

When asked what he plans to do about this Terrifying Problem Facing America (TM), Bush responded, “Don’t bother to ask me … [t]he temptation is going to be … to get me to negotiate with myself in public. To say, you know, ‘What’s this mean, Mr. President? What’s that mean?’ I’m not going to do that” What a fresh and sassy press corps, eh? When the President says that the program that provides seniors with their daily bread is “broken”, they dare to ask what he means by that. Such cheek! How dare they expect Bush to explain himself. His is a God on Earth. One does not question his motives or his facts. One does not seek to understand them. One simply obeys.

In other words, he’s content to let the “Social Security is broken” meme float around for a while longer before he offers his solution. By which time a terrified American public will be so desperate to fix this most horrible of all problems that they happily swallow the first solution offered (regardless of whether it solves anything).

To confirm his God-like status, he goes on to say that “[t]he law will be written in the halls of Congress. And I will negotiate with them, with the members of Congress.” He will not discuss this issue with mere plebians or their mouthpiece, the Press. Sit down, little children and let the adults talk.

Bush has already told us what the plan is: people will be able to invest money in private investements instead of Social Security. A couple of questions come up immediately: how much does this program cost? what about people that invest poorly?

Buying into Failure by Paul Krugman gives some answers to these questions. It will cost quite a bit to switch over to this private system: at least 1 to 2 trillion, by most estimates. Maintenance of the program will entail management fees that can be around “20 times as high” as the “one percent for overhead” that Social Security incurs today. This contradicts the Republican party line that private industry always runs meaner and leaner than government programs. In fact, “[p]rivatization dissipates a large fraction of workers’ contributions on fees to investment companies.”, which “cut[s] sharply into the returns individuals can expect on their accounts” Given an average, expected return of “4 percent or less”, workers can expect net returns to actually diminish. Investment firms clean up on fees though; that sounds just about right, given the track record of this administration.

Attempts at restricting private investments to “low-overhead index funds”, which should reduce overall costs, don’t make anything better. They simply guarantee that the investment companies still get their commisions, while restricting the investor choice the program was supposed to offer in the first place.

What happens when workers can handle their own investments privately? Why, exactly what happens with their other investments: Some win, some lose. That’s the whole point of a 3-pillar investment system: guaranteed income from the government (covers some costs), income from a pension and private investments. If you remove the guaranteed income, you just have a lot more poor, homeless 70 year olds. That is just what’s happening in Chile and Britain, where the government must “provide subsidies for workers failing to accumulate enough capital to provide a minimum pension”. America can have all of that too if they dismantle their Social Security to funnel more of their savings into private investment firms’ pockets. Those that invest well will perhaps fare as well as they would now … but there will be many that do not. America will invent a new, poorly-planned program to help them (and it should), but it doesn’t have to be this way.

Don’t buy the hype of our broken Social Security until they explain themselves better. The reason Bush isn’t talking is that he hasn’t been told how to “sell” the idea yet…because it, like so many other ideas advanced by this administration, doesn’t do what he says it does. The problem is exagerrated, the motives are false, the proposal is criminal and large corporations make out like bandits; did you expect any less?