A Tale of Fear and Greed: The Push to Privatize Social Security
For years, far-right critics of Social Security have warned of the impending financial collapse and bankruptcy of our nation's public pension system. Then suddenly, these predictions of doom burst into the headlines of the major news media. Are we finally going to have to face the music about Social Security's coming insolvency?The predicted crisis stems from official reports that the Social Security trust fund will begin to experience a shortfall as the baby boomer generation reaches retirement age -- paying out more in benefits than it takes in. This pessimism about the long-term solvency of the trust fund has opened the door for radical proposals to restructure how Americans plan for retirement.A growing number of Americans now express cynicism about the future of Social Security. Yet, much of this public sentiment has been engineered behind the scenes by powerful interests. A coalition of Wall Street money managers, conservative ideologues, and "new Democrats" have joined forces to lend fresh credibility to the tired prediction that Social Security will inevitably go bust. Their preferred solution is to push for as much privatization of Social Security spending as the public will tolerate.The payoff from this campaign will come in the form of huge new cash flows running into Wall Street's coffers. The Wall Street Journal reported that even the most moderate privatization scheme would divert $60 billion a year from the trust fund into mutual funds managed by big investment firms. According to the Journal, Social Security privatization could be "the biggest bonanza in the history of the mutual funds industry." The New York Times estimates that the more radical privatization proposals could send anywhere from $400 billion to $2 trillion annually toward market speculation. Either way, financial middle men would siphon billions in fees and commissions from this cascade of money.Naturally, the mutual funds industry has been among the most adamant proponents of privatization, speaking to political leaders in a language both parties can understand. The Investment Company Institute (ICI), the trade association and chief lobbyist for the mutual funds industry, was the top political contributor among trade associations in the last election. According to Robert Dreyfuss, ICI's Director of Industry Studies, "Privatization has been at the top of our list for some time."While quietly lobbying Congress to promote their agenda, ICI is careful not to attract too much unwanted public scrutiny. As a Democratic Congressional aide put it, "They don't want to be seen as swarming over the dying carcass of Social Security." ICI hired the professional Washington lobbying firm of Verner Liipfert, which currently employs former Treasury Secretary Lloyd Bentsen and former Senate Majority Leader George Mitchell. To further ICI's agenda, Verner Liipfert orchestrated the creation of the bipartisan Public Pension Reform Caucus in the House of Representatives.Barely able to contain their enthusiasm, individual investment firms such as Merrill Lynch, Fidelity Investments and State Street Bank and Trust have also increased their political contributions and begun speaking out in favor of privatization. State Street CEO Marshall Carter told the trade publication Pensions & Investments that they have already begun preparing for the influx of cash, saying, "You could be staring at 130 million new accounts."The fever on Wall Street is not just limited to the money movers. The National Association of Manufacturers and the U.S. Chamber of Commerce have both established task forces to address the issue. Ken Vest, spokesperson for the American Council of Life Insurance (ACLI), says that the big insurers "...want to do anything they can to encourage private savings plans."WINNING OVER THE PUBLICAs with any major battle to sway the public's opinion, it is not enough to merely spend money in Washington. There must be a strategy to win the hearts and minds of the voters. For this, big business turned to the Cato Institute, a right-wing libertarian think-tank, providing $2 million for a three year campaign to sell privatization to the people. The powerful ideological motivators chosen to accomplish the task were already familiar to Wall Street -- fear and greed. First the public must be convinced to fear that the Social Security system is teetering on the verge of collapse. Greed is then employed to sell privatization by promising higher rates of return on private retirement savings via market speculation in stocks and bonds.Pro-corporate "grassroots" organizations, small in membership but lavishly funded, also plan to spread fear about the instability of Social Security. For instance, Citizens for a Sound Economy, a group that in the past has organized well-funded campaigns in favor of the tobacco, pharmaceutical, and oil industries, plans to spend $2 million to promote privatization through newspaper, radio and TV ads targeting the elderly, women and the young.But if big business has given steam to the issue, and right-wing think-tanks have provided the ideological cover, the real credit for putting privatization on the map must go to the "new Democrats" who saw yet another opportunity to upstage their conservative peers. The Democratic Leadership Council and the ill-named Progressive Policy Institute, two leading "new Democrat" institutions, have joined the privatization crusade. Bob Kerry, a prominent Democrat and key sponsor of privatization legislation, was asked about whether progressive Democrats might mobilize to defend Social Security. Kerry brazenly remarked, "I'll kick the shit out of any liberal who tries that."The problem for privatization advocates is that Social Security works well, is immensely popular, and is in no real danger of failing. Thus as political commentator Alexander Cockburn keenly observed prior to Clinton's reelection, "Destroying the New Deal has to be an inside job."According to the Washington Post, both Clinton and Dole received briefing papers from Wall Street interests that recommended the candidates remain neutral on privatization until after the election. According to Steve Elkins of the National Association of Manufacturers, this silence would avoid politicizing the issue and forcing either candidate into a defensive stance in favor of the old system. For his part, Clinton appointed an advisory council to look into various proposals for ensuring the long-term solvency of the Social Security trust fund. Several proposals have emerged, each endorsing some degree of privatization. These range from allowing the trust fund itself to invest a higher portion of its assets in stocks, to turning over payroll taxes for individual accounts to be managed by stock brokers.CRISIS? WHAT CRISIS?Given the high-stakes media onslaught, it will be difficult for the average citizen to argue against privatization, presented as the only way to avoid approaching crisis. But, what exactly is the crisis?The Social Security trust fund maintained a surplus of over $60 billion last year alone. Yet, the law governing Social Security requires that the fund show projections that it will be in balance for 75 years into the future. According to the Social Security trustees' projections, there will be sufficient funds to cover all retirees until the year 2030 with no tax increases whatsoever. As baby boomers retire and the population shifts to higher age brackets, benefit levels will start to exceed social security taxes collected. The fund will then need to draw on interest to cover the shortfall.Several economists have pointed out that the trustees' predictions are overly pessimistic. For planning purposes, the trustees make three financial projections 75 years into the future: a pessimistic one, an optimistic one and an official projection between the two. The official guess used by the trustees assumed a growth rate of 1.5 percent per year over the next 75 years. This middle estimate thus relied on a growth rate half the 2.9 percent rate experienced during the last 75 years. Even the great depression decade of the 1930s, with a growth rate of 1.9 percent, outperformed the trustees' planning estimate. The trustees' low estimate of 0.7 percent growth is slower than even population growth. According to economist Doug Henwood, "The system will go bust only if you assume decades of stagnation. If the economy grows in line with the 1973-94 average of 2.4 percent, still slower than the 75-year average of 2.9 percent, it will run a big surplus." Thus, the fuel for dire predictions of "crisis" stem from extremely pessimistic economic planning projections 75 years into the future.Even if one accepts the overly pessimistic numbers reported by the trustees there is little cause for concern. According to former Social Security commissioner and Clinton advisor Robert Ball, there is no crisis. Ball maintains that "with a few minor adjustments Social Security can continue to pay full benefits for the next 75 years." The 1996 trustees' report noted that the predicted problem could be solved for the next 75 years by a 2.2 percent increase in payroll taxes (about one percent on employees and one percent on employers). Alternatively, Doug Henwood notes that salaries above a fixed amount ($92,000 in 1992) are exempt from Social Security taxes. He notes, "Lifting the cap and taxing higher incomes would keep the system solvent indefinitely." Robert Ball's proposal is to permit the trust fund itself to invest a certain percentage of its funds in stocks (up to 40 percent), allowing the fund to grow more quickly and avoid a possible shortfall while still protecting individual retirees from the risks of market speculation with the guaranteed safety-net of a public pension. On the downside, this proposal might lead to increased government debt as fewer bonds are purchased.Other, more punitive proposals include such "painless" solutions as lifting the retirement age, or recalculating the consumer price index (CPI) to lower benefits behind a political wall of smoke and mirrors.Ironically, the major threat to Social Security comes from the current proposals to fix it. Currently the costs of administering the public system run at less than 0.7 percent of annual benefits. By handing over management of retirement funds to a host of Wall Street professional investment managers, administrative costs would skyrocket. Indeed, this is the entire appeal of the privatization scheme for investment management companies. They could be lining their pockets with fees and commissions on the billions of dollars currently being invested by the Social Security trust fund.One of the popular models touted by privatization reformers is practiced in Chile, where individual retirement accounts are currently managed by private investment firms. Administrative costs in Chile run from 13 to 15 percent, biting deeply into any gains from riskier stock investments. The private savings model in Chile has severely reinforced existing inequalities. The retirement safety net for the poor equals the price of a loaf of bread and a cup of coffee per day. It is likely that half of all retired workers in Chile will fall under the poverty line. At least 43 percent of those who have individual accounts are not making regular contributions to them, thus leaving these workers uncovered by an adequate pension in their later years. Sylvester Scheiber of Clinton's Social Security Advisory Council models his proposal on the Chilean system, noting; "They did have certain advantages in Chile. They did have a dictatorship and they did have control over the media." Ironically, Chile's military personnel held onto their publicly guaranteed pension benefits despite the reform.The sparkling appeal of high returns on riskier stock investments similarly dulls when one realizes that markets go down as well as up. Along with the risk of picking bad investments, and the cut taken by investment jockeys to cover their costs and profits, is the possibility that one's retirement will coincide with a market downturn, recession or even depression, as has been known to occur from time to time. Given a 75 year planning period it doesn't seem ludicrous to take these possibilities into account.In addition, privatization is guaranteed to create an immediate fiscal crisis in the Social Security trust fund. Money diverted to private accounts would no longer be available to pay current beneficiaries. The transition costs would create an enormous shortfall which would severely weaken the system, by as much as $7 trillion over the next 75 years, according to the Cato Institute. Indeed, this is a primary goal of the anti-Social Security forces. By changing Social Security from a universal program to a stigmatized welfare program for poor and low-income workers, opponents of the system hope to drive a wedge into its support and make possible further dismantling. The rich would opt out of the system in favor of private investments while support would wane among middle class workers.Despite the negative hype, Social Security remains a popular program. Social Security currently provides retirement income to over 35 million people, disability insurance for all workers in case of accident, and survivor insurance for families in the event of the death of a parent or spouse. The system is fair, administratively efficient and in no real financial danger.The American Association of Retired Persons (AARP) has mounted the most effective campaign in favor of preserving the current system. According to the AARP there is no present crisis and 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. Ever watchful of ways to bring the opposition into the fold, Wall Street has toyed with the idea of trying to co-opt the AARP. State Street Bank executive and funder of the Democratic Leadership Council William Shipman suggested that AARP enjoy a share of the windfall by marketing mutual funds to their retiree members. To their credit, AARP has no plans to participate in such a scheme.The barrage of confusing economic predictions obscures the real question -- what kind of a society do we want? The big winners from privatization will not be working people saving for retirement, but money managers on Wall Street. We must not let the motive of fear and the enticement of greed blind us to false promises which undermine the guarantee of basic dignity to each citizen during their autumn years.Sources include: "The End of Social Security As We Know It?," Robert Dreyfuss, Mother Jones, Nov./Dec. 1996; "Privatizing Social Security, The Wall Street Fix," Dean Baker, Economic Policy Institute Issue Brief #112; "Reforming Pensions Revisited," Doug Henwood, Left Business Observer.