There's three main areas to focus on:
1. How does the system work now, and
2. Is there really a "crisis" that will require a change?
3. What is the solution proposed by the Bush Admin?
1. How does the system work now?
Social Security is a guarantee that when you are too old to work, you
will still be able to receive money to live on. Children whose parents
die also can receive some benefits, as can some people who have become
disabled. This fund comes entirely from payroll taxes. All employees
are taxed 6.2% on up to $88,000 of their income (anything above that
is not touched), and their employers contribute another 6.2%. The
money taken out of paychecks now is put towards benefits for current
retirees. So our parents' payroll taxes are supporting their parents,
when our parents retire our payroll taxes will be supporting them, and
eventually our children's generation's taxes will support us when we
retire. This is a "social safety net" that allows all retirees in this
country to have some sort of support, regardless of whether they have
children to support them. Also, all the money paid to the gov't in
payroll taxes is stored by investing it in US Bonds, which has allowed
the country to implement large projects for the common good, such as
the interstate highway system.
Because there was a need to have some sort of cushion in case of
unexpected circumstances, the amount of taxes taken in has been
slightly more than was needed (about 4 out of every 5 dollars was used
for benefits, and the fifth dollar saved). This resulted in a sizeable
Social Security Surplus, or Trust Fund. This surplus is basically
invested US Bonds as well, and used to pay for the current
generation's retirement benefits, added to the next generation's
payroll taxes. In 2000, this surplus was up to about $0.6 trillion.
During the elections that year, Al Gore proposed putting this surplus
into a "lock box", to keep it separate from the rest of the Federal
Budget and protected from administrative borrowing.
(Some notes on the budget surplus:
In 2000, there was also a Federal Budget surplus of about $232
billion. Bush gave almost all of that away on the "tax refunds" of his
first couple years in office. Then in 2002, the Iraq War required
larger and larger amounts of money. Bush responded to this by
decimating the SS surplus - no "lock box" for him. Rather than having
a combined surplus of around $8.5 trillion (as was the case in 2000),
the 2004 budget had a record deficit of $413 billion. )
2. Is there really a "crisis"?
In short, no. According to long term projections, Social Security will
be balanced for about 50 years. After that time, there is a chance
that, depending on wages, birth rates, and immigration, that there
will be more money needed for retirees than is provided by that
current amount of payroll taxes. Even this possible chance for a
shortfall does not constitue a crisis. In 10 or 20 years, the
projection of this will be much easier to read, and there are several
easy steps to take at that time to keep the program solvent. One is to
raise the cap on payroll taxes; that is, allow some earnings above
$88,000 to be taxed. Other changes might include raising the
retirement age to delay slightly when benefits are paid out, and to do
some kind of need-based dispensing of benefits to determine those who
might be in more dire financial situations at retirement age than
There are two main reasons why those on the right have been saying
there is a need for "Social Security Reform". One is purely based on
their wallets. If the Bush reform is enacted, trillions of dollars
will be sent through financial companies, who will make a fortune on
fees, and through other large corporations. Obviously, this is will
make many CEOs and board members happy. Second, and more the driving
force in this proclamation of "crisis" is based purely on their
ideological views. Conservatives tend to favor a "smaller government"
system (though this hasnt' been the case with the current
administration), which allows people more personal freedom and
independence to do what they wish with their lives, thus the desire
for "personal investment accounts". Also, conservatives tend to
believe in The Market as the foolproof way to solve any problem, and
trust the Market Forces to govern better than people. This is why they
favor these taxes being invested into the stock market rather than
distributed by the government to retirees.
3. What is the solution proposed by the Bush Admin?
The basic idea is to cut benefits for everyone to keep the system
solvent without the need for a tax increase. However, they can't just
propose a simple cutting of benefits, so the chance to make up this
money is given in the form of a Personal Account. This allows you to
put up to 4 percentage points of those payroll taxes into this special
account. This account would be used to invest in the stock market. For
every dollar you make in this account up to some amount (now assumed
to be 3% rate of return, but that could change), your benefits would
be cut accordingly. This is on top of other guaranteed benefit cuts.
If you opt out of the system, your benefits are still cut, but there
is no chance of making more money for retirement than is possible
through the current system.
Once you retire, you are forced to use your saved up benefits to buy
an Immediate Annuity, which will make periodic payments of just the
amount needed to keep you at the poverty level. The goverment will
handle all details of this annuity, and any money you have left over
after buying this annuity is yours to spend as you wish. When you die,
the government gets all the money left in the annuity - it is NOT
In this proposed system, the benefits are cut for future retirees, but
not for current ones (anyone currently age 55 or older). But the
current working generations payroll taxes would be diverted from this
generation of workers. So where will the money come from to pay for
the current retirees' benefits? Bush proposes borrowing money from
Japan and China until the year 2015. The claim is that they'd "only"
need to borrow $614 billion. But the people currently aged 55 or older
will be around for 30 or more years, collecting benefits from a system
that will only have 2/3 or less of the income it needs to be solvent.
This seems to indicate that much more money than that will eventually
be needed. Less rosy projections indicate that this amount will be
closer to several trillion dollars.
This presents some major problems with this suggested "solution". One
is that by using the stock market to gain value, Social Security
becomes much less secure. In the current system, everyone is
guaranteed a consistent rate of return. In the proposed one, what you
get depends on whether you retire when the market is up or down. In
addition, benefits are being cut sharply, so an extremely high rate of
return on the investments would be needed to make up the difference.
This return would need to be around 6.5 or 7% for the proposed system
to work and have the government finances not collapse. Without getting
into too much financial jargon, that essentially means that stocks
would have to be priced like the tech stocks were during the Internet
Bubble in the 90's, and that they would rise at the same rate.
Unfortuantely, stocks now are much more expensive than they were back
then relative to the corporation's profit, which means a much lower
returns. (Interestingly, this presents a flaw in the privatizers'
logic: if the economy were to grow at such a rate that the return on
these investments would be enough to make up for the cut in benefits,
then it would also be enough to keep the current system of Social
Security solvent with no changes. So this "solution" is inherently
flawed, and unnecessary. )
Another problem is what happens with the money being borrowed. Future
generations will be saddled with even more debt, in addition to the
huge deficit the budget is running at now. And this points to the
ultimate goal of this plan: the elimination of Social Security. In
2015, the money will have run out from the initial loan taken now, and
the goverment will still have millions of retirees to pay benefits to,
with no Trust Fund and substantially less money coming in through
payroll taxes. Today's younger generations of workers will be the ones
to bear the brunt of transforming the program, getting substantially
less benefits while at the same time seeing most of their taxes going
towards paying off the loans. This clears the way for another cry of
"crisis" and another round of benefit cuttings. Evnetually, there will
be nothing left of the current system to save, and the transition to
complete dependence on vagaries of the market will be complete.
This kind of privatization is not new - other countries have attempted
it before, with little success. Argentina, Chile, and Britain have all
done something similar, and none have seen the kind of success that
Bush is promising for the US. The Chilean government is still throwing
huge amounts of money at the program to keep it afloat after switching
to private accounts over 20 years ago, showing the fallacy of any
government savings from this. Britain has also been trying this for
almost 20 years, and a recent report warns that at least 75% of
retirees there have not made enough using the privatization system to
stay out of poverty. Argentina has fared the worst: their economy
collapsed and they were forced to default on their loan of over $800
million, with closing banks and devalued currency.
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