Why Liberals (and Democrats) Should Support Social Security Reform

The following is a long (4 page) document which can read on this page or you can click on the link below to read or save the document in PDF format. The PDF version has bold text emphasis on certain portions which I didn't put in the version on the blog. Why Liberals Should Support Social Security Reform (PDF File) Left-click to read, right-click to save Feel free to distribute the PDF file to anybody who might find the arguments interesting. Rossputin ------------------------ Why Liberals (and Democrats) Should Support Social Security Reform There are compelling reasons for liberals and Democrats to support serious reform of the system, but they are often mixed in with technical discussion which does not appeal to people whose policy choices are not primarily based on efficiency or economics. So, for anyone who opposes reform (or anyone who speaks to someone who does) here is a discussion of some of the important arguments in as plain language as I can muster which might make cause liberals and Democrats to consider the many benefits of reforming the Social Security System. 1. Social Security is a pyramid scheme which would be a criminal fraud in almost any other circumstance. People who are working now pay in to the system. Much of the money goes to people who have retired, but the problem is what happens to the rest (the “surplus”) since current payments are more than what’s needed to pay retirees. Here’s what really happens: The government takes the surplus, promising the Social Security System that Uncle Sam owes the money back, and spends it just like any other tax received by the government. Imagine a friend asks you to hold some money for him and you said you say OK and put it in your left pocket. You tell your friend that your left pocket will only be used for his money. Then imagine you take the money from your left pocket and put it in your right pocket, and put a note in your left pocket saying that it was owed the money from your right pocket. Then imagine you take the money from the right pocket and spent it. Would your friend or the law approve? Would you say that the IOU in your left pocket is actually worth anything? Of course not, but that’s exactly what the government does with your Social Security taxes. The only difference is that the government can eventually enforce the IOU by taxing future workers more and then giving the money back...but that’s is the ONLY way and just because they have the power to tax our children more doesn’t make it right. 2. Social Security is not insurance, investment, or a contract. The Supreme Court has ruled that no matter how much you pay into Social Security, you are guaranteed NOTHING. The money is treated just like any other tax and is not saved or invested. There is no account holding your money or anything else in your name and the government can decide to change or even cancel the program at any time. Your Social Security benefits can be eliminated or reduced at any time by the whim of a few politicians. None of this is true of investment in a personal account which you own and which can never be taken by the swipe of a bureaucrat’s pen. 3. Social Security is often the largest tax that low income workers pay. Many low income workers pay little or no income tax, but they pay 12.4% in Social Security taxes, half of which are “paid by the employer” and half by the worker. Don’t be fooled by “paid by the employer”; that money should be in the worker’s pocket. Remember that the employer only cares about his total cost, not where the money goes. So, the half of the tax which is “paid by the employer” is actually paid by the worker because the employer has already shown that he’s willing to pay that much for the work. For example, an employer is willing to pay $400 per week for a job. Since he and the worker each pay 6.2% Social Security tax, the worker gets $376 and $24 is sent to the government (making the employer’s total $400). Since the employer is willing to pay a total of $400, the $24 the employer gave the government is a direct lowering of the worker’s wages and absolutely should not be thought of as a “free” contribution for the worker. This employee would pay Federal income tax of about $2,423 on income of about $19,550, or about 12.4%. Thus the Social Security tax doubles the total federal tax paid by this moderately low-income worker. For lower income workers, Social Security becomes the largest or the only tax paid! 4. The Social Security tax keeps low-income workers from saving for retirement. High-income workers have extra money after paying for rent, food, etc., which they can put in retirement accounts. They’ll be OK even if Social Security collapses. Low-income workers have no extra money after those necessary expenses but if their Social Security taxes (or part of them) were available to put in a retirement account, it gives them the opportunity to build a nest egg the way rich people can. 5. Following up on that idea, rich people generally can leave something for their children after they die because they’ve saved money, even if they die prematurely. This “inheritability” of wealth helps keep the next generation out of poverty and gives them advantages over people without any inheritance, even if the inheritance is small. But Social Security keeps poor people poor. This is because Social Security benefits are not inheritable. When someone dies, no matter how long he’s paid into the system, the government simply keeps the money. It’s true that a spouse can take the benefits of his/her deceased wife or husband, but only if the spouse gives up his or her own benefits! So when someone dies, the government gets to keep somebody’s Social Security payments! This means that the children of a low-income worker who was prevented from building up his own savings by the high payroll tax are prevented from the likely boost out of poverty which even a small inheritance could bring to the family. Going back to the example earlier of holding a friend’s money, it’s as if you argued that you don’t owe the money to his family if something happens to him. Not only is the system unfair and immoral, but it’s incredibly damaging to low-income workers who work hard but are prevented by the government from improving their families’ long-term situation. 6. As if the system weren’t unfair enough to low-income workers, it’s even worse than it seems because Social Security discriminates against women and minorities due to work patterns and life expectancy. Since women tend to work fewer years and often at lower salaries, they tend to earn lower Social Security benefits than their husbands. Then women tend to live longer. This means that the surviving wife has to take her husband’s Social Security benefits (which are higher than hers) but must give up her own to do so. Thus, the 12.4% of her wages which she paid for all those years are simply kept by the government! Since minorities tend to have average life spans less than Caucasians, more African-Americans and Hispanics than Caucasians die before retirement age. The government then keeps the money paid in by the minority workers and pay it to the longer-living people, turning Social Security into a unethical transfer system from African-Americans and Hispanics to white people! 7. Any addition of personal accounts to the system will be VOLUNTARY and the government will continue to GUARANTEE the benefits of anyone who is currently in or near retirement. The right to contribute into your personal account at the beginning of a system reform will likely decline with age. Anybody already receiving Social Security benefits will not even be eligible to participate in the reformed system. Instead they will stay fully in the current system. Only people with many working years ahead of them will be able to contribute the maximum percentage of their earnings to their personal accounts. 8. Don’t buy the fear-mongering about being invested in stocks and bonds! Almost every major union including those like the national teacher’s union which argue against private accounts puts a huge amount of its own pension funds into the market. There’s a good reason for this: There’s no decade in our history where the return on an investment in the stock market or in bonds didn’t surpass the returns from Social Security. In other words, in every decade since the start of Social Security, you would have been better off with your money in the market than in Social Security, including the decades with stock market “crashes”. 9. Ownership gives people pride in themselves and interest in knowing what government is doing. High-income people can already bring pride and confidence home and instill that in their children, with the benefits that brings to their development as adults. Becoming a real owner of assets, knowing that he is doing something which will benefit following generations not only instills pride and civic responsibility in low-income workers but also encourages them to teach those same values to their children. One of the keys to the success of our nation has been the limited nature of our government and the interest our citizens have had in maintaining those limitations. Giving low-income workers a real stake in our markets and government would be an important benefit for the entire country, going a long way towards eliminating the sort of “class warfare” from which nothing good ever comes. 10. A couple slightly technical arguments, but which are worth making: The argument that nothing needs to be done for 40 years is bogus. When people talk about 2042 as the year the system goes bankrupt, they mean that that’s the year when all the prior surpluses will have been used up. But since it’s a pyramid scheme with all the money already spent and just leaving meaningless IOUs, the system will actually be bankrupt in less than 15 years. That’s when the promised benefits will be less than payroll taxes coming in. Since there’s no actual trust fund holding the prior surpluses, there will absolutely have to be either slashing of benefits, raising of taxes, or both. Year 2042 is meaningless. We have a problem now. Furthermore, the argument against personal accounts based on increased government debt is a deception. The government will have to borrow that money anyway, and can either borrow less now at lower interest rates or more later at higher interest rates. During the time while the personal accounts would be operating, workers would be accumulating higher retirement benefits than they would be within the system. So when the system finally collapses, the government will not have to massively raise taxes or slash benefits for everyone in order to make sure people are not impoverished in retirement. The borrowing needed now is just prepaying borrowing which will be necessary later. As a friend of mine says, when someone argues that a plan is expensive, you must ask “Compared to what?”. 11. Personal accounts will hugely benefit our younger generation while not effecting our senior citizens one bit. Young people know that Social Security will not be there for their retirement. Arguing against allowing personal accounts is an unconscionable burden on our young people. It’s even worse for young people than it seems because the system bases retirement benefits on the highest 35 years of working income. This means that very new workers are contributing to the system but (if you think they will work for more than 35 years and their income will rise over time) they are not actually earning Social Security benefits. If we had personal accounts, workers would be saving for their retirement every year, and not simply losing 12.4% of their earnings while they’re young. Not only does the current system harm our youngest workers financially, but it gives them reason not to bother working! Remember the value of compound interest. Even a small contribution to a personal account at the beginning of a career turns into a lot of money by retirement. For example, $1000 earning 6% becomes about $4,300 in 25 years. The current system steals that potential retirement savings from a young worker at a time when retirement savings are most valuable, i.e. the beginning of a career. To sum up, Social Security is a pyramid scheme which discriminates against women, minorities and young workers. The benefits are not guaranteed and payroll taxes are not invested in anything – they are just spent by the government with a promise to take money from future young people to pay back people working now. The actual inability of the system to be self-sustaining is in less than 15 years so we must act now. Personal accounts will be voluntary and will have no impact on current senior citizens. Being invested in the market is good for people’s finances and civic participation. And most importantly, Social Security keeps poor families poor. Many people think of the Democratic Party as the party of the worker and of low-income families. Since the greatest benefits would be to low-income workers and minorities, particularly in the ability of those workers to save money which really belongs to them and can be left to their children, it can only be the worst of politics causing unions, the AARP and the Democratic party to oppose personal accounts. True liberals who care about the quality of life of the least fortunate among us and hard-working but low-paid workers should be the most vocal critics of the current system and the most forceful supporters of personal accounts. Remember, personal accounts stand to benefit minorities and young people while having no impact on current retirees or those close to retirement age. This should not be a partisan issue and there are many Democrats who acknowledge that the Social Security System has serious problems and should be dealt with now. I urge everyone regardless of political party who has opposed reform because they think it hurts the least fortunate among us to really examine what the system does to our low-income workers. And I urge you to hold responsible any politician or organization who says they’re looking out for the little guy when all they’re really trying to do is to keep people paying more taxes or union dues.
  • Randy Piper
    Comment from: Randy Piper
    03/20/05 @ 11:38:53 pm

    Ross: Your 11-point overview is the best summary I have read to date on the Social Security challenge. I hope that Independents and Democrats of all stripes read your post. I also hope that card-carrying members of the AARP -- whose leadership has created a campaign of fear and falsehoods surrounding SS reform -- that AARP's rank-and-file would take a few minutes to read and circulate your first-rate piece. Congratulations and Enjoy the Day!! Randy Piper, Ph.D., M.B.A.

  • PGL
    Comment from: PGL
    03/22/05 @ 03:29:28 pm

    This is the best summary of the Bush set of lies perhaps. Biggest LOSERS in this attempt to divert one's payroll contributions to subsidize the General Fund disaster? Young workers. But whoever wrote this nonsense would either not understand the simple point or never admit it.

  • William
    Comment from: William
    03/22/05 @ 06:07:13 pm

    thats bullshit nonsence all of it, try www.aarp.com for real information about SS

  • Lew Warden
    Comment from: Lew Warden
    03/22/05 @ 10:09:37 pm

    Here is a letter I sent to President Bush's Advisory Panel on Tax Reform and March 21st, and also to a rather long and rapidly growing list of the folks “out there.” I’ve been getting strong favorable responses and a surprisingly few negatives. You may find the idea intriguing. • * * President Bush has repeatedly said that where Tax and Social Security reform are concerned, “everything is on the table.” So I’ll take the President at his word and offer an unique plan to solve our fiscal problems. I have grave doubts about the utility of the VAT, the Flat Tax, and other consumer based taxes which are being proposed by some Republicans because (a) they hit an already overstressed tax population, (b) they directly and visibly add to the cost of the product and thus inhibit consumption, which inhibits production, which inhibits employment, which inhibits consumption, which isn't good for anyone, (c) they are complex and thus not readily understood by the public, and (d) they propose to replace the Income Tax but are difficult to put into place at the same time the Income Tax is producing revenue. As for Social Security reform, forget about this individual accounts idea. It’s too loaded with political ideology, and without the employers’ contributions the amounts yielded on 6.2% deductions will be far too small to be of any substantial value to the recipients. Also, as the President’s own supporters admit, the cost of setting up and handling the individual accounts just about equals the deficit he forecasts. Besides the people know the market’s too iffy and that averaging over decades doesn’t mean diddly when you must eat every day and the rest of the bills come in every month. He’ll never sell it. Because I don't believe in knocking the other guy's ideas unless I have what I think are better ones, I submit the following proposal to meet our fiscal problems, not in the distant future, but right now, just as fast as Congress and the President can put pen to paper. I’m talking now money, lots of now money, not pie in the sky. This proposal is simple, readily understood by the public, and can quickly be put in place without any disruption of the present income stream. And it's a three-fer. That is, it solves the Social Security problem, opens the door for a major tax reform that will eliminate the need for the hated Income Tax, rid us of the IRS and the Tax Code as we know them today, together with those burdensome returns and accounting and legal expenses—not to speak of the favoritisms resulting from manipulations of the Tax Code—and commence the task of reducing the National Debt and establishing fiscal responsibility. Three major solutions for the price of one. We propose to start this program off with a modest one half of one percent tax on all stock market trades, a Securities Transaction Tax (STT) as it is referred to in the literature. This is substantially less than the fees brokers collect from both sides of a stock trade. Based on an average of the last four years of US stock exchanges trades as reported by the Statistical Abstract of the United States for 2003--such a tax for the same period would have produced annual revenue of $1,259.375 billion, or $129.895 billion more than was produced by the Income tax during the same period. $1.3 trillion in new money! Why that sum alone is enough to make the Social Security Fund fully solvent in just one year. Then apply that revenue to retiring the National Debt, which now rests at some $7 trillion. And as that debt gets paid down, so does the cost of “servicing” it, a staggering expense that is the third largest item in the annual Federal budget, right after social programs and defense spending. And at no real cost or pain to anyone. Because it is incredible to suppose that a tiny tax of a mere one half of one percent on a stock trade of any significant financial value would discourage anyone from buying or selling a stock. Now arbitraging and, perhaps, day trading may be different. But who dares speak for those ruthless gamblers who have been known to wreak havoc on the economies of lesser nations with their predations? Surely not you gentlemen or the President. Best of all, the mechanism for the collection of this tax is already in place. It’s how the SEC collects the funds by which it pays for the cost of its stock market regulatory activities. Just change a decimal point here and a number there in the SEC’s computer program and watch the money roll in, right now. Now money. New money. Money we need so desperately. Much better than going to the Borrowing Well, selling Tax Free government bonds which only add to the burden on future generations of taxpayers. Then, the immediate problems solved, extend the Securities Transaction Tax to all financial transactions, in which form it becomes known as a Currency (or Money) Tax or a Financial Transaction Tax (FTT), and a stream of revenue will painlessly result that could be enough to meet the needs of all levels of government, Federal, State, and local. No more Income Tax. No more troublesome returns. No more incomprehensible tax codes. No more special favors. No more IRS. Don’t tax people or corporations, just tap into the flow of money as it courses through the economy. Like giving blood to the blood bank, or milking Old Bossie. But keep the percentiles low or you’ll end up killing the cow. An added benefit is that the economy becomes totally transparent, which makes the solution to any number of problems become easier. Something to think about? And devoutly to be desired. * * * Friends, if you like this proposal, copy it and send it to your friends. Also send it, by hard copy, snail mail, because they don’t accept e-mail, to President’s Advisory Panel on Federal Tax Reform 1440 New York Ave. NW, Suite 2100 Washington, DC 20220 And if you don’t like it, how about sending me an e-mail telling me why? LEW WARDEN 221 Town Center West, #227 Santa Maria, CA 93458 lewwarden@pronet.net

  • David
    Comment from: David
    03/22/05 @ 11:06:08 pm

    Excellent summary. How about one more point? Karl Marx said the workers should own the means of production. This is a chance for them to do just that.

  • Rod Anderson
    Comment from: Rod Anderson
    03/23/05 @ 09:13:09 am

    Your point that "But Social Security keeps poor people poor" is exactly why the Democrats are fighting reform. Once people aren't poor, then they don't need to depend on the Gov't anymore -- and the Dems lose a voter. It is the politics of dependence (dare I say slavery) that not only keeps programs like this going, but tries to add all of us to the roll of dependents.

  • RLM
    Comment from: RLM
    03/24/05 @ 11:59:00 am

    As a fiscal conservative I am appalled by Bush's plans to meddle in the free market. The massive amounts of money flowing into “personal” accounts would NOT be invested according to free market principles. Individuals would not have the freedom to invest in the next Microsoft or Google. The money would instead be invested in a very limited number of "safe" stocks under rules DICTATED by the Congress and influenced by politics. The role of Wall Street is to move investment funds into the most productive enterprises. The losers in this scheme, for lack of sufficient capital, would be the innovators, precisely the companies that we need the most to maintain our competitive edge in the world Too many people have fallen for the "it's your money" scam. If you can't invest where you want to, and when you retire the government tells you that you can't take your money out but must put at least part of it into a long-term annuity, then how can you say that its YOUR money? Instead of this endless conjecture about what would occur with privatization, why not bypass the whole discussion and look at what has actually happened when privatization has been implemented. Look what happened in the UK with a plan quite similar to Bush's (as much as we know of it): From a British newspaper of June 2004: "A new pension scandal could be set to engulf millions of people in the coming years. This fiasco involves the top-up state pension, formerly known as Serps, and it's a tale of billions of pounds worth of government "bribes," promises of great returns that have turned hollow, and a whole lot of people on course to be worse off in retirement as a result of opting for a private pension. “Many of those affected are blissfully unaware of the storm clouds brewing overhead, no doubt partly because they find the subject too complex or sleep-inducing to grapple with. “But the wake-up calls are growing louder, with pensions experts warning that some people who bailed out of Serps (the state earnings-related pension scheme) and signed up for a personal pension could end up with retirement incomes that are just half what they might have expected had they stayed in the state scheme". Chile's system is somewhat different, but the results have also been a disaster. And closer to home, consider the contrast between two pension funds for government workers in Texas. One, covering the state’s teachers, is now about $8 billion short of what it owes current and future retirees, and is projected to be $13 billion short by next August. It is expected to seek a state bailout. The other fund, for municipal workers, is based just three blocks away in Austin, but couldn’t be more different. This fund can readily pay promised benefits to the retirees of some 80O participating cities and towns in Texas, and doesn’t need any extra help from taxpayers. Gary W. Anderson, its executive director, says grateful retirees often call him to extend "what we call ’attaboys’ down here in Texas." These two pension funds face the same challenges in the same financial environment. The crucial difference is in the way they manage their assets The teachers’ plan uses the same approach most pension funds have adopted over the past quarter-century: investing in a combination of stocks and bonds, some of it actively managed by professional investment advisers. If the stocks and bonds do well, the fund can post strong returns and be able to afford to pay retired teachers their pensions even after deducting the substantial costs of managing the portfolio. The strategy also runs the risk that the investments won’t do well, and the last few years of bearish markets have been hard on the teachers’ fund, erasing billions of dollars of value. At the same time, the fund’s obligations to retirees have been rising, creating a calamitous mismatch between assets and liabilities. It’s more or less the same story at nearly all pension funds. At the Texas Municipal Retirement System, however, "we just took a different approach," Mr.Anderson said. The fund tuned out the siren song of Wall Street long ago, and followed a much more conservative strategy. It forecasts how much it will have to pay retirees and when, and then buys and holds high-grade bonds that will pay those amounts on the same schedule. There is much more, but you get the picture. -Rich

  • Comment from: Rossputin
    03/24/05 @ 06:19:18 pm

    RLM: As Don Boudreau says when talking about economics, when someone says something is expensive, you must always ask "Compared to what"? It's the same situation here: It's true that not having full control of your money is government interference that we can't support. But having a little control is better than what we have now. If I have to choose between fighting for full control, a battle I'll definitely lose, or for a step in that direction which I might win, I'll take the battle I might win. The English system has had trouble because of high overhead costs and management fees which would not be the case in our system. That does not mean it has been a failure though it has not been the success it should have been so far. While there have been some similar issues in Chile, as might be expected in a country with a fairly small capital market system, you're entirely wrong that the results there have been a disaster. To the contrary, they've been great and 95% of the population has opted for personal accounts instead of the government pension system. Here are a couple documents you might find interesting: First, from the non-partisan CBO: http://www.cbo.gov/showdoc.cfm?index=1283&sequence=0 Second, from the left-leaning CBS News: http://www.cbsnews.com/stories/2005/03/10/eveningnews/main679435.shtml As for the Texas pensions you mention, I don't know the details of those funds but the bottom line is that the first one sounds like a defined benefit program. We need to be moving towards defined contribution programs. Furthermore, if you like the idea of the results of the second fund, then you can just buy bond funds in your personal account. Either is better than Social Security. Thanks for reading and commenting. Rossputin

  • WCV
    Comment from: WCV
    04/04/05 @ 05:22:56 am

    Wow, I'm not sure where to start taking apart #3. "Most low income workers pay no income tax, but they pay 12.4% in Social Security taxes, half of which are "paid by the employer and half by the worker." Millions of low income workers will be astonished to learn this, and will demand to know how they have missed out on this favored status as non-income-tax-payers. A childless adult working full time at minimum wage, does, indeed, pay federal income tax, and the best they can hope for is a small (under $50) Earned Income tax Credit, which still leaves them with a nontrivial income tax liability. Next - still within #3 - I read that we should not be fooled by the "paid by the employer" technicality; the ridiculous assertion is made that "that money should be in the worker's pocket. In the mainstream, middle-class world, this assertion is valid. But I see no reason low-wage workers should expect to see ANY portion of the so-called employer's "contribution" in their post-privatization paychecks. Think about it: Let's say you are McDonald's, and you no longer have to pay "your" share of FICA taxes to the government. You now have options for the use of that money. You can (a) give all of it to the employee, (b) give it to your customers in the form of lower prices for Big Macs, or (c) an intermediate position between (a) and (b). Hamburger flippers are in ample supply, there is no need to put this money in their paychecks. Customers, on the other hand, are the scarce resource here, so they will enjoy the freed-up cash in the form of lower prices. #3 gets my vote for Most Ridiculous Item of the Day.

  • Comment from: Rossputin
    04/04/05 @ 11:50:08 pm

    You're right...I should have said "many" and not "most"...but the bottom line is that for most, Social Security taxes is the largest tax they pay. As for the "paid by the employer" part, you may be right that in the case of very low skill jobs the employer might be able to keep that part of the tax if he weren't required to pay it. But as soon as you get to labor that's even slightly more difficult to find than a burger flipper, my point is absolutely valid. I hope that burger flippers aspire to something more and don't just think that the current system is fine because they'll always be part of a labor situation with more supply than demand. I'm glad you voted for #3 for something, but other than the word change from "most" to "many", I wouldn't change my assertion a bit.

  • WCV
    Comment from: WCV
    04/05/05 @ 12:16:55 am

    Okay, fair enough, I think your points are valid (I support the concept of privatization but an undecided on the current proposals) and there's room for reasonable people to disagree on the extent to which workers will see the "employer's" share of SS taxes. As for the hamburger flippers, my readings over many years has led me to conclude that about 10-15 percent of Americans earn low wages throughout their working years. They never advance, never buy homes, never build a retirement nest egg. The current SS system treats these people badly, will reform make them better off?

  • Social Security Choice
    Trackback from: Social Security Choice
    03/22/05 @ 01:21:27 pm

    Why Liberals Shouls Support Personal Accounts
    Ross Kaminsky, of Rossputin.com, has got a quality blog post listing 11 points on why liberals should support personal accounts for Social Security. Each point is valid and can stand alone, but when brought together, they represent a powerful argument....