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Don't tamper with social security Mr. President

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opednews.com Headlined to H3 4/17/13

(Article changed on April 18, 2013 at 07:20)

(Article changed on April 17, 2013 at 21:29)

I was deeply dismayed at the president's decision to cut social security by putting chained CPI in the budget. Whether this passes the House of Representatives or not is irrelevant really because he has put the proverbial camel's nose under the tent. The door is ajar however slightly. He now has the distinction of being the first democratic president not to defend social security 100 percent. And now the privatize-social-security cohorts will be emboldened to push harder to fulfill their ideological--Paul Ryan's Randian--dream--i.e., social security a la Chilean model. Never mind that social security has been a success; never mind that social security recipients are happy with it; never mind that social security is solvent; never mind that social security has nothing to do with the deficit; and never mind that the lifting cap would solve its funding concerns in perpetuity.

The fake urgency to fix the country's economy by balancing the budget through spending cuts is transparent for its duplicity--the goal is hardly to save social security but a more cynical one to pump trillions of dollars into the pockets of Wall Streeters in the name of tapping the benefits of privatization of social security. Pinochet's Chile is often hoisted as an example of the virtues of privatizing social security. But the jury is still out on Chile. The implementation of Jose Pinera's (Cato Institute) plan for privatizing social security in Chile came at enormous human costs. But renowned economists like Milton Friedman and Friedrich Von Hayek were smitten by the Chilean model and wanted it imported to the United States (Friedman) and the U.K. (Von Hayek) in the Margaret Thatcher era. It is fundamentally the same plan Rep. Ryan wants for the U.S. The Chilean model involved a shock treatment to the economy that produced almost of four years of economic disaster. Then it started to grow in 1978. But by 1982 the economy collapsed again. The country of Chile is now bifurcated into rich and poor. It has a private pension plan and a "pay-go" plan such as ours. To get around that innate friction of shock treatment, the Paul Ryan approach here is to guarantee benefits to retirees and people close to retiring. Ryan has a long-term horizon, four decades for complete plan implementation.

Grading the Chilean model: the privatized pension fund was more expensive to administer and after two decades many retirees discovered their privatized pension-fund investments paid half of what retirees in the "pay-go" system got in retirement benefits. Then by 2006 this hybrid system was both inequitable and dysfunctional demanding overhaul and subsidies for the poor.  " . . . [original privatized pension plan] longer even exists in Chile. In its pure libertarian form, the original Chilean pension-privatization scheme, which featured no economic redistribution whatsoever, failed - at least according to Chilean popular consensus." (see Bruce Wilson, Salon)

This begs the question, is the Chilean model of a privatized-pension system appropriate for the U.S. or will the privatization of social security lead to the same kind of costs and bifurcation of retirees; and ultimately will widespread privatization lead to greater inequality in the distribution of income? I believe if you honestly wish to copy a model you have to consider its benefits and costs. True, our "pay-go" system is somewhat redistributive and does not benefit from market-driven investment returns. But it was not designed to make money. It was designed to reduce poverty among the elderly.

One virtue of our present social security plan is that it is a defined-benefit plan--you know how much you pay in and you know how much you will get out--based on some actuarial analysis. Now, if you believe social security payouts to you at retirement will not be enough to maintain your living standard, you are welcome to open a private account at a financial institution--bank, savings and loans, credit union--and save for this event in your life. And there is a plethora of other options, of course, like IRAs, annuities, money-market accounts, certificates of deposit, mutual funds, municipals, treasuries, stocks and bonds, 401(k) plans, etc. Each of these have their positives and negatives, and even the brightest students for ivy-league business schools--Notre Dame, Cornell, Washington U, Pennsylvania (Wharton), UC-Berkeley, Brigham Young, NYU, Georgetown, etc.--might find it quite a challenge to pick the best investment strategy for their portfolios. Imagine how much more difficult it might be (perhaps near impossible) for someone without a sophisticated academic degree--like most people to set up an individual retirement account to be supplemented by a voucher? One might be self-motivated to save at 20--I'm not sure. At that age you're immortal. However, one morning you wake up and you're retired. You discover your 401(k) is now 201(k). You freak out! Why? Your 401(k) has lost fifty percent of its value. You discover also that interest rates are a paltry one and one-half percent. So, you can't make money on bonds. Then you don't have health insurance and nobody wants to sell you a plan (especially if you have a precondition). You could buy Cobra, but it would cost you an arm and a leg. And as bad luck would have it, your company raided your pension plan; now you're really up the creek. 

There's a Wall Street Journal piece that talks about what companies do to your pension. It says, "A little over a decade ago, pension plans had $250 billion in surplus assets. But employers siphoned billions from the pension plans to pay for restructuring costs, often by providing additional payouts in lieu of severance, and by withdrawing money to pay retiree health benefits -- and in some cases parachutes for executives."  

"When the market cratered in 2008, there was no surplus to cushion the blow, and today, pensions collectively are underfunded by 20%." And there is more, "Another reason your pension plan might be underfunded: Your employer stopped contributing to it. The Government Accountability Office found last year that 10 large companies that hadn't made required contributions to their pension plans paid top executives $350 million shortly before terminating their underfunded pension plans in bankruptcy."

But there's one glimmer of hope. Social security (and Medicare)--an entitlement, not welfare, not a voucher plan--is there. Granted the government did not see it fit to keep its hands off your money and started to tax your social security benefits in the early 1980s. In 1983 President Reagan signed the 1983 Social Security Amendments that resulted in taxes on people filing returns on individual income above $24,000 or joint income above $32,000 starting in 1984. Ironically, it was also in the 80s that the government reduced the top marginal tax rate from 70 percent (1980) to 50 percent (1986), implicitly saying we need to give the folks at the top a tax break and make up for it by taxing retirees--go figure! Let me offer the following thought without the underpinnings of theory--curiously, the payroll tax increase of 1984 led to Social Security surpluses; but the top marginal tax rate cuts led to budget deficits.

Social security started in 1935 as a pay-as-you-go plan. The thinking at the time was to provide security to retired against poverty to workers. It was expected that it would be "funded" by current workers. Later the government realized that there would not be enough workers to pay the benefits of the baby boomers and in 1977 they tweaked the payroll taxes. They came up with a plan for workers to pay more--from 6.45 to 7.65 percent--into the trust fund to meet the needs of the baby boomers when they came on line for benefits. That fund has over $2.7 trillion and is expected to be depleted in 2033 in payouts to baby boomers. Wall Street is salivating over this money--and their allies in Congress are trying to satiate them. But there is another problem. Uncle Sam borrowed the money and spent it on other things. And this act of the government gives factions wanting to privatize social security much leverage. This ties social security to the budget, which can be used as a mallet to drive home the idea that social security is going broke and must be reformed, although in fact it has a $2.7 trillion surplus. That's like your boss raiding your pension fund and paying himself a bonus with it. Then he tells you, "Sorry you have no pension benefits because the pension fund is broke." At the top, I said social security has nothing to do with the deficit. Well it doesn't. It's in a surplus! The fix does not require rocket science. A little bit of common sense would go a long way toward a fix.

So, why does the president seem so willing to compromise the wellbeing of retirees and offer up chained CPI on his budget platter? Some people liken the chained CPI offer to a chess move--a gambit. I don't play chess so the move, if it is one, is obscure to me. But there is something wrong with antagonizing your supporters to get the approval of your enemies--people who want you to fail and have said so publicly; people who have publicly declared their intent to repeal your signature legislation (Affordable Care Act, a.k.a Obamacare). Yet, I have heard pundits say, the budget proposal will go nowhere. There is a greater probability of a stick of butter surviving inferno unsinged than this president's budget passing the House of Representatives. Maybe, that is the point for then the republicans would be on record voting against cuts in entitlements they have been clamoring for.  It is not clear how any of this improves the state of the U.S. economy, however.

My displeasure with the presidential gambit from the chained CPI move reflects a concern that it opens the door to the Chilean model taking over our "pay-go" model. The move runs the risk, in the name of seeking a grand bargain, that the other side calls your bluff. Further, if they win we cannot discount the downside of the Chilean model whose higher administrative costs led ultimately to higher taxes and subsidies for the poor. The returns to retirees in the privatized-pension plan were lower than in the "pay-go" plan. Could that happen here, too? Finally, would the gap between the rich and the poor widen under a privatized-pension plan in the U.S as appears to have happened in Chile?

 

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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The Chilean model of privatized pe... by Seymour Patterson on Wednesday, Apr 17, 2013 at 8:15:58 PM