posted July 21, 2005
Stealing Social Security: Past, Present, and Future

copyright 2005 by Jack Rasmus
“Z� Magazine, December, 2004

With Bush’s recent election victory, privatizing Social Security is once again on the agenda—in fact high on the agenda! If not domestic policy issue #1, then at least #2, along with a major restructuring of the tax code and introduction of a ‘flat’ national sales tax.

Privatizing Social Security was one of a handful of domestic policy issues specifically referenced by Bush in his November 3 election victory speech and was reiterated once again in his first press conference the following day—revealing its high priority among a long list of Bush domestic policy objectives for his second term. Between now and his next January inaugural speech, Bush policy makers will work the details while the talk show mouthpieces, pundits and political propagandists for the Republican Right—already undertaking the task—will raise the volume on the need to privatize Social Security in order to ‘save’ it.

The push to privatize Social Security is not a product of the recent election campaign. The current privatization drive was re-launched anew by Federal Reserve Chairman, Alan Greenspan, at least as early as last February 25, 2004. In his opening salvo of the new offensive before the House Budget Committee at that time, Greenspan declared the Social Security retirement system could not honor its commitments at this stage, was headed for a crisis, and that it was time to cut retirement benefits by raising significantly the age at which workers could begin retiring from the current 65 for normal retirement and 62 for early retirement. When specifically questioned about additional benefit cuts for those already retired, or for younger workers when they eventually do retire, Greenspan was noticeably evasive.

Since early this year under the cover of the Social Security Administration, and funded by the National Association of Manufacturers and large pharmaceutical companies, scores of community-level public meetings throughout the U.S. have been held to promote the idea of privatization of the program and to solicit public response to the Bush plan as a necessary prelude to finalizing plans for launching the privatization drive early next year. In the interim, policy white papers have been written and rewritten, quantitative analyses cooked and re-cooked by conservative think tanks, and funding lined up from corporate donors for advertising budgets to sell the privatization scheme as part of Bush’s euphemistically called ‘ownership society’ starting early next year, 2005.

It is worth pointing out this is the same Alan Greenspan who, back in 1983, personally headed up a predecessor Social Security Reform Commission for then President Ronald Reagan. At that time Greenspan also predicted a collapse of the Social Security system. His recommendation back then in 1983, as today in 2004, was to ‘save’ Social Security by a radical overhaul. In 1983 that was accomplished by sharply increasing the payroll tax paid by workers that funds Social Security. Greenspan’s 1983 recommendations were quickly adopted by Congress. And over the past 20 years, both payroll tax rates and taxable income levels have continued to rise, to the present 12.4 % rate today on earnings up to $87,900 a year. The direct result of this 20 year rise has been to generate a surplus of $1.46 Trillion dollars in the Social Security trust fund.

Who Stole the $1.46 Trillion Surplus?

Over the last 20 years a Social Security surplus of $ 1.46 trillion was created and it’s again going broke, according to Greenspan, But with that much surplus, how can Social Security again be on the financial ropes? Is it because benefits were increased dramatically over the years? There have been virtually no significant increase in social security benefits the past 20 years. Could it be that millions additional ‘baby boomers’ were discovered hiding under the bed all these years, and will soon be retiring in the years ahead? Roughly the same ‘boomers’ who were born between 1945-1955, and were alive in 1983, are around today.

So where did all that money go? What happened to the $1.46 trillion Social Security Surplus?

What happened is the biggest financial scandal in U.S. history, the biggest swindle of American working class families, or any working class, anywhere in all of history. The magnitude of the scandal exceeds the $1 trillion bail out by American taxpayers of the corrupt Savings & Loan industry under Reagan and Bush I during the 1980s. The costs of the on going, three years of corporate scandals and rip-offs under George W. Bush are dwarfed in comparison.

The $1.46 trillion Surplus, paid for by workers to guarantee a minimum retirement, promised to them in 1983 in exchange for the record payroll tax hikes, has been sucked out of the Social Security Fund by administrations from Reagan to George W. Bush with the agreement of Congress! Not a penny of the $1.46 trillion remains in the Social Security trust fund. Only paper IOUs from Congress indicating the money is ‘owed’ to the fund.

Despite legislation passed in the early 1990s declaring a ‘lock box’ on the Social Security surplus, that entire surplus nevertheless has been permanently ‘borrowed’ every year and transferred to the federal government’s general fund to help reduce and offset chronic annual U.S. general budget deficits over the past 20 years. No sooner had politicians of both the Republican and Democratic Parties in Congress passed the ‘lock box’ resolution than they defied and ignored that same resolution.

Social Security’s surplus has been tapped every year to help cover accumulated general U.S. budget deficits totaling approximately $4 trillion dollars from Reagan through Bush—about $2.9 trillion of which have been due to tax cuts by Reagan and George W. Bush for the rich and their corporations, and the rest to pay for a doubling of military spending by Reagan in the 1980s, for the Bushes’ two Iraq wars, for Clinton’s war in Bosnia, and for the current War on Terrorism.

In other words, American workers and families have indirectly been paying with their wages and their retirement benefits for the Reagan-Bush tax cuts and wars of the last 20 years! If the $1.46 trillion ‘borrowed’ were restored to the Social Security Fund there would be a massive excess of funds today in the Social Security System—which could be used to help pay for a large part of the cost of universal health insurance for everyone in America!

The incredible magnitude of this $1.46 trillion theft of workers’ wages and retirement security is quantified in the following Table illustrating the annual Social Security Surplus and the Federal budget deficit before and after the ‘borrowing’ of the Surplus.

TABLE ONE (in $billions)
Year Social Security Surplus Deficit Before Surplus Deficit After Surplus
1984 $0.3 -$185.7 -$185.4
1985 $9.4 -$221.7 -$212.3
1986 $16.7 -$238.0 -$221.3
1987 $19.6 -$169.3 -$149.7
1988 $38.8 -$194.0 -$155.2
1989 $52.8 -$205.2 -$152.4
1990 $56.6 -$277.8 -$221.2
1991 $52.2 -$321.6 -$269.4
1992 $50.1 -$340.5 -$290.4
1993 $45.3 -$300.5 -$255.2
1994 $55.7 -$258.9 -$203.2
1995 $62.4 -$226.4 -$164.0
1996 $66.6 -$174.1 -$107.5
1997 $81.4 -$103.4 -$22.0
1998 $99.2 -$30.0 $69.2
1999 $123.7 $1.9 $125.6
2000 $149.8 $86.6 $236.4
2001 $160.7 -$33.4 $127.3
2002 $159.7 -$317.5 -$157.8
2003 $163.5 -$467.6 -$304.1

Cumulative $1.464 trillion $3.977 trillion -$2.513 trillion

Source: Economic Report of the President, 2003. For more detail also see Allen Smith, The Looting of Social Security, 2004.

It is worth noting that more than $600 billion of this theft of Social Security occurred under the George W. Bush’s first term, to help cover an accumulated general budget deficit under Bush of more than $1 trillion through fiscal year 2004. The stolen $600 billion surplus under Bush is just about what the combined cost of the Bush tax cuts for the rich, plus the cost of the Iraq war, have been thus far under Bush’s first term.

Who’s been paying for the war and who’s funding the tax cuts for the rich is thus not a particularly complicated question!

This grand theft of $1.4 trillion stands in stark contrast to World War II and even the Vietnam War period. The cost of World War II was financed primarily by a highly progressive Income Tax, as well as other taxes on corporations to prevent excess profits being derived from government contracts. Halliburton-like greed and behavior was not tolerated during that conflict. Even the Vietnam War was largely financed by a surtax on incomes, paid largely by wealthier citizens rather than by the transfer of a payroll tax-generated social security Surplus to cover U.S. budget deficits.

If there is a crisis in Social Security today it is a political and criminal crisis, not a financial one. The money was there. If it’s now gone, it’s because it was stolen—by Reagan, by the Bushes, and with Clinton and the Congress conveniently looking the other way.

Stealing $1.1 Trillion More

Apologists and defenders of the grand theft argue it doesn’t matter that the money is gone since the Social Security system is a ‘pay as you go’ system. Those entering the work force pay for those retiring from it, and as long as the economy grows, incomes rise, and more young people enter the workforce there will be enough to pay for those retiring. Yes, that’s true. But only if one assumes workers entering the labor force will be allowed to continue to pay into the system.

The current 52 million receiving Social Security retirement benefits are covered, it is argued, even if their numbers rise to the 77 million estimated by 2018 as the baby boomers become fully retired. Even the trustees of the Social Security system acknowledge that the retirement fund will still be solvent until 2042. In the meantime, the Social Security trust fund will generate another $1.1 trillion surplus between now and 2018.

That remaining short term surplus of $1.1 trillion is what the Bush plan to privatize is really about. The Bush privatization plan will be designed to open the way for Wall St. to get its hands on the remaining $1.1 trillion of the projected surplus. The Bush plan will enable this by allowing the creation of personal retirement accounts and by permitting younger workers to withdraw part of their payroll tax contributions that would normally have gone into the social security trust fund, and invest the amount in these personal retirement accounts. The latter will be comprised largely of stocks and other investments managed by banks and financial institutions.

Banks and financial institutions will extract a healthy management fee for managing these accounts, much as is now done with similar 401K and other personal pension accounts. They will also get to manipulate the ‘float’ of these investments and generate additional profits, much as a bank now does with individual savings accounts. And Wall St. stock and bond companies will make $billions in commissions on the transactions.

The Bush proposals will initially appear modest in order to get a foot in the door, allowing workers to choose to divert 2% to 4% of their current payroll tax 12.4% contributions to the personal retirement-investment accounts. But the pressure to raise the percentage will result almost certainly in a further expansion of the 2%-4%. Some conservative sources are already advocating allowing as much as half, 6.4%, of payroll tax contributions to divert to the personal retirement accounts. With each increase in the contribution ceiling the financial pressure on maintaining what remains of the traditional social security system will correspondingly also increase.

While banks and financial institutions will be guaranteed additional windfall profits from access to these diverted payroll tax contributions, not so with workers who choose to divert their contributions. For them, there will be no guaranteed payout based on a formula reflecting the number of years worked and wages earned, as is the case currently with Social Security. Moreover, the retirement income will be subject to the long term instability of stock and bond markets, which have not performed well as of late. In addition, there will be the added risk of bankruptcy of the institutions holding the personal retirement accounts, much like the 401Ks of Enron that went bust losing the retirement savings of its employees in the process.

In exchange for being allowed to divert part of their payroll tax payments, younger workers will of course have to accept lower social security retirement benefits in exchange. Estimates are that if they chose to divert, their remaining social security benefits at retirement will be 25%-40% less than what they would otherwise have earned. There is no guarantee, of course, that they will earn enough from the 2%-4% diversion to private accounts to compensate for the 25%-40% loss. Their net return may in fact be much less.

Nonetheless, Bush administration apologists will argue that young workers will have the best of both worlds—some Social Security, albeit at reduced levels, and some personal investment accounts. And that the loss to Social Security will be equal to their reduction in benefits to those who choose to divert. But what happens in the meantime before those younger workers retire? How does the system ‘pay as you go’ for those currently retired or about to retire?

Some sources estimate the transition cost associated with an even modest 2%-4% diversion will be at least $1 trillion, and likely twice that, over just the first decade. It’s not coincidental that the estimates of the amount likely diverted to the banks and financial institutions will be, at minimum, $1 trillion. Once again, that’s about what the projected surplus between now and 2018 will be.

And what happens if the diversion limits are raised above 2%-4%? Or if the diversion is allowed beyond 2018? Or if economic or demographic growth rates are below historical averages in the next decade and beyond? Or if hourly wages and incomes continue to fall as more and more higher paying jobs are offshored and replaced onshore with lower service pay jobs? Or if the US labor markets continue to restructure toward more ‘contingent’ (part time, temp, contract) workers at lower aggregate annual incomes? All will reduce the aggregate net flow into the traditional social security system at a time that contributions are simultaneously being diverted to the banks and corporations managing the personal retirement accounts.

‘What happens’ is that benefits for those currently on social security, or soon to retire, will have to face significant further reductions, either in the form of further raising the retirement age, perhaps as high as 70 years, or by other reductions in existing benefits. ‘What happens’ is that younger workers who divert funds will face benefit cuts even greater than the projected 25%-40%.

Not only is it likely the retirement age will be raised in Bush’s initial privatization plan but that the way benefits are calculated and paid for will dramatically change as well, in effect lowering benefits for retirees even further. One such change might be calculating social security based on some inflation indicator rather than based on earned wages and years of work, as is the present case. Other likely benefit reduction possibilities for those retired are some combination of smaller cost of living annual adjustments, reduced survivor benefits, or even a part time work supplement requirement.

Younger workers can also expect further benefit reductions when they actually retire. That would serve in turn as further incentive to get them to divert their payroll tax contributions into privatized plans. Even eventually raising payroll tax rates for them would not be out of the question. That would serve as a particularly strong incentive to get younger workers to leave the system even more rapidly.

There’s an interesting parallel here. Partially privatizing Social Security and allowing a split system, part private part social, would in effect create a ‘two-tiered’ retirement system—much like the two-tiered wage schedules and health benefits systems that have been increasingly displacing single tiered wage and benefits systems in private industry over the past two decades. And just as those two-tiered wage and health coverage systems have resulted in younger workers getting less, while companies benefit by keeping their labor costs down and profits up, so too might younger workers similarly end up in aggregate with less net retirement resources.

Net long term loss has always been the historic legacy of all ‘two-tiered’ approaches. The corporate strategy in terms of wages and benefits since the early 1980s has been to split workers with such ‘two tiered’ systems for wages and benefits, pitting younger against older, to get them to compete with and blame each other instead of addressing the true source of the problem. It appears that game, which has been thus far so successfully played by the corporate world on the wage and benefits level, is now about to extend to the deferred wage, or retirement benefits, level in the form of a ‘two-tiered’ social security benefits system as well.

Allowing younger workers to invest in personal retirement accounts is only the first step in a longer process, but a step nonetheless that will mark the beginning of the end of the guaranteed national defined retirement benefit plan that has been Social Security as we know it. It will start with a modest 2%-4% but will not end there. An expansion of the diversion of funds is all but certain. And it may well doom what remains of financial stability of the Social Security system over the longer run, especially post 2018.

But that may be just what the domestic policy Neocons want. That may be the unmentioned, primary, and longer run objective. The conservative right is not so foolish as to attempt to discontinue the program outright, attacking it head on in the short term, even though the likes of Karl Rove now argue Social Security is no longer the untouchable ‘third rail’ of American politics and is ripe for privatization.

More likely the Neocon plan is first to weaken Social Security beyond repair, to allow it to atrophy over the longer term, perhaps taking as much as a decade or even two. At that later date the cost of retrieving what’s left of the traditional, ‘pay as you go’ system would be exceedingly high. It may then be relatively easy a decade or so hence to dismantle Social Security altogether, eliminating the last vestige and great symbol of Roosevelt’s New Deal and replacing it with a totally privatized retirement system.

The Fundamental Economic Strategy of Reagan-Bush

This greatest theft of all time should be viewed in a broader context. That context is the fundamental economic strategy of the Reagan-Bush regimes during the past 20 years. As it was with Reagan, the basic economic strategy of Bush has been purposely to create as big a chronic federal budget deficit as possible.

By generating huge annual deficits through raising defense spending and simultaneously cutting taxes for the wealthy, those in power can then turn and force through massive cuts in spending on social programs. Without the huge deficits there is no rationale for the cuts. This is, in fact, what has been going on for the past two decades. What remains of most social programs and services today are empty shells of the programs they once were before Reagan and Bush.

While the $1.46 trillion Surplus generated between 1983 and 2004 has already been stolen, there is still the additional $1.1 trillion surplus that will be generated between 2004 and 2018. But workers first must be convinced that the way Social Security has existed, and been structured, over the last 70 years is no longer viable, and that it will never ‘pay out’. That it will not be there for them when they retire two or three decades hence. That they should therefore ‘take the money and run’ now and invest as much of their payroll taxes in personal retirement accounts, accounts which they will ‘own’.

It’s Bush’s ‘ownership society’ all right, but with the banks and corporations holding the mortgage and calling in the note when they please.

The Basic Ideological Motive: Dismantle the ‘New Deal’

The wealthiest capitalists of this country have never accepted the permanency of the Roosevelt New Deal reforms of the 1930s, when concessions were made to American workers in time of depression and world war. Social Security was the touchstone program of those concessions, of the New Deal itself.

Nixon talked about undoing the New Deal in the early seventies. It was part of his so-called ‘New American Revolution’ that he planned to launch in his second term, but was cut short by impeachment and Watergate.

Upon first entering office Reagan made an attempt to raise the Social Security privatization flag in 1982-83, but had to back off and settle for the payroll tax increases. Like George W. Bush, getting big tax cuts passed for wealthy contributors came first. Social Security was still the ‘third rail’ of politics and at that time still could not be touched, particularly after the payroll tax had just been raised and surpluses created. Cutting other discretionary social programs was the Reagan focus, of necessity if not of choice. And in his second term Reagan never got the opportunity to launch a new offensive to try to privatize Social Security.

The Neocons in the Bush I administration resurrected many of Nixon’s plans on paper, and were prepared to take up the task, but were distracted by the first Gulf War, the consequent recession of 1990-1991, and the one term stand of their patron, George senior.

Bill Clinton slowed down the drive to privatization but could not stop the momentum. His one effort to resurrect New Deal-like programs, his National Health Insurance proposal, was quickly abandoned and replaced with the doomed policy called ‘managed health care’. The policy focus of his administration then quickly turned once again to cutting other social services, the most notable of which was welfare program reform at the time. Clinton was satisfied with ‘borrowing’ the social security surplus to make it appear as if he had created general budget surpluses, when in fact that appearance was made possible only by the ‘borrowing’ of the social security surplus. Privatizing Social Security would have proved counter-productive to that appearance.

With most major social programs thus now eliminated or cut to the bone by 2004, the remaining social program target of any consequence is Social Security. Bush and friends believe the time has come once again to privatize Social Security. Caring little, if at all, about budget deficits, Bush is interested less in manipulating the Social Security surplus to reduce general budget deficits, and more interested in allowing banks and financial institutions access to that surplus in the form of personal retirement accounts. And if that undermines the future financial stability of the Social Security traditional system, well, so be it. The sooner it is transformed and replaced by a totally private retirement system the better, according to the conservative policy view.

While there is no crisis in Social Security today, Bush’s coming plan to privatize Social Security will mark the beginning of that crisis. The first act in that drama will be the siphoning off of yet another $1.1 trillion by means of personal retirement accounts—the initial strategic objective in the longer run goal of undermining the Social Security system altogether.

Jack Rasmus, National Writers Union, UAW 1981, AFL-CIO

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