posted July 22, 2005
Who Benefits–The Big Winners of Private Investment Accounts

copyright 2005 by Jack Rasmus
“In These Times� Magazine, March 2005

George W. Bush’s plan to privatize Social Security has nothing to do with enhancing workers’ retirement income. Rather, it is a scheme to redistribute money from the majority of people who work to the minority of people who own the banks and brokerage firms.

The vehicle for enabling the fundamental transformation of Social Security—and transfer of wealth—is the Private Investment Account (PIA). PIAs will allow current participants in the Social Security program to divert up to 4 percent of their present 12.4 percent payroll tax deductions going to the Social Security Trust Fund and invest it in individualized 401k-type accounts managed by private financial institutions.

Diverting that percentage of payroll taxes to PIAs will generate what are called “transition costs� of around $2 trillion over the coming decade. Social Security is a “pay as you go� system, with those working contributing via payroll taxes to provide benefits for those currently retired or disabled. Since Bush has already stated that “the one thing I’m not open-minded about is raising the payroll tax rate� (which would cover the projected shortfall), the only alternatives are either to cut Social Security benefits for future and/or current retirees, or to borrow money in public markets by selling Treasury bonds.

The Bush administration is using the concept of PIAs to sell the whole idea of privatization to the public. They claim that the accounts will result in greater net income at retirement. But will the public really benefit from diverting their Social Security money into PIAs? As they say in financial circles, “let’s do the numbers�.

To begin with, the historic long run net return on T-bonds in the Social Security Trust Fund, adjusted for inflation, is around 3 percent. In order for participants to do better by diverting their payroll taxes, they would have to earn more than 3 percent after inflation by investment in stocks in their PIAs. But the rate of return on stock investments may average zero percent or less for years or even decades, as it did between 1901-1921, 1928-1948, or 1962-1982. In normal periods, stocks average 3.7 percent annual returns over the long run, only 0.7% more on average than returns in the current system.

A February 4 study by the Center on Budget and Policy Priorities paints an even darker picture. A worker retiring in 2042 after having earned average compensation would ordinarily receive about $20,000 a year in Social Security benefits. If nothing at all were done to offset a Social Security Fund shortfall due in 2042, and all future benefits were paid to that worker out of payroll taxes at the time, that worker would still receive approximately $18,000 in benefits. With the Bush plan, that same worker would have his benefits reduced to less than $15,000 a year, according to the Center’s analyses.

So who are the real winners here? The answer is clear: Big Finance.

Congress has already used $1.6 trillion of the Social Security surplus over the last 20 years to cover the general U.S. budget deficit. The diversion of payroll taxes to PIAs means that, at minimum, another $2 trillion would be diverted from the Social Security Trust Fund. The banks, Wall Street brokers, insurance companies, mutual funds and other financial institutions that will manage and manipulate the PIAs will directly benefit. Those financial institutions will charge administrative fees of typically around 2 percent, not to mention a variety of other related charges, such as when a participant switches from one PIA fund to another, leaves or re-enters the workforce or arranges for annuities at retirement.

But the biggest gains to financial institutions will come not from fees but from the interest they’ll charge for financing the federal government’s borrowing of $2 trillion transition costs. Treasury Secretary John Snow has already indicated that the Bush administration will offer Treasury Bonds to the big financial institutions at above normal rates of interest. Even more potentially lucrative are the revenue and profit streams from reinvestment the several trillion dollars worth of PIA funds they will manage.

But and his advisers know they could correct the alleged $3.7 trillion shortfall by 2042 (or 2052) without introducing PIAs, through modest increases in the payroll tax for wealthier taxpayers; an extension of the estate tax, currently scheduled to expire after 2009; or simply reversing Bush’s projected $11 trillion tax cuts for millionaires through 2042. But the administration’s objective is just the opposite—to dismantle Social Security as we know it and replace it with a totally privatized retirement system that benefits corporate interests.

Jack Rasmus, National Writers Union, UAW 1981

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