Social Security Private Accounts Will Hurt Younger Workers

The Bush social security proposal to create private accounts has generated interest among younger workers.  Ironically, it is the younger workers who will lose the most if this scam becomes law.

The Bush Administration is misleading the American people by saying that the Social Security Trust Account is going broke.  What is not mentioned is that the program was “broke” when it began.  The first recipient retirees had not contributed to the program.  The program did not begin as a high yield account.  Rather, it was agreed that it was in the national interest to provide a steady income to help lift retired workers out of poverty.  The program began as a sacred pact between the government and its citizens:  Do the right thing by the current retirees, and the government will make certain that benefits will be there when it is your turn to retire.  Congress established that the revenue to pay for the program would come from taxes levied on the current workers.  In return, the government promised to provide a retirement income for the current workers once they reached retirement age.  For most of its 70 years that the social security program has been in existence, the amount of revenue collected has been calculated to provide just enough to cover the obligations of the retiree population. 

In fact, until 1980, the surplus in the Social Security Trust Fund did not exceed $20 billion.  Then, in the mid-1980s, Congress decided to address the twin facts that retirees were living longer and the aging baby-boom population would increase the resource demands on the social security system as they retired.

In anticipation of the projected increase in demand on the Social Security Trust Fund, Congress adopted a new collection policy.  It raised the social security tax rate for the express purpose of building a revenue reserve.  By the year 2000, 85% of the population was still making less than $75,000 per year.  Each dollar earned by these 110 million workers was taxed at the rate of 12.4%.  Self-employed workers pay the entire 12.4%.  Those who work for a company pay 6.2% out of their salary, while the company pays the other 6.2%.  By 2001, the government was collecting $140 billion more annually than it was spending to cover benefits to retirees. At the end of the Bush presidency, there will be more than a $2 trillion surplus in the Social Security Retirement Trust Fund.

President Bush recently went to Parkersburg, West Virginia, to dramatize his claim that the Social Security Trust Fund was not real.  He went to the Bureau of Public Debt to show that the trust fund was only a bunch of IOUs stacked in cabinets.  The intent of the administration photo op was to add to public concern while portraying the president as proactively concerned with the issue.  What the administration does not want known is that $700 billion of the stack of IOUs in the Social Security Trust Fund have been issued during President Bush’s first five years in office.

President Bush is pretending to be concerned about the looming social security deficit, yet, by 2008; nearly $1 trillion of the $2 trillion cash reserve will have been squandered during this administration.  The money has been used to hide the long-term budget shortfalls caused by the administration’s over-generous tax cuts for people making more than $1 million annually.

How will younger workers suffer most under the Bush social security modification plan?  The private account proposal is really about giving the government an excuse to renege on its obligation to younger workers.  If the administration does not find a way to reduce its obligation to the young workers, more revenue will have to be generated.  The Bush Administration will turn the implementation of private accounts for young workers to their advantage by masking their true intentions -- lowering taxes on the Superrich.

The Bush plan is a classic case of bait and switch.  Let us say that the president got his way and young workers were allowed to divert 4% of the money currently deducted for social security directly into a private retirement account.  Even though the amount being contributed to the trust fund from retirement taxes of younger workers will only decrease from 12.4% to 8.4% (about 33% of the current contribution), the social security benefits delivered to these young workers once they retire will be cut by much more than 33%.  Do not be surprised if the Republicans ultimately try to cut benefits for younger workers by 40%, 50%, or even 60%.  The Bush Administration is attempting to scam younger workers into trading the firm commitment the federal government made to fund social security benefits.

The claim that younger workers can make tons of money by simply investing their meager private account assets in the stock market is unrealistic.  Most workers will have far less than $1,000 to contribute to their account annually.  The current average annual contribution is about $575.  Only a very aggressive investment strategy would allow the money in most retirement accounts to overcome a 40% to 60% reduction in social security benefits much less experience significant gains.  As the people who aggressively invested in companies like Enron and Worldcom can attest, aggressive investment strategies can result in great losses.  Under such circumstances, the young workers will face retirement with inadequate social security funds and nothing in their retirement account.

Most American families are living paycheck to paycheck.  It is easy to fool them into believing that being able to save a few hundred dollars each year in a private account will provide them with a secure retirement.  They have no concept about how much money it would require to equal the nest egg social security is currently providing.

By 2002, the average monthly social security benefit payment for a retired worker and spouse was $1,494.  If you were 65 years old and planned to live an additional 20 years, you would need about $350,000 in the bank to withdraw an inflation-adjusted $1,494 per month.  That kind of money is not going to be accumulated by investing $575 annually in a personal retirement account.  Yes, money grows over time, but the buying power of money diminishes.  Your money has to increase each year just to stay even with inflation.  For instant, it took about $3 in 2001 money to buy as much as $1 bought in 1976 because inflation averaged 4.5% annually between 1976 and 2001.  If inflation averages just 3% annually during the next 50 years, an 18-year-old worker will need to have about $1.5 million in a personal retirement account by the year 2055 in order to draw a monthly benefit check with the same buying power of the current retired couple’s $1,494 social security income.  Exactly how much of the social security benefit should a young worker give up for the slim chance of making a killing with investments in a personal retirement account?

The Bush Administration is using half-truths to mislead the public regarding the scope of the social security crisis.  It does this by sending out minions to argue that increasing payroll taxes would not solve the problem. The minions piously claim that even raising the income level that the social security tax is levied on from the current $87,000 to $1 million will not be enough.  What they do not tell you is that an average of less than 3% of the income of people making over $1,000,000 is being taxed for the Social Security Trust Fund.  Currently, 100% of the income of people earning less than $87,000 and an average of 56% of the income of people earning between $87,000 and $1 million is already being taxed to contribute to the trust fund.

 As I clearly documented in Conning the Rich: The Great American Fraud, by 2000, taxes on those making over $1 million annually had dropped an average of more than 31% during the previous 20 years.  Despite this fact, the Bush Administration has rushed in to give this tiny group of over privileged Americans more tax breaks while using the Social Security Trust Fund surplus to hide the impact on government revenue. If, as the administration claims, everything is on the table, why is the administration only willing to consider increasing taxes on the people with incomes of $87,000 to $1 million who have not received tax relief.

A recent article in the Baltimore Sun pointed out that the government is projecting a $4 trillion shortfall in social security collections during the next 75 years. As daunting as the shortfall seems, if the social security tax was increased by an additional 1% for everyone and if all income for people making over $1,000,000 was subject to the social security tax, the problem would be solved.  Raising the amount collected from worker from 6.2% to 6.7% and having employers match the amount would generate an additional $36 billion annually.  Collecting social security taxes on the 97% of the income from the people making over $1 million annually will generate an additional $80 billion to $107 billion annually.  With the additional $116 billion to $143 billion annual influx from the above two sources, the $4 trillion collection shortfall would disappear.  The increased tax burden on the 240,000 people making over $1 million each year would be far less than the 31% tax cut they had received during the past two decades.

The Bush Administration has no intention of solving the social security shortfall in such a fashion.  Its single-minded goal is to develop an ever-expanding number of methods to reduce the taxes for their superrich friends at the expense of the 99.5% of Americans who earn less than $500,000 annually.  If all the tax cuts they have proposed become permanent, taxes on the top 1/5 of 1% (who make over $1 million per year) will be 45% less than they were before the late President Reagan began the trickle-down fraud.  When you consider that most other Americans have seen little or no tax relief, the actions of the Bush Administration and Congress border on criminal behavior.

A perfect example of how warped government priorities have become can be found in the 2006 budget.  In the name of fiscal responsibility, Congress will probably cut about $20 billion from domestic programs.  These cuts will adversely affect millions of Americans.  Yet, the $20 billion in revenue savings is the approximate amount the government will lose by repealing the tax on estates of $5 million or more.  Only about 3,500 estates of $5 million or more have any tax liability in a given year.  Still, Congress is rushing to protect these few deceased Americans while leaving millions of Americans out in the cold.

The Democrats have allowed the Bush Administration to mischaracterize tax reform as a rich vs. poor issue because the nation is in a state of denial.   It is common practice to consider people earning $50,000 to $100,000 as middle class.  In truth, those earning about $50,000 are included in the richest quarter of the population.  Those making $75,000 are in the top 15%, and those making $100,000 are in the top 10%.  It has not been in the best interests of most rich Americans to support the Republican tax cut movement. By the year 2000, taxes on people making over $1 million had decreased by 31%.  During that time, taxes on people earning between $50,000 and $500,000 had not decreased.  The net effect on income has been dramatic.  Although after-tax income of most rich Americans (those in the $50,000 to $500,000 group) has only increased by 28%, the after-tax income of the millionaires increased by 591%.

As was documented in my previous books, A Broken Covenant: The Rape of the American Middle Class, and Conning the Rich: The Great American Fraud, the American taxpayers have been misled by the architects of the Reagan and current Bush doctrine for a quarter of a century.  Between 1976 and 2000, the income share of the wealthiest 1/5 of 1% increased from 3% of the nation’s total to 13%.  Setting policy to maximize the tax advantages of the 240,000 people making over $1 million annually has given this tiny group of influential people an unfair advantage over the majority of American taxpayers. 

The Republicans have lost sight of a significant point of the free enterprise system.  While it is a fact that a few will do much better economically than the majority of Americans, there is no reason for the government to add to the advantage of the privileged few by repeatedly cutting the taxes of millionaires.  Government is most useful when it helps keep the economic playing field level by compensating for the extreme gains afforded to a few.  At the very least, the government should not keep adding to the spoils of the richest few at the expense of the majority.

Social security has always been about the commitment of the government to arrange for current workers to fund the needs of current retirees.  The social security crisis has been exaggerated because the Bush Administration is looking for a creative way to back out of its obligation to future retirees by scaring young workers into agreeing to a program that will cut their promised benefits.  Now is the time for all workers to stand together against this attack on the social security program.