Will the President's Plan for Privatization Take the Security Out of Social Security?

YES: These plans gut guarantees of a basic level of financial security for all Americans. Click here to view the NO response to this question.

The President's Commission to Strengthen Social Security has developed privatization plans that would make deep cuts in guaranteed benefits and could lead millions of Americans to delay their retirement. These privatization plans erode Social Security's basic promise of retirement security for all Americans. They would take the security out of Social Security, and they should be rejected.

Social Security promises all Americans that if they work hard, pay their taxes and play by the rules, they will be able to retire and live in dignity. Social Security is not a handout. It's an earned benefit that rewards and promotes work. It guarantees that, regardless of the state of the economy or the stock market, every contributing American will have a basic level of financial security. The commission's privatization plans gut that guarantee.

The Bush commission has developed privatization plans that would take trillions of dollars out of the Social Security trust fund to finance privatized accounts. This would force deep cuts in guaranteed benefits. According to the nonpartisan actuaries at the Social Security Administration, those cuts would exceed 25 percent for many current workers. In the future, cuts could exceed 45 percent. These cuts would apply to all retirees, even those who choose not to invest in private accounts. Although the commission does not explicitly raise the retirement age, its cuts almost certainly would force millions of Americans to delay their retirement in order to build up their financial assets.

Even without these cuts, Social Security's guarantee ensures only a basic existence. Today, the average Social Security benefit is less than $10,000 a year, and for women the average benefit is closer to $9,000. For most seniors, especially those who live in high-cost areas such as my home state of New Jersey, that's barely enough to maintain even a basic standard of living. President George W. Bush may believe that $10,000 a year is too much to promise America's seniors. I disagree.

Each week, America's workers send a portion of their paychecks to the Social Security trust fund so that, when they retire, their benefits will be there. The trust fund is supposed to be used to guarantee those benefits. Unfortunately, Republicans want to use this money to pay for other programs, including tax breaks for large corporations, while proposing changes that would result in drastic benefit cuts for seniors.

Some argue that we need deep cuts in Social Security benefits to save the program. But the numbers prove them wrong. During the next 75 years, the entire Social Security shortfall will be $3.7 trillion. Meanwhile, last year's tax cut, if made permanent, will cost $8.7 trillion during the same period. In other words, the tax cut will cost more than twice the entire Social Security shortfall. Remember that the next time you hear someone argue that we have no choice but to cut benefits. We have the resources to meet our obligations and honor our promises. It's simply a matter of setting priorities and maintaining fiscal discipline.

To be clear, I am not opposed to the use of private accounts to save for retirement. To the contrary, it is essential that Americans save privately for their retirement, and that is why I strongly support providing tax subsidies for 401(k) plans and IRAs. But private accounts, by their nature, cannot provide the same level of security as does Social Security. When investments tumble, health declines and all else fails, Social Security benefits are there —guaranteed — as a final lifeline for seniors.

Privatizers dismiss concerns about cuts in guaranteed benefits by arguing that defenders of Social Security simply are trying to "scare seniors." But given the 25 percent cut proposed by the Bush commission, Americans of all age have a right to be scared.

Some argue that privatized accounts will give seniors better returns. However, having earned my living as a trader and investment banker for 30 years and having run one of America's largest financial companies, I understand something about markets. I can assure you it is pure folly to assume that privatized accounts always will increase in value and that they will be at a high water mark when an individual retires. The truth is, markets go up, down, and sideways — sometimes for many years. One thing they never do is provide guaranteed protection against both inflation and the risk of outliving your savings — only Social Security does that.

Some privatizers argue disingenuously that privatization won't actually cut guaranteed benefits. They do this by assuming that, without privatization, Congress will break its promise to retirees by allowing benefits to be cut rather than shoring up the Social Security trust fund. In effect, the privatizers argue that Congress, having used Social Security funds for other purposes, now should be able to break its promise to retirees because there is not enough money in the trust fund.

If an ordinary citizen used this line of argument, it wouldn't pass the laugh test. Imagine, for example, that you borrowed money from a bank and promised to repay it. Later, you overspent and failed to save enough to repay the loan. Would your failure to save be an excuse for reneging on your obligation? Would it be a basis for pretending that you, the borrower, didn't really promise to repay the loan in the first place? Of course not. Yet now that Congress has failed to save enough and faces a shortfall in the Social Security trust fund, some privatizers want to use that as an excuse for reneging on benefits promised to those who paid into the system in good faith. That's wrong.

Other privatizers admit that privatization would cut benefits but claim that "current or near-retirees" would be protected. However, this is far from clear.

First, to the extent that individuals contribute to private accounts, these contributions automatically could trigger offsetting cuts in guaranteed benefits. This is a classic "bait and switch" — giving with one hand, then taking away with another. The cuts in guaranteed benefits would apply even if the value of a privatized account declines substantially. Those unlucky enough to lose money in their privatized accounts would have fewer Social Security benefits upon which to fall back. While some have argued that each of the commission's plans ban older Americans from investing in privatized accounts, the text of their report suggests otherwise.

It also is important to emphasize that the Bush commission avoids calling directly for deeper and more immediate cuts in guaranteed benefits only by assuming massive general-revenue subsidies of the Social Security trust fund worth up to $6.5 trillion in today's dollars. Yet the Bush budget includes not a single penny to pay for these subsidies. And now that the Bush tax cut has been enacted and the government again has begun running large deficits, it is highly unlikely that the subsidies will materialize. Without them, the Bush commission would force the Social Security trust fund into a negative cash flow by 2010, and it would be insolvent as early as 2025. At that time, many of today's middle-aged and older Americans will be retired and dependent on Social Security.

In other words, current and near-term retirees are not protected under the Bush plan, notwithstanding claims to the contrary. Even while proposing deep cuts, the Bush commission assumes general-fund subsidies that are unlikely to materialize. This makes probable additional cuts, including cuts for current and near-term retirees.

There is another problem with privatized accounts that rarely is understood — they are very costly to administer. One reason is that many accounts are quite small, so a significant share of any gains is eaten up by management fees and administrative charges. The administrative costs associated with a similar system in the United Kingdom reduced the account balance of the typical worker by 36 percent, relative to the balance that would have accumulated without any administrative costs.

Privatization is a good deal for the big financial companies that would earn fees to administer privatized accounts. That explains why many might support such an initiative. But while a few big financial firms would hit the jackpot if privatization were approved, ordinary Americans would be the big losers.

I congratulate Insight magazine for highlighting the debate on privatization. We need to get the public engaged in this discussion. Unfortunately, the Bush administration has tried to shove its privatization plans under the rug until after this fall's election. Remember, their commission released its report late in the day on the last Friday before Christmas — an obvious attempt to avoid public scrutiny.

But the future of Social Security is too important to be decided behind closed doors by a handful of politicians and policy technicians. It needs to be debated in the open — in the media and on the floors of Congress. Even the chairman of the Republican National Committee, Marc Racicot, agrees that we should start the debate now. Unfortunately, he has been unable to convince the GOP leadership. That's a shame. The American people have a right to know that their benefits are at stake, and they should have an opportunity to have meaningful input into that decision.

Social Security at its most basic level provides a simple guarantee: Work hard and contribute now, and your financial future will be secure. For proponents of privatization, including President Bush, to suggest cutting guaranteed benefits in favor of individual bets on the market strikes at the very core of Social Security's promise. Those who disagree with that promise have a right to call for the program's repeal. But they shouldn't pretend that privatization promises security for America's seniors — it doesn't.

Jon S. Corzine
U.S. Senate (D-NJ)
Washington

This article was originally posted online at Insight on the News on June 3, 2002.