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Important questions about Social Security

ASK THIS | January 24, 2005

The press needs to dig beyond the political rhetoric and make sure people understand what's motivating the push for private accounts, and what's at stake.

By Dan Froomkin



Q. Why is the Bush White House so dead-set on transforming Social Security? What’s the motive?


Q. What does Bush mean by “ownership society”? What becomes of the safety net?


Q. How have workers been affected by the somewhat analogous shift in the private sector from defined-benefit to defined-contribution pension plans?


After a slow start, more and more reporters are making it clear that no matter how many times President Bush says so, Social Security isn't going broke and private accounts aren't going to help keep it solvent. In fact, the opposite is closer to the truth.


But members of the press, by and large, are still not getting at the real Social Security story, because they're not asking themselves the obvious follow-up question: What's the motive? If indeed the program isn't in trouble, and private accounts won't make things better − then why are Bush and associates so dead-set on transforming it?


Part of the answer is that letting individuals manage their own retirements is a key component of what Bush calls the "ownership society." That’s shorthand for a Republican and libertarian ideal in which taxes are low, government is small, and people supervise their own retirements and choose their own health insurance rather than depend on the government to do so.


Critics argue that Bush's vision of an ownership society would mainly benefit the wealthy and corporations – and would leave the poor, working poor and middle class in even worse shape. They believe there is great value in collective institutions, particularly when it comes to sharing risk and building a safety net for the unfortunate.


So instead of just putting quote marks around the phrase "ownership society" and regurgitating it, reporters should explain it to their readers and viewers and explore what its effects might be. Who would the winners and losers be? Would it make the gap between those who own the most and those who own the least wider or narrower? What would happen to those so unfortunate they own nothing? Would there be any social safety net left at all?


The real Social Security 

The other big motivating factor behind private accounts is that Bush and his associates understand that Social Security is full of liberal social engineering. Private accounts would undo a lot of it.


They know what Social Security really is – and since this is turning out to be an epochal battle, it's about time the public fully understood it, too.


Explaining how Social Security works may not sound like electrifying work, but it can start with some pretty interesting, simple questions: Is Social Security a retirement plan? And should its performance be judged that way?


Because here's the thing: Social Security is not a retirement plan. This may come as a surprise to most Americans, and maybe even some reporters, because at first glance it sure looks a lot like a simple (if massive) retirement savings account. People generally contribute to Social Security through payroll deductions, then get an amount of money back after retirement that bears some relationship to how much they put in. This might well lead them to think their money is already being socked away and invested, just like, say, a 401(K) plan.


From that perspective, Social Security's rate of return looks low, and the introduction of private accounts that could be invested in bonds or the stock market looks like a fairly small change, and a plainly good idea.


But Social Security in fact is an enormous and extremely complex, pay-as-you-go social program. Payroll taxes are not investments. They are taxes that pay for a mammoth government entitlement program that guarantees elderly and disabled people – plus their dependents and survivors – an amount of money based largely on their needs, rather than on how much they contributed.


You could call it a social welfare program, an entitlement program, or universal-coverage old age, survivors and disability insurance. But you shouldn't call it a retirement plan.


Redistribution of wealth 

It's also the engine for a massive redistribution of wealth. By design, Social Security involves colossal subsidies not just from workers to retirees, but from single people to married couples, from two-earner couples to one-earner couples, from high-income earners to low, from men to women, from the able-bodied to the disabled, and from those who die early to those who die late.


Get a passing acquaintance with Social Security formulas and payment statistics, and you learn all sorts of things. For instance:

  • A retired couple receives more benefits than a retired single person, even if only one member of the couple contributed to Social Security;
  • Disabled workers collect benefits even if they've barely contributed at all.
  • Widows and other survivors of the retired and the disabled get benefits whether or not they contributed.
  • Low-income workers get a much higher percentage of their working incomes back after retirement than higher-income workers.
  • People who die early may not see any Social Security benefits at all, while people who live decades after retirement receive benefits the entire time. This is because Social Security is a lifetime guarantee that pays benefits to recipients until they draw their last breath – regardless of how much money they contributed.

 Do most people realize that only two-thirds of Social Security beneficiaries are actually retired workers themselves? The rest are disabled workers, and survivors and dependents of retired and disabled workers.


See all that social engineering at work? Bush and his associates surely see it. They see the government taking away their money and using it in ways beyond individuals' control – often to help other individuals who aren't sufficiently self-reliant. They see a system in which, with some notable exceptions, what you get is what you need. Finding that vaguely socialistic, they want to replace it with a system in which what you get is what you paid.


If people don't fully understand what Social Security is, they can't understand why conservative anti-government Republicans want so much to change it. And they can't understand what effects changing it might have on society.


Defined benefit vs. defined contribution pensions
As it happens, the private sector offers us a case study that is somewhat analogous to the introduction of private accounts to Social Security – and very much worth exploring.

Over the last several decades, there has been a dramatic change in how pension plans are structured as employers increasingly offer workers "defined-contribution" plans instead of "defined-benefit" plans.


Reporters should be looking at the effects of this shift for clues about how private Social Security accounts might pan out.


Some background: In a defined-benefit pension plan, employees are promised a monthly benefit starting at retirement and lasting until they die, generally based on a formula that takes salary and years of service into account, with cost of living adjustments built in. Most large employers used to run their pension plans that way. For the employees, there was essentially no control, but also essentially no risk. (Sounds like Social Security, eh?)


Over the years, however, more employers have come to embrace defined-contribution plans, such as 401(k) plans, in which employees have individual accounts to which both they and the employer contribute. Employees can choose how much to contribute, up to certain limits, and can control how those funds are invested. They get control, but along with choices come risk. Poor decisions can lead to poor results.

In 1980, 39 percent of American workers had defined-benefit pension plans; in 2004 that figure is just 21 percent. A huge factor in that decline was the shift in employment away from large, unionized, manufacturing companies.


For employers, defined-contribution plans are vastly easier to administer and don't create amorphous and possibly unfunded financial liabilities. For employees there is greater risk, but some considerable advantages such as portability – and a sense of ownership.


So one question worth having reporters investigate is: How have defined-contribution programs served workers, compared to defined-benefit programs? Who are the winners and losers?


About those private accounts 

Reporters should also be exploring some of the practicalities of private accounts. For instance: People who opt to put some of their payroll taxes in a personal account would obviously in return accept a reduction in guaranteed monthly benefits compared to those who don't. But what happens to those who invest badly?


What if due to low wages, poor decisions or unlucky investments, someone's nest-egg isn't enough to make up the difference? What if a retiree refuses to buy an annuity – or cashes it out – and then is left destitute? Would we as a society be prepared to let them live with the consequences? Wouldn't we miss our social insurance policy then?


Social Security today is the expression of our society's collective desire to prevent the elderly and disabled from falling into poverty and destitution. Private accounts would replace that collective goal with the individual goal of amassing as much wealth as possible – a radical transformation. A defined-benefit system would become a defined-contribution system – and every man for himself.


In a recent Washington Post poll, 55 percent of respondents said they disapproved of Bush's handling of Social Security; but the exact same margin said they like the idea of letting workers put some of their Social Security savings into stocks or bonds. This could be a sign of their convictions – or, at least as likely, their confusion and lack of knowledge.


Make Social Security a beat
Whatever members of the public ultimately decide, they deserve to make their decisions based on an understanding of what's really at stake – not smoke and mirrors and catchy soundbytes. It's up to the media to make that happen.


To that end, Social Security shouldn’t just be the topic of an occasional story in response to statements by Bush or other politicians. It ought to be a beat, staffed by someone who can report on the topic with confidence and authority based on a thorough knowledge of the facts.


News organizations of all sizes − not just the largest ones − should get into the act. Social Security may not sound sexy at first, but deeply moving and important human-interest stories lie just beneath its surface. Reporters covering this story should put people’s circumstances in front of their readers and viewers, not just the statements of politicians and experts. And if reporters and editors originate their own stories about Social Security, rather than just react to the rhetoric, they’ll find it a very rich beat indeed.

A "great" opportunity seemingly lost
Posted by Joseph Fratolill - retired
12/06/2005, 11:19 AM

The proposal to offer new entrants into the workforce the "option" to choose a private account over the status quo was one of the truly "intelligent" ideas to come out of government in years. Social security is actuarially unsound, with fewer workers supporting a growing number of retirees each year. Merely "tinkering" with the program by either: (1) raising the rate on income earned, or (2) raising the income limitation on which contributions are based, or (3) raising the retirement age does NOTHING to resolve this dilemma. BUT choosing a private account invested in either treasury securities, or a pre-determined mix of treasuries/high-grade common stocks WOULD DEFINITELY raise the return on such contributions, and would eventually get the government OUT of the social security "business". Why would this be a good idea? Because under the current unified accounting system, social security contributions - like ALL other dollar inflows - go into a common pot from which the government spends as it wishes (in addition to its daily needs) - either for the war effort, for alligator research, or for a "bridge to nowhere" in some remote part of the country. Moreover, the notion that privatization represents a "risky" venture is nonsense, inasmuch as it ignores the hugely successful use of private investments in nearly all pension accounts.

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