Devil in the details

President Bush’s pitch to workers, especially young workers, that privatization will make you rich is a Wall Street swindle. A detailed analysis of the most likely Bush administration proposals for Social Security included in the Goldman Sachs Global Economic Research Bulletin for Dec. 17 shows the Bush program to be a fraud — but a clever fraud.

The Presidential Commission on Social Security in 2001 advanced the leading proposal favored by the Bush team. Under this “Reform Model 2” :

• Workers under 55 could voluntarily redirect four percentage points of their payroll taxes, up to $1,000 annually, into a personal savings account (PSA). Upon retirement, the funds in these accounts would generally be converted into a monthly annuity payment.

• Traditional Social Security benefits would be cut at a rate equivalent to the worker’s PSA contributions, plus a 2-percent compound interest rate, referred to as the “clawback.”

• A new welfare-style change in Social Security would be added, establishing a minimum benefit for long-term low-wage workers and widows at 120 percent of the poverty line.

• A one-earner couple, median income, for example, retiring in 2022 would receive a $1,881 monthly benefit under current law. Under Bush, if this couple invested 4 percent of their SS payroll tax in a PSA and actually reaped “projected” earnings, they would only receive a $1,744 monthly benefit. The base monthly benefit would be reduced to $1,578 for the same couple if they lost their PSA income through stock market losses

• Benefits under the traditional Social Security system would be indexed to prices instead of wages beginning seven years after the reform plan is implemented! This will result in a 48 percent cut in benefits over 75 years.

• Goldman Sachs estimates investment firm profits and administrative fees at 10 percent. However, experience in some Latin America countries (e.g. Chile) where privatization of social security has been showcased, suggest it will be much higher. Reports in recent years show a majority of Chilean workers’ private accounts were wiped out by fees, losses, or penalty withdrawals before retirement. These workers now live on the reduced minimum benefits. Fees in the privatization of British social security ranged from 15 percent to 20 percent.

• Many working families will be under tremendous pressure to cash out their PSAs every time there is a layoff, especially in the absence of universal health care. In addition, financial asset returns are volatile. A 50-percent decline in stock prices — what occurred in 2000 — would cut benefits payments for PSAs by 15 percent to 25 percent.

Bush’s assertion that PSAs are better because “stock returns are better than government bonds” contradicts the plan to sell $1.5 trillion in government bonds (or ... omigod! ... tax increases!!) to “finance” these returns. In reality, the growth in the bond market will restrain stock returns. The immense budget deficits defy any reasonable justification other than they are consistent with an extreme right-wing theory that the way to fully “liberate” free enterprise from the “slavery of regulation and intervention” is to bankrupt the government.

Bush’s plan is under a lot of fire right now. But all he may need to do to achieve his ultimate goal is to pass any plan that diverts Social Security payroll taxes into PSAs. Once that step is taken the social contract between the working generation and their parents and grandparents that they provide for each other is weakened. Not coincidentally, a key political base of the Democratic Party since the New Deal — Social Security retirees — is also weakened and split.

jcase@steuber.com