Online at: http://politicalaffairs.net/article/view/526/1/64/

Social Security Privatization a Blow to Retirees

By Labor Research Association

Archives - Dates and Topics

2005 – online

January – February 2005

Jan. 3-8 click here for related stories: social security

From www.laborresearch.org

The massive shift in wealth that began with the Republican victory in 2000 and escalated during the 2001 recession is now reaching its final stage in the plan to privatize Social Security.

Since Bush first took office, real wage increases for active workers have been reversed, pushing families into unprecedented levels of debt. Tax cuts for the rich and runaway military spending have generated huge federal budget deficits, which now provide the pretext for cutting domestic programs that benefit working families.

An introduction to Social Security

Social Security is one of America's most important and successful programs, providing over $471 billion in benefits to more than 47 million people in 2003. While Social Security is often considered simply a retirement program, about one-third of its beneficiaries are not retirees. The Social Security system provides three distinct types of benefits for workers and their families: lifetime retirement benefits for retirees who have worked at least ten years, their spouses, and their children; disability insurance for workers, their spouses, and their children; and survivors' insurance for the families of deceased workers. Social Security guarantees working and retired Americans and their families economic stability that keeps them out of poverty.

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Income protection for retirees is the next Bush target. Retired workers now face insolvent pension plans, vastly reduced retiree health benefits and proposals to strip away the Social Security safety net.

Workers directly fund Social Security with 6.25 percent of their wages, plus an additional 6.25 percent that is paid in by employers. Social Security benefit increases are pegged to increases in wages, which have historically outpaced inflation.

The first major change under the Bush proposals is to tie Social Security increases to the consumer price index, which will result in lower benefits. The second major change under the Bush plan would allow workers to put up to $1,000 a year of their Social Security payments into private investment accounts to purchase stocks and bonds. The Social Security benefits guaranteed for each worker would be reduced for each dollar invested through the private accounts.

Economists agree that the private accounts plan will reduce Social Security benefits for the vast majority of workers. Even workers who are able to achieve an average rate of return on their private account investments will see their benefits fall 7 percent by 2022. Workers who are not able to generate a return on their investment will see their benefits fall by 62 percent.

The Bush plan will also send the federal deficits to new highs. The cost of the transition to the Bush plan will be $2 trillion, all of which will have to be borrowed. Adding this huge sum to the federal deficits will force up interest rates and undercut economic growth.

The pretext for the Bush proposals is the argument that the Social Security system is headed for collapse and must be overhauled. Bush claims that the shortfall in Social Security funding is $11 trillion. According to the Social Security trustees, however, the shortfall is $3.7 trillion over the next 75 years. The system can continue to pay full benefits at current levels for the next 38 years.

Most economists and policy makers agree that the Social Security system must be modified to provide guaranteed benefits for all workers as the baby-boom generation retires and average life spans increase. The anticipated shortfall in Social Security funds can be fixed with only modest tax increases and small benefit reductions. According to Economy.com, the shortfall in Social Security funding can be permanently fixed by raising taxes by one percent.

Medicare faces a much more severe funding problem, with an estimated shortfall of $8 trillion over the next 75 years. Bush has not called for any reforms to address the shortfall in Medicare and, in fact, greatly added to the shortfall with his 2003 prescription drug legislation, which saddles Medicare with more costs but no additional funding.

The real beneficiaries of Bush's privatization plan are the Wall Street finance and investment firms that will take in billions in fees for handling the new private accounts. These same firms were the largest contributors to Bush's 2004 re-election campaign.

Bush's threat to guaranteed Social Security benefits comes at a time when more workers are completely dependent on Social Security than ever before. Only 21 percent of all workers are covered by traditional pension plans and the number is falling rapidly. Only 11 percent of all workers who earn less than $15 per hour are covered by pension plans. These workers do not earn enough to generate personal savings for retirement.

Retirees who have been forced to rely on 401(k) plans are facing account balances that never recovered from the last recession. The average plan balance in 401(k) accounts is $64,000; only a fraction of what is required for a secure retirement. Social Security benefits are already too low to keep many retirees out of poverty. Reducing benefits further will only push more retirees into financial catastrophe.

With the AFL-CIO, the AARP, NOW and the NAACP all opposing Bush's Social Security plan, it might seem that the proposal is doomed, but Bush's determination to push the plan through and Republican control in Congress mean that a huge battle will be necessary to stop privatization. The Bush administration has already demonstrated that it is willing to install programs and carry out policies that are opposed by the majority of Americans.

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