Bush SS plan screws middle age & young workers with "price indexing"

[papau]

If price indexing of Social Security is adopted...

<< ... "a 20-year-old just entering the labor force would LOSE 34 percent of his or her expected benefits. This would amount to almost $134,000 over a lifetime of retirement. But the private accounts proposed by Bush would give that 20-year-old "a chance to gain back, on average, about $47,000." >>


*SOCIAL SECURITY: Massive Benefit Cuts*
The Center for American Progress
Jan. 4, 2005

<< The real impact of President Bush's Social Security privatization scheme: massive cuts in promised benefits. The White House is expected to propose a new system of calculating Social Security benefits called "price indexing." The technical change would mean "cutting promised benefits by nearly a third in the coming decades" -- with even deeper cuts in the future. For example, if the "price indexing" change is made, "a retiree in 2075 would receive 54 percent of the benefits now promised." David C. John, a Social Security expert at the conservative Heritage Foundation called the proposal "very much like sticking your hand in a wasp nest."

WHAT IS PRICE INDEXING?: The current method of calculating Social Security benefits is adjusted to reflect the standard of living when a person retires. That means when your benefits are calculated based on your average earnings, the salary you made 25 years ago is adjusted upwards to reflect the overall rise in wages (wage growth) since that time. The "price indexing" plan, expected to be proposed by Bush, would make that adjustment based on the rise of consumer prices – essentially the inflation rate. Since wages rise much faster than inflation, that means your newly adjusted salary will be lower. The end result is far lower benefits for every new generation of retirees. If this system had been in place since Social Security's inception, people today would be retiring with a benefit tied to the living standard of the 1930s, when 40 percent of households lacked indoor plumbing.

THE DIRTY LITTLE SECRET OF PRIVATIZATION: Bush's plan for private accounts is being sold as a plan for younger workers to benefit from the higher returns of the stock market. Don't believe the hype. The private accounts are actually a mechanism for younger workers to recover a small fraction of the money they lose from price indexing. For example, if price indexing is adopted "a 20-year-old just entering the labor force would lose 34 percent of his or her expected benefits. This would amount to almost $134,000 over a lifetime of retirement. But the private accounts proposed by Bush would give that 20-year-old "a chance to gain back, on average, about $47,000." That is assuming the market doesn't go south (as it just did from 2000-2002). So the question for younger workers is not whether they want private accounts. It's whether they want a huge cut in guaranteed benefits in exchange for a chance to gain back a fraction in the stock market.

THE TRUTH ABOUT THE TRUST FUND: With all the clamoring about Social Security, a simple fact has been obscured: the Social Security budget is currently running a surplus; "as a result, Social Security has a large and growing trust fund." Die-hard privatizers dismiss this trust fund as "meaningless i.o.u's." In today's New York Times, however, Paul Krugman points out this distorts how the Social Security budget – which is legally separate from the rest of the budget – works. Krugman explains: "The bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund." According to the non-partisan Congressional Budget Office, with no changes whatsoever in the current system, the trust fund is in good shape until at least 2052. To put that in perspective, in 2052, Paris Hilton will be 70 years old. In other words, there is no real crisis. (For more on Social Security's financial future, see this American Progress report by Christian Weller and Terri Shaw.)

THE COST OF PRIVATIZATION: President Bush and his right-wing allies are trying to mislead the public about the cost of privatization. Funding private accounts costs $2 trillion because the government has to replace the money that is diverted from the trust fund into individual accounts to pay benefits for current retirees. White House Press Secretary Scott McClellan claims, "The cost is $10 trillion if we do nothing. So what you're talking about would be a significant savings over those costs." There are two problems with this argument. First, the $10 trillion figure grossly distorts the modest long-range deficit of the Social Security program by projecting that shortfall over eternity. (There is no shortfall at all until 2052. Projections beyond 2052, obviously, are extremely unreliable.) Second, and more fundamentally, "borrowing $2 trillion to fund individual accounts does nothing to reduce Social Security's long-term deficit." Under the Bush plan the long-term deficit is reduced exclusively through deep benefit cuts.>>

Read this at: http://www.americanprogressaction.org/site/pp.asp?c=klLWJcP7H&b=100480

[48pan]

1. What we have to do...

I have regular contact with hundreds of 18-25 year old students. They almost universally believe that they won't get any Social Security unless they get private accounts.

We have to do something to change their minds before they buy into the rest of the Bushit. They are almost all in favor of the private account scam.

[asjr]

2. What the president is doing is urging younger workers to gamble.

With the crazy stock market it would really be a gamble.

[RaleighNCDUer]

3. Notice how the crisis date keeps moving back.

It was 2018, back in the '80s. Then it was 2029. Then 2042. Now, 2052.

Know what? The baby boomers that are to be such a drag on the system will ALL BE DEAD BY THEN.

There is no crisis.

[DaveinMD]

5. I keep saying that

but even people here won't believe me. The estimates are faulty.

[Yupster]

6. It's still 2018

That's the date we'll start paying out more than we take in.

In 1986 that was recognized and taxes were raised so we could save a surplus of hundreds of billions of dollars for that rainy day we knew was coming.

Well it's still coming in 2018, and oh look -- we've spent every dime of the surplus.

In 2018 the congress will have to find money to pay out every month which as of now they're not close to having.,

Crisis?

No, but something will have to be done.

My guess?

In 2017 the congress will pass the "Unified Budget" which will make social security payments a general obligation of the US treasury. That accounting change will make all those bonds in the mysterious trust fund magically disappear.

Then congress will raise taxes and raise the retirement age just like they did in 1986, and all those hundreds of billions of dollars would have just been looted by congress.

[papau]

7. That is a possible way to loot the Trust Fund - interesting - but

would "general obligation" mean no more payroll tax?

[Yupster]

9. No - the payroll tax will continue

You can have many different taxes fill the general fund. We do today.

[Ravenseye]

10. And solvent till 2040 something? But there's a problem...

Social security was supposed to be, by law, separate from the main U.S. budget. That way it was harder to be raided etc. Separate. Problem with the surplus they started saving up though was what to do with the cash? So they took out U.S. Treasury Bonds. Basically the Social Security administration loaned the surplus back to the government at a decent rate of return. Not Bull stock market good, but better than a checking account.

So the problem will come in 2018 when the Social Security Administration starts cashing in their bonds, more and more every year. While this wouldn't have been a problem if Gore had been elected and the surplus protected, Bush's severe deficit spending has made our country dangerously unstable financially. Unless that is corrected the Social Security Administration cashing in it's bonds will create additional financial stress on an otherwise already burdened system.

It's a problem, but one that can be corrected by increasing taxes, or reducing spending to get rid of the deficit. Privatization would destroy social security. Just ask an economist.

[Kagemusha]

4. Uh people don't pay payroll taxes thinking SS lends $ to the govt.

Most people think they pay payroll taxes to finance social security ITSELF.

That the surplus taxes do not is a massive fraud.

[jswordy]

8. It's just as I thought

After reading the fine print of the emerging SS plan, I see it is just what I thought it was going to be...a plan to halve benefits within 2 generations (those 75 in 2075 will receive just 45.9 percent of benefits paid today), and eliminate SS in the third or fourth generation.

I also see where it would allow up to 2/3 of a person's total SS contribution to be diverted to stocks, a huge windfall for the Bushco and GOP campaign donors. And it would cut benefits to near-term recipients by indexing SS to inflation.

Yes, it is all as I had suspected. Run the country into debt, then tell folks we can't afford their social safety nets so they have to go! Thus the GOP agenda is achieved.

[Ravenseye]

11. exactly

I mean....it's not like they haven't SAID this is what they're doing. Norquist pretty much laid it out with the 'drown it in the bathtub' comment.

These people are corporate anarchists who use manipulate and lie to good decent americans to get them to support an agenda that they believe will improve their lives, when it'll only improve the rich men controlling their parties lives.

I find it amusing that so many christians in this country are so blind to this fact. Americans it seems, make lousy christians.

[ThomasJackson]

12. and your point is ... ?

i don't get it. frequently when i read threads about SS folks who argue that SS is solvent and not a problem at all link to studies and reports that all say that "SS is solvent through 2042 and that even after that can pay 75 to 80% of benefits" so whats the problem.

well ..... this is the problem. this is what it means to only pay 70 to 80% benefits.

[DaedelusNemo]

13. Actually, they're cutting it much more than that

If they were to solve the entire problem by simply cutting benefits, tit would be to roughly 80%. But their plan actually cuts it down much more of that. This is because those 'private accounts' are very expensive (and not private, either.)

[DaedelusNemo]

14. Should benefits be cut at all? If so, how much?

Certainly, some adjustment - more money or less spending - is needed. Here's what i've seen of the debate so far, from the Washington Post at http://www.washingtonpost.com/wp-dyn/articles/A45726-2005Jan3.html:

****************
"Currently, initial benefits are set by a complex formula that calculates workers' average annual earnings in their 35 highest-paid years and adjusts those earnings up from those years to reflect standards of living near that worker's retirement age. That adjustment is based on wage growth over that time span. Under the commission plan, the adjustment would be based instead on the rise of consumer prices.

The change would save trillions of dollars in scheduled expenditures and solve Social Security's long-term deficit, but at a cost. According to the Social Security Administration's chief actuary, a middle-class worker retiring in 2022 would see guaranteed benefits cut by 9.9 percent. By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised."
*****************

The question is whether this is a draconian cut or was the benefit formula set awry to begin with? Two opinions:

*******************
"A person with average wages retiring at age 65 this year gets an annual benefit of about $14,000, but a similar person retiring in 2050 is scheduled to get over $20,000 in today's dollars," Mankiw said in a speech at the American Enterprise Institute. "In other words, even after adjusting for inflation, a typical person's benefits are scheduled to rise by over 40 percent."

Opponents of the proposal have also been mobilizing. Under an inflation-linked formula, benefits would keep up with prices, but wage levels determine standards of living, Rother said. Social Security benefits currently equal 42 percent of the earnings of an average worker retiring at 65. Under the new formula, that benefit would fall to 20 percent of pre-retirement earnings. Future retirees would, in effect, be consigned to today's standard of living.

"It's like saying elderly people today should live at a 1940 standard of living," said Robert Greenstein, executive director of the liberal Center for Budget and Policy Priorities. "Part of our social contract has been to allow seniors to participate in rising standards of living rather than consigning them to some second-class status in retirement."
*********************

The CAP's summation (linked in original post):
*********************
The "price indexing" plan, expected to be proposed by Bush, would make that adjustment based on the rise of consumer prices – essentially the inflation rate. Since wages rise much faster than inflation, that means your newly adjusted salary will be lower. The end result is far lower benefits for every new generation of retirees. If this system had been in place since Social Security's inception, people today would be retiring with a benefit tied to the living standard of the 1930s, when 40 percent of households lacked indoor plumbing.
**********************

Previously, i've said that price indexing seems pretty reasonable, in that people are worried about the prices of things when they're retiring, not what other people are making. Some good points have been made, though, so to the re-examination we go.

Personally, this is all based on so many what-ifs that i find it hard to take the numbers seriously. It's like fudging numbers in speculative accounting. Beyond the assumptions about growth and demographics, this particular debate is based on the expected difference between wages and inflation. Suppose wages went up slower than inflation (especially given the dismal growth rate being projected by all these studies) - it seems to me people would be clamoring to switch to price-based rather than wage-based benefits. But anyway.

The CAP's summation seems to me somewhat unfair in their invocation of 30's outdoor plumbing. Not all increases in the standard of living are about rising costs - much of it is about improving technology. What we pay now for indoor plumbing is much, much less than the equivalent cost in the '30s. It seems like political speech makes everybody want to put their thumbs on the scale at least a bit. But anyway, they do have a point.

If the CPI is not keeping up with standards of living, then retirees will be stuck in a time warp. Nowadays, retirees want cable and internet (i certainly will!) but is that reflected in the CPI? On the other hand, is it necessarily the case that the standard of living keeps pace with wages? or isn't there usually some increase of discretionary income as part of that wage increase, an increase of optional spending? If so, Social Security would be paying out benefits not just to make sure retirees can be comfortably secure, but to hand out extra 'fun' spending money too.

The notion of cutting benefits 53% sounds horrendous. But how much of that is gutting the retirement and how much of it is paring excess? What if we're making SS twice as expensive as it needs to be? In that case, what i would advocate is cutting the SS tax by half, keeping SS as a minimum guaranteed retirement, and let people add on whatever retirement (or whatever else) they want with the other half they get to keep. But i doubt it's that simple. It does seem plausible that the cost of the standard of living may go up faster than inflation, if not as fast as wages.

My immediate reaction is to say we should go ahead and correle benefits with prices, on condition that the CPI be regularly reviewed and new items now considered to be part of the standard of living be added to it continuously. That is, try to make the CPI a measurement of the standard of living rather than a measure of inflation, or (more likely) create another measure to do that. The problem i see immediately to this is that this makes the determination of the standard of living a political football that could waver wildly by administration.

On the other hand, that's probably a political plus for democrats. People arguing over whether Granny can have cable or not.