Note: This was written in June and July of 2008, before Obama was even a presidential candidate, let alone elected. It was also written before the economic meltdown and the bailout of the financial sector, leaving working families with high, long-term unemployment and reduced wages. But even in the Summer of 2008, you could see the direction of things from Obama's choice of economic advisors, largely Clinton-era banking and finance officials whose deregulation led to the recent meltdown. Conclusion: after Bush's 2005 fiasco, Democrats and Republicans will join hands to privatize and cut Social Security, Medicare, and Medicaid in a more subtle way. Don't let your guard down!
Kinder, Gentler Privatization of Social Security
By San Francisco Gray Panthers, Summer, 2008
Working-class Americans, with Democratic Party help, beat back Bush’s 2005 attempt to take future payroll taxes from the Social Security Trust Fund and put them into private market-based retirement accounts for individual workers, and then scale back Social Security benefits. (See SF Gray Panthers demonstration of January 2005.) The current Democratic and Republican candidates both insist they are against Social Security privatization, but if you look more closely, they are pushing a new form of privatization, gentler, and more gradual that the Bush version, but privatization all the same.
This discussion focuses on the Democratic Party for several reasons: (1) they seem more likely to win in November because McCain is associated with discredited Bush policies and because Obama has so much more money, (2) most of our allies perceive the Democratic Party as more friendly to Social Security, Medicare, and Medicaid, and (3) the Democrats’ plans for gradual privatization of Social Security are more explicitly articulated by the powerful policy-making think tanks associated with the Democratic Party and with Obama. (McCain’s is ambiguous on Social Security, sometimes calling for 2005-Bush style private accounts and sometimes calling for 2005-Pelosi style private accounts in addition to traditional Social Security. McCain did, however, replace Phil Gramm as economic advisor with Martin Feldstein, considered the chief intellectual force of social security privatization.)
This discussion should not degenerate into a into a dead-end discussion of whether we are pro-Obama or anti-Obama, which would be confusing, and needlessly divisive. Instead, we should concentrate on informing ourselves and others about the likely threats to Social Security, no matter who wins the Presidency. It must be emphasized that both Obama and McCain, both Democrats and Republicans, and their associated policy-forming institutions insist that after the polarizing gaffe of 2005, restructuring Social Security must be a bi-partisan, co-operative effort based on compromise between the parties. Neither party has the power to force through its complete agenda. Neither party is willing to accept the blame for privatizing Social Security, and cutting back its benefits. Democrats and Republicans are together on this. If we want to save those programs, we'll have to do it ourselves, and it will be a bigger job than in 2005.
Advocates for seniors and people with disabilities have good reason to be disturbed over the implications for Social Security of Barrack Obama’s strong association with the centrist Brookings Institution, and particularly with Obama’s appointment of Jason Furman as his top economic advisor.
Jason Furman is closely linked to Robert Rubin, a Wall Street insider and a current director of the giant Citigroup, the world’s largest bank. As Clinton’s Treasury secretary, Rubin promoted NAFTA, the 1990’s deficit reductions that decimated so many social programs, and banking deregulation. In the end, Clinton worked behind the scenes on a bi-partisan plan to splice private accounts into Social Security so government would only have a safety-net role, and was stopped only by the Lewinsky scandal. (A new book, “The Pact,” by Steven M. Gillon, describes the confidential meetings of Clinton and Newt Gingrich that initiated the effort to restructure Social Security.)
Furman himself was special assistant to the president for economic policy under Clinton, and was a staff economist at the Council of Economic Advisers. He has also been a senior economic adviser to the chief economist at the World Bank.
More recently, Furman directed the Hamilton Project, which Rubin founded and largely funds, and is a part of the Brookings Institute, one of the most powerful policy think-tanks in the country with deep connections with Wall Street. Obama’s economic team includes consultants such as Lawrence Summers, who succeeded Rubin as Treasury Secretary, former Federal Reserve vice-chair Alan Blinder, William Daley, who was Clinton’s NAFTA Task Force Chairman and still supports NAFTA, and long-term Obama advisor and Democratic Leadership Council Senior Economist Austan Goolsbee. Goolsbee favors achieving Democratic Party objectives through market mechanisms, such as promoting free trade (trade agreements where US business can freely exploit foreign labor, and then freely move its factories abroad), but with ameliorations such as compensations for damaged workers and communities. Obama’s economic team includes Paul Volcker, former Federal Reserve Chair under Carter and Regan, who countered the 1960s-1970s workers' offensive of strikes by raising the prime rate to a record rate of 21.5%, in December 1980, deliberately causing the worst recession since the 1930s, throwing millions out of work, and beginning a sustained attack on workers and their families that persists to this day. The Obama team also includes more left-leaning economists like Joseph Stiglitz, Jared Bernstein, and James Galbraith. Nevertheless, Furman’s position as team leader and his closeness to Rubin, Wall Street, and the Brookings Institute, Volcker’s power as former Federal Reserve chair, plus Goolsbee’s closeness to the Democratic Leadership Council, makes it all but certain that those will be the dominant voices on Obama’s economic team, especially since Obama is raising prodigious corporate contributions ($6 million from securities and investment companies, including $544,000 from Goldman Sachs, the world’s largest investment bank) as well as smaller personal contributions (over 90% of total donors). As the economy melts down, Obama’s response has been increasingly aligned with Wall Street.
Jason Furman has achieved notoriety for praising globalization and NAFTA-type free trade agreements, praising Wal-Mart for lowering consumer goods prices (See Furman’s paper on this), for saying workers are better off than 20 years ago, and for excusing massive layoffs. However, our concern here is that Furman advocates a kinder and gentler form of Social Security privatization. This may seem surprising from someone who in 2005 worked for the Center on Budget and Policy Priorities and provided the economic analysis to defeat the Bush plan for Social Security privatization, but as early as 2006, Furman was on CNBC off-handedly advocating mandatory private accounts on top of traditional Social Security accounts, and benefit cuts for traditional Social Security accounts.
Bi-Partisan Efforts to Restructure Social Security
An extensive Internet search for particulars on Furman’s Social Security proposals fails to show much that is specific, but Furman’s parent think-tank, the Brookings Institute, has published considerable detail, which is probably more significant anyway, as it represents a consensus of powerful government and corporate policy-makers with close connections with Obama. Brookings and Obama’s advisors will propose a more gradual Social Security privatization with a few protective or compensatory measures thrown in, much as these same policy advisors promoted NAFTA with a few protective or compensatory measures thrown in.
“Taking Back Our Fiscal Future,” a combined report authored by the Brookings Institute and the Heritage Foundation found that despite overall differences, both groups agreed that “Unsustainable deficits in the federal budget threaten the health and vigor of the American economy,” and that “the first step toward establishing budget responsibility is to reform the budget decision process so that the major drivers of escalating deficits—Social Security, Medicare, and Medicaid—are no longer on autopilot.”
In other words, a way must be found to drastically cut costs on “entitlement programs” like Social Security, Medicare, and Medicaid, where all retired or poor Americans have been guaranteed certain benefits. (Note the Iraq-Afghanistan war being fought on borrowed money and rapidly increasing “regular” military expenditures are not even mentioned as major drivers of escalating deficits.)
The joint report recommends
(1) “Congress and the president enact explicit long-term budgets for Medicare, Medicaid, and Social Security that are sustainable, set limits on automatic spending growth, and reduce the relatively favorable budgetary treatment of these programs,” (meaning eliminate the current budget process whereby guaranteed benefits for retired and poor Americans receive first budget priority), and
(2) “significant long-term deviations from budgeted amounts trigger automatic adjustments in benefits, premiums, provider payments, or other revenues.”
(3) The report further comments: “This requirement would give the public and their elected representatives a chance to decide explicitly how much they want to spend on these three entitlements, and how much on other priorities – such as national defense, education, and scientific research – and what level of taxes they are willing to pay to support these programs.”
Similar themes are echoed in another Brookings Institute piece “Next President and Congress: Tackle Social Security First”, where Alice Rivlin and John Kingdon argue “Of course, everyone has to compromise to accomplish a comprehensive Social Security reform. Republicans have to give up diverting existing revenues into private accounts. But they can preserve private accounts on top of Social Security and strengthen incentives for individual retirement savings without going to "privatization." Democrats have to accept future benefit cuts, but they need not be drastic and can spare current retirees and lower-income beneficiaries. The package could include future gradual increases in the retirement age and concentrate benefit cuts on higher income people.”
The Possible Democratic Plan for Privatizing Social Security
A more detailed outline of a possible Democratic Party version of Social Security reform is in a June, 2008 piece “Bridging the Social Security Divide: Lessons From Abroad” by Brookings Institute Senior Fellow R. Kent Weaver. Weaver is professor at the Public Policy Institute at Georgetown University, and has written extensively on economic policy, including a Government Accountability Office (GAO) advisory document to the Senate Budget Committee on Entitlement Reform, including Social Security. Weaver describes the Bush Social Security Privatization Plan to break up funding for the existing Social Security Trust Fund into individual private accounts as counter-productive, since it generated anger, hardened positions, and made compromise harder. Instead, this Brookings paper advocates bi-partisan compromise on Social Security reform to produce gradual privatization.
Basically, the plan is to (1) increase Social Security payroll tax revenue, (2) require employers to set up private retirement accounts for individual workers and apply the additional payroll tax revenues to the private accounts of low and medium income wage earners, (3) gradually diminish the guaranteed benefits paid by traditional Social Security so the private accounts become a major source of retirement income, and (4) invest the current Social Security Trust Fund in private securities. Here are the elements of the Brookings Institute plan with its explanations in quotes:
Social Security Payroll Tax Increase: “Increase the payroll tax from 2.0-2.5%, to be split between workers and employers.” (Obama has already proposed a “doughnut hole” tax increase: continuing the current payroll tax exemption for incomes from $102,000 to $250,000, but taxing payrolls above $250,000, (3% of taxpayers) probably at 2-4%, as opposed to the 6% paid by employees earning less than $102,000. It is estimated this would raise less than half the shortfall expected over the next 75 years.)
Mandatory Individual Private Retirement Accounts on top of traditional Social Security. “All of the new contributions (see above) would go into individual accounts that would be mandatory for all workers, but no existing payroll taxes would be diverted to individual accounts. Workers would choose from a modest range of index fund options managed by private sector fund managers. … The Social Security Administration would manage the collection and flow of money from individual accounts into those funds … At retirement, individuals could choose between annuitizing the funds in their individual accounts to guarantee a steady income stream or drawing the funds down by a set schedule. Lump-sum withdrawals would not be permitted.” (Obama has already said that he wants to make private saving easier, cheaper, more automatic for middle-class workers, and will require employers to set up IRAs for each worker. The payroll tax increase would be used to match 50 percent of the first $1,000 of savings for families that earn less than $75,000. More recently, automatic enrollment in Individual Retirement Accounts, IRAs, was proposed in a joint Brookings Institute-Heritage Foundation paper.)
Gradual Reductions Defined Benefits of Traditional Social Security: “The initial Social Security-defined benefit would be reduced for future cohorts of retirees over time as the new individual accounts are phased in. Replacement rates will be set so that the combined “old” Social Security benefits and new mandatory savings accounts will roughly equal current benefits, given moderate estimates on rate of return for the mandatory savings component. Given the progressive nature of the current Social Security benefit formula, some changes in the Social Security benefit formula or injection of general revenues to finance benefits of low earners would be required. Workers would also need to receive better information about how working longer can lead to higher benefits, and about the increased risk posed by having their Social Security benefits depend partially upon the performance of individual investment accounts.”
Investment of the Traditional Social Security Trust Fund in Corporate Investment: “Currently, Social Security trust fund surpluses are invested only in U.S. Treasury securities. Canada, New Zealand, Norway and Sweden all invest part of the public pension funds in equity, corporate bonds and other assets through independent entities in order to gain higher returns. These funds are clearly charged with maximizing fund assets for retirees rather than social investment criteria. The U.S. should consider doing the same thing. As in other countries, these funds should have a strict legislative mandate to maximize return for retirees. The U.S. could use multiple funds of limited size with heavy reliance on private fund managers, to prevent any disruption of capital markets. This approach not only would increase returns on Social Security contributions, it would ease the cash flow transition expected to occur in 2017 as Social Security shifts from serving as a source of financing for the federal government to being a drain on government revenues.” (Obama has said money people put into (traditional) Social Security should not go into the stock market.)
Emergency Fast-Track Congressional Powers to Deal with Anticipated Shortfalls: “ … automatically putting in place a combination of automatic tax increases and benefit cuts in specified proportions if the alarm bell is triggered … The president would be required to make a report to Congress within a specified amount of time proposing specific legislative steps to address that shortfall. Each house of Congress would then be given a window of time to consider the president’s recommendations under special rules limiting debate and prohibiting amendments. This procedural vote would require a special majority of 60 percent of members voting in each chamber. Final approval of the president’s plan would require a normal majority vote in each chamber. The procedural vote hurdle would hopefully encourage the president to submit a plan that could win broad support.” (Dianne Feinstein’s S-355, calls for a permanent, bi-partisan Social Security and Medicare Solvency Commission, with power to propose legislation that would be fast-tracked on an emergency basis in Congress. Senior and disability advocates opposed S-355.) The Brookings paper, in fact, proposes a Social Security Commission structured along the same lines as Feinstein’s Commission, involving Democratic and Republican chairs of relevant House and Senate Committees, to insure buy-in of its recommendations by all legislative groupings.
Some ameliorating features:
Improvement of Minimum Benefit: “ … the U.S. has one of the highest rates of relative senior poverty among the advanced industrial countries. Poverty is especially serious among elderly widows. … Congress should include in a Social Security reform package a more generous minimum benefit for retirees who have worked (or whose spouse has worked) long careers at low wages in the United States. This benefit should be paid for out of general revenues. The current safety net income program for the elderly, Supplemental Security Income, serves very few people because its benefit levels are low and its assets tests are extraordinarily stringent. … In Canada, close to 40 percent of seniors receive the Guaranteed Income Supplement, which has moderate income tests, no assets tests, and streamlined re-application procedures …
Contributions to compensate for wages lost while caring for children: “…A requirement that government make contributions to Social Security and mandatory savings accounts on behalf of a custodial parent of very young children who is out of the labor force or has only minimal labor force participation during his or her children's first years of life. These contributions would be paid at (or topped up to) a flat rate, perhaps 60 percent of average earnings, and paid for out of general revenues.
What’s wrong with this plan?
Mandatory individual retirement accounts, as proposed by Obama, Pelosi, and others, work against retirees even when the accounts do not replace traditional Social Security, because they accelerate the replacement of employer-sponsored guaranteed-benefit retirement plans with plans dependent on workers’ ability to save and the stock market’s ability to continuously grow.
In the Brookings plan outlined above, over time, less of retirement benefits comes from traditional Social Security and the Social Security Trust Fund, and more is dependent on income from a worker’s private retirement account. This is a highly uncertain income since it depends on (1) how much money the employer has been willing to put into a worker’s private account, (2) how much money a worker has been able to save during his lifetime , and (3) how well the stock market is performing.
Employer contributions, instead of being fixed by law and the same for everyone, will be negotiated between worker and employer. Employer contributions will be driven down, just as private company pensions have been driven down over the last three decades, and more vulnerable employees’ contributions will be driven down even more.
Workers are already unable to save, and will be less able in the future. According to the Center for Economic and Policy Research, the current recession is expected to have over 4 million jobs lost, result in 5-10 million more living in poverty, and cause a $2,000 - $3,750 reduction in annual median family income. Meanwhile, food, gas, health, and rental prices are rising sharply, and social and safety-net services are decreasing.
These individual market-based private accounts are being proposed at a time of great instability in financial markets. The sub-prime loan crisis has not only lead to unprecedented mortgage foreclosures, but also to credit crunches and even failures of major banks like Bear-Sterns. The still-expanding US economic crisis, puts added pressure for government to put money into the private accounts in hopes that the stock market can use the money to inflate the next fiscal bubble.
For the same reasons as above, the Social Security Trust Fund must not be invested in the stock market. The fall of Bear Sterns is estimated to cost the Massachusetts Pension Reserves Investment Management Board $24 million, the New York State Common Retirement Fund $30 million, and CalSTRS, the California State Teachers Retirement System, lost $84 million of its $85 million invested when Bear Sterns folded.
Obama has already adopted aspects of the Brookings plan for privatizing Social Security for campaign purposes, but he may not adapt them all during the presidential campaign. Nevertheless, the Democrats’ close association with Rubin, Furman, Goolsbee, the Brookings Institute, and the Democratic Leadership Council makes it likely that the Democrats will adopt the Brookings plan once he is elected.
As Robert Pollin writes, “But keep in mind that Bill Clinton advanced similar goals in 1992, under his economic program of "Putting People First." Yet Clinton's economic program changed drastically even during the two-month interregnum between the November election and his inauguration in January 1993. During this time, Clinton decided that the first priority of his administration would be to serve the interests of Wall Street. The Clinton years were defined by across-the-board reductions in government spending as a share of the economy's total spending, virtually unqualified enthusiasm for free trade, tepid and inconsistent efforts to assist working people in labor markets, and the deregulation of financial markets.” Clinton made his “decision” based on the same advisors as Obama’s.
We need to remember that the non-partisan Congressional Budget Office projects that Social Security can pay all scheduled benefits for nearly 40 years with no changes whatsoever. And even if nothing is ever changed, Social Security will always be able to pay future retirees a higher benefit (adjusted for inflation) than current retirees receive. If government promises to repay the Social Security Trust Fund are “worthless IOUs” because the money was spent financing past wars, then the war-makers must repay the Fund, not us.
Democratic and Republican forces, both allied with corporate and financial interests, are agreed that the economy cannot sustain the promises made to recipients of Social Security, Medicare, and Medicaid, given the arrival of 20 million new retirees, the requirements of rebuilding the military for current and future wars, and requirements to compete with China, India, and Europe in the future.
As the Brookings-Heritage report says, “Our political leaders have been avoiding this enormous issue—largely because it requires that the public be told that not all past promises can be met. Our group has come together, from diverse points on the political spectrum, to sound an alarm: if America is to remain strong, such evasions must end. “
We must be there to send a different message: past promises CAN be met, and MUST be met. But it was action in the streets and the workplace that won us those promises, and it will have to be action in the streets and the workplace that protect them.