Gradual Privatization of Social Security is Still Privatization

8/14/2019 Gradual Privatization of Social Security is Still Privatization

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Gradual Privatization of Social Security is Still Privatization

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 thebailout of the financial sector, leaving working families with high, long-termunemployment and reduced wages. But even in the Summer of 2008, you could see thedirection of things from Obama's choice of economic advisors, largely Clinton-erabanking 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 cutSocial Security, Medicare, and Medicaid in a more subtle way. Don't let your guard down!

By San Francisco Gray Panthers, Summer, 2008

Working-class Americans, with Democratic Party help, beat back Bushs 2005 attempt to

take future payroll taxes from the Social Security Trust Fund and put them into privatemarket-based retirement accounts for individual workers, and then scale back SocialSecurity benefits.(See SF Gray Panthers demonstration of January 2005.) The currentDemocratic and Republican candidates both insist they are against Social Securityprivatization, 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 morelikely to win in November because McCain is associated with discredited Bush policiesand because Obama has so much more money, (2) most of our allies perceive theDemocratic Party as more friendly to Social Security, Medicare, and Medicaid, and (3) the

Democrats plans for gradual privatization of Social Security are more explicitlyarticulated by the powerful policy-making think tanks associated with the DemocraticParty and with Obama. (McCains is ambiguous on Social Security, sometimes calling for2005-Bush style private accounts andsometimes calling for 2005-Pelosi style privateaccounts in addition to traditional Social Security. McCain did, however, replace PhilGramm as economic advisor withMartin Feldstein, considered the chief intellectual forceof social security privatization.)

This discussion should not degenerate into a into a dead-end discussion of whether we arepro-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 andMcCain, both Democrats and Republicans, and their associatedpolicy-forminginstitutions insist that after the polarizing gaffe of 2005, restructuring Social Security mustbe a bi-partisan, co-operative effort based on compromise between the parties. Neitherparty has the power to force through its complete agenda. Neither party is willing toaccept the blame for privatizing Social Security, and cutting back its benefits. Democratsand Republicans are together on this. If we want to save those programs, we'll have to do
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it ourselves, and it will be a bigger job than in 2005.

Obamas Links

Advocates for seniors and people with disabilities have good reason to be disturbed overthe implications for Social Security of Barrack Obamas strong association with thecentrist Brookings Institution, and particularly with Obamas appointment of JasonFurman as his top economic advisor.

Jason Furman is closely linked to Robert Rubin, a Wall Street insider and a currentdirector of the giantCitigroup, the worlds largest bank. As Clintons Treasury secretary,Rubin promoted NAFTA, the 1990s deficit reductions that decimated so many socialprograms, andbanking deregulation. In the end, Clinton worked behind the scenes on abi-partisan plan to splice private accounts into Social Security so government would onlyhave 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 NewtGingrich 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 senioreconomic adviser to the chief economist at the World Bank.

More recently,Furman directed the Hamilton Project, which Rubin founded and largelyfunds, and is a part of the Brookings Institute, one of the most powerful policy think-tanksin the country with deep connections with Wall Street. Obamas economic teamincludesconsultants such as Lawrence Summers, who succeeded Rubin as Treasury Secretary,

former Federal Reserve vice-chair Alan Blinder, William Daley, who was ClintonsNAFTA Task Force Chairman and still supports NAFTA, and long-term Obama advisorand Democratic Leadership Council Senior Economist Austan Goolsbee. Goolsbee favorsachieving Democratic Party objectives through market mechanisms, such as promotingfree trade (trade agreements where US business can freely exploit foreign labor, and thenfreely move its factories abroad), but with ameliorations such as compensations fordamaged workers and communities. Obamas economic team includes Paul Volcker,former Federal Reserve Chair under Carter and Regan, who countered the 1960s-1970sworkers' offensive of strikes by raising the prime rate to a record rate of 21.5%, inDecember 1980, deliberately causing the worst recession since the 1930s, throwingmillions 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 likeJoseph Stiglitz, Jared Bernstein, and James Galbraith. Nevertheless, Furmans position asteam leader and his closeness to Rubin, Wall Street, and the Brookings Institute, Volckerspower as former Federal Reserve chair, plus Goolsbees closeness to the DemocraticLeadership Council, makes it all but certain that those will be the dominant voices onObamas economic team, especially since Obama is raising prodigious corporatecontributions ($6 million from securities and investment companies, including $544,000
http://www.latimes.com/news/nationworld/washingtondc/la-na-furman11-2008jun11,0,2364094.storyhttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/Citigrouphttp://www.commondreams.org/archive/2008/03/29/7960/print/http://www.counterpunch.org/blackburn10302004.htmlhttp://www.usnews.com/articles/news/politics/2008/05/29/the-pact-between-bill-clinton-and-newt-gingrich_print.htmhttp://www.usnews.com/articles/news/politics/2008/05/29/the-pact-between-bill-clinton-and-newt-gingrich_print.htmhttp://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://en.wikipedia.org/wiki/Brookings_institutehttp://usinfo.state.gov/journals/itps/1102/ijpe/pj73talbott.htmhttp://www.brookings.edu/about/Trustees.aspxhttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.nytimes.com/2007/04/18/business/18leonhardt.html?ex=1334548800&en=7eb5e2553d92a9f4&ei=5090&partner=rssuserland&emc=rsshttp://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7Dhttp://www.marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7Dhttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.commondreams.org/archive/2008/03/29/7960/print/http://www.opensecrets.org/news/2008/06/big-donor-goldman-sachs-turns.htmlhttp://www.latimes.com/news/nationworld/washingtondc/la-na-furman11-2008jun11,0,2364094.storyhttp://en.wikipedia.org/wiki/Citigrouphttp://www.commondreams.org/archive/2008/03/29/7960/print/http://www.counterpunch.org/blackburn10302004.htmlhttp://www.usnews.com/articles/news/politics/2008/05/29/the-pact-between-bill-clinton-and-newt-gingrich_print.htmhttp://www.usnews.com/articles/news/politics/2008/05/29/the-pact-between-bill-clinton-and-newt-gingrich_print.htmhttp://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://en.wikipedia.org/wiki/Brookings_institutehttp://usinfo.state.gov/journals/itps/1102/ijpe/pj73talbott.htmhttp://www.brookings.edu/about/Trustees.aspxhttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.nytimes.com/2007/04/18/business/18leonhardt.html?ex=1334548800&en=7eb5e2553d92a9f4&ei=5090&partner=rssuserland&emc=rsshttp://www.cfr.org/publication/16188/foreign_policy_brain_trusts.html#5http://www.marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7Dhttp://www.marketwatch.com/news/story/have-you-gone-paul-volcker/story.aspx?guid=%7BFC39F929-B835-431D-90E7-C48585790133%7Dhttp://www.bloomberg.com/apps/news?pid=20601103&sid=aUEIoIsU8XR4&refer=ushttp://www.commondreams.org/archive/2008/03/29/7960/print/http://www.opensecrets.org/news/2008/06/big-donor-goldman-sachs-turns.html


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from Goldman Sachs, the worlds largest investment bank) as well as smaller personalcontributions (over 90% of total donors). As the economy melts down, Obamas responsehas been increasingly aligned with Wall Street.

Jason Furman hasachieved notoriety for praising globalization and NAFTA-type freetrade agreements,praising Wal-Mart for lowering consumer goods prices (See Furmanspaperon this), for saying workers are better off than 20 years ago, and for excusingmassive layoffs. However, our concern here is that Furman advocates a kinder andgentler form of Social Security privatization. This may seem surprising from someonewho in 2005 worked for the Center on Budget and Policy Priorities and provided theeconomic analysis to defeat the Bush plan for Social Security privatization, but as early as2006, Furman was onCNBC off-handedly advocating mandatory private accounts on topof traditional Social Security accounts, and benefit cuts for traditional Social Securityaccounts.

Bi-Partisan Efforts to Restructure Social Security

An extensive Internet search for particulars on Furmans Social Security proposals fails toshow much that is specific, but Furmans parent think-tank, the Brookings Institute, haspublished considerable detail, which is probably more significant anyway, as it representsa consensus of powerful government and corporate policy-makers with close connectionswith Obama. Brookings and Obamas advisors will propose a more gradual SocialSecurity privatization with a few protective or compensatory measures thrown in, much asthese same policy advisors promoted NAFTA with a few protective or compensatorymeasures thrown in.

Taking Back Our Fiscal Future, a combined report authored by the Brookings Instituteand the Heritage Foundation found that despite overall differences, both groups agreedthat Unsustainable deficits in the federal budget threaten the health and vigor of theAmerican economy, and that the first step toward establishing budget responsibility is toreform the budget decision process so that the major drivers of escalating deficitsSocialSecurity, Medicare, and Medicaidare no longer on autopilot.

In other words, a way must be found to drastically cut costs on entitlement programslike Social Security, Medicare, and Medicaid, where all retired or poor Americans havebeen guaranteed certain benefits. (Note the Iraq-Afghanistan war being fought onborrowed 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, andreduce the relatively favorable budgetary treatment of these programs, (meaning
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eliminate the current budget process whereby guaranteed benefits for retired and poorAmericans 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 theirelected representatives a chance to decide explicitly how much they want to spend onthese 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 tosupport these programs.

Similar themes are echoed in another Brookings Institute piece Next President andCongress: Tackle Social Security First, where Alice Rivlin and John Kingdon argue Ofcourse, everyone has to compromise to accomplish a comprehensive Social Security

reform. Republicans have to give up diverting existing revenues into private accounts. Butthey can preserve private accounts on top of Social Security and strengthen incentives forindividual retirement savings without going to "privatization." Democrats have to acceptfuture 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 retirementage 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 reformis 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 PublicPolicy Institute at Georgetown University, and has written extensively on economicpolicy, including a Government Accountability Office (GAO) advisory document to theSenate Budget Committee on Entitlement Reform, including Social Security. Weaverdescribes the Bush Social Security Privatization Plan to break up funding for the existingSocial Security Trust Fund into individual private accounts as counter-productive, since itgenerated anger, hardened positions, and made compromise harder. Instead, thisBrookings paper advocates bi-partisan compromise on Social Security reform to producegradual 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 theadditional payroll tax revenues to the private accounts of low and medium income wageearners, (3) gradually diminish the guaranteed benefits paid by traditional Social Securityso the private accounts become a major source of retirement income, and (4) invest thecurrent Social Security Trust Fund in private securities. Here are the elements of theBrookings Institute plan with its explanations in quotes:
http://www.brookings.edu/opinions/2008/0617_social_security_rivlin.aspxhttp://www.brookings.edu/opinions/2008/0617_social_security_rivlin.aspxhttp://www.brookings.edu/papers/2008/06_social_security_weaver.aspxhttp://www.gao.gov/new.items/d08372.pdfhttp://www.brookings.edu/opinions/2008/0617_social_security_rivlin.aspxhttp://www.brookings.edu/opinions/2008/0617_social_security_rivlin.aspxhttp://www.brookings.edu/papers/2008/06_social_security_weaver.aspxhttp://www.gao.gov/new.items/d08372.pdf


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Social Security Payroll Tax Increase: Increase the payroll tax from 2.0-2.5%, to be splitbetween workers and employers. (Obama has already proposed a doughnut hole taxincrease: 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 thiswould 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 bemandatory for all workers, but no existing payroll taxes would be diverted to individualaccounts. Workers would choose from a modest range of index fund options managed byprivate sector fund managers. The Social Security Administration would manage thecollection and flow of money from individual accounts into those funds At retirement,individuals could choose between annuitizing the funds in their individual accounts toguarantee 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 makeprivate saving easier, cheaper, more automatic for middle-class workers, and will requireemployers to set up IRAs for each worker. The payroll tax increase would be used tomatch 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,wasproposed in a joint Brookings Institute-Heritage Foundation paper.)

Gradual Reductions Defined Benefits of Traditional Social Security: The initial SocialSecurity-defined benefit would be reduced for future cohorts of retirees over time as thenew individual accounts are phased in. Replacement rates will be set so that the combinedold Social Security benefits and new mandatory savings accounts will roughly equal

current benefits, given moderate estimates on rate of return for the mandatory savingscomponent. Given the progressive nature of the current Social Security benefit formula,some changes in the Social Security benefit formula or injection of general revenues tofinance benefits of low earners would be required. Workers would also need to receivebetter information about how working longer can lead to higher benefits, and about theincreased risk posed by having their Social Security benefits depend partially upon theperformance 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. Treasurysecurities. Canada, New Zealand, Norway and Sweden all invest part of the public

pension funds in equity, corporate bonds and other assets through independent entities inorder to gain higher returns. These funds are clearly charged with maximizing fund assetsfor retirees rather than social investment criteria. The U.S. should consider doing the samething. As in other countries, these funds should have a strict legislative mandate tomaximize return for retirees. The U.S. could use multiple funds of limited size with heavyreliance on private fund managers, to prevent any disruption of capital markets. Thisapproach not only would increase returns on Social Security contributions, it would ease
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the cash flow transition expected to occur in 2017 as Social Security shifts from serving asa source of financing for the federal government to being a drain on governmentrevenues. (Obama has said money people put into (traditional) Social Security should notgo 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 inspecified proportions if the alarm bell is triggered The president would be required tomake a report to Congress within a specified amount of time proposing specific legislativesteps to address that shortfall. Each house of Congress would then be given a window oftime to consider the presidents recommendations under special rules limiting debate andprohibiting amendments. This procedural vote would require a special majority of 60percent of members voting in each chamber. Final approval of the presidents plan wouldrequire a normal majority vote in each chamber. The procedural vote hurdle wouldhopefully encourage the president to submit a plan that could win broad support.

(Dianne Feinsteins S-355, calls for a permanent, bi-partisan Social Security andMedicare 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 structuredalong the same lines as Feinsteins Commission, involving Democratic and Republicanchairs of relevant House and Senate Committees, to insure buy-in of its recommendationsby 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 seriousamong elderly widows. Congress should include in a Social Security reform package amore generous minimum benefit for retirees who have worked (or whose spouse hasworked) long careers at low wages in the United States. This benefit should be paid forout of general revenues. The current safety net income program for the elderly,Supplemental Security Income, serves very few people because its benefit levels are lowand its assets tests are extraordinarily stringent. In Canada, close to 40 percent ofseniors receive the Guaranteed Income Supplement, which has moderate income tests, noassets 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 accountson behalf of a custodial parent of very young children who is out of the labor force or hasonly minimal labor force participation during his or her children's first years of life. Thesecontributions would be paid at (or topped up to) a flat rate, perhaps 60 percent of averageearnings, and paid for out of general revenues.
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Whats 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-benefitretirement plans with plans dependent on workers ability to save and the stock marketsability to continuously grow.

In the Brookings plan outlined above, over time, less of retirement benefits comes fromtraditional Social Security and the Social Security Trust Fund, and more is dependent onincome from a workers private retirement account. This is a highly uncertain incomesince it depends on (1) how much money the employer has been willing to put into aworkers 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 benegotiated between worker and employer. Employer contributions will be driven down,just as private company pensions have been driven down over the last three decades, andmore 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 theCenter for Economic and Policy Research, the current recession is expected to have over4 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 greatinstability in financial markets. The sub-prime loan crisis has not only lead tounprecedented mortgage foreclosures, but also to credit crunches and even failures ofmajor banks like Bear-Sterns. The still-expanding US economic crisis, puts addedpressure for government to put money into the private accounts in hopes that the stockmarket 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 thestock market. The fall of Bear Sterns is estimatedto cost the Massachusetts Pension

Reserves Investment Management Board $24 million, the New York State CommonRetirement Fund $30 million, and CalSTRS, the California State Teachers RetirementSystem, lost $84 million of its $85 million invested when Bear Sterns folded.
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Conclusions

Obama has already adopted aspects of the Brookings plan for privatizing Social Securityfor campaign purposes, but he may not adapt them all during the presidential campaign.

Nevertheless, the Democrats close association with Rubin, Furman, Goolsbee, theBrookings Institute, and the Democratic Leadership Council makes it likely that theDemocrats will adopt the Brookings plan once he is elected.

As Robert Pollin writes, But keep in mind that Bill Clinton advanced similar goals in1992, under his economic program of "Putting People First." Yet Clinton's economicprogram changed drastically even during the two-month interregnum between theNovember election and his inauguration in January 1993. During this time, Clintondecided that the first priority of his administration would be to serve the interests of WallStreet. The Clinton years were defined by across-the-board reductions in governmentspending 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 thederegulation of financial markets. Clinton made his decision based on the sameadvisors as Obamas.

We need to remember that the non-partisan Congressional Budget Office projects thatSocial Security can pay all scheduled benefits for nearly 40 years with no changeswhatsoever. And even if nothing is ever changed, Social Security will always be able topay future retirees a higher benefit (adjusted for inflation) than current retirees receive. Ifgovernment promises to repay the Social Security Trust Fund are worthless IOUsbecause the money was spent financing past wars, then the war-makers must repay theFund, not us.

Democratic and Republican forces, both allied with corporate and financial interests, areagreed that the economy cannot sustain the promises made to recipients of SocialSecurity, Medicare, and Medicaid, given the arrival of 20 million new retirees, therequirements of rebuilding the military for current and future wars, and requirements tocompete with China, India, and Europe in the future.

As theBrookings-Heritage report says, Our political leaders have been avoiding thisenormous issuelargely because it requires that the public be told that not all pastpromises can be met. Our group has come together, from diverse points on the politicalspectrum, 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 bemet. But it was action in the streets and the workplace that won us those promises, and itwill have to be action in the streets and the workplace that protect them.
http://www.dollarsandsense.org/archives/2008/0308pollin.htmlhttp://www.brookings.edu/~/media/Files/rc/papers/2008/04_fiscal_future/04_fiscal_future.pdfhttp://www.brookings.edu/~/media/Files/rc/papers/2008/04_fiscal_future/04_fiscal_future.pdfhttp://www.dollarsandsense.org/archives/2008/0308pollin.htmlhttp://www.brookings.edu/~/media/Files/rc/papers/2008/04_fiscal_future/04_fiscal_future.pdf


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Documents

Gradual Privatization of Social Security is Still Privatization