[PEN-L:11427] Re: Objections to Social Security ...

[Michael Eisenscher <meisenscher@xxxxxxxxxxx>]

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At 03:39 PM 7/23/97 -0700, William S. Lear wrote:
>On Wed, July 23, 1997 at 13:07:52 (-0700) Doug Henwood writes:
>>A Cato Institute press release. Note the authors' employer - State Street
>>Advisors, a large portfolio manager.
>
>So, who is going to write a point-by-point rebuttal to this, aside
>from Doug, who has a pretty good start of one in _Wall Street_, on
>pages 303-307?
>
>
>Bill
>

I don't have time for the point by point response, but for those who might
be interested, Peter Donohue and I had an article in the February issue of Z
which covers much of that turf.  I have also attached a something I prepared
for a presentation to a Labor Party forum on Social Security Reform, which
has some additional information.

In solidarity,
Michael

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SOCIAL SECURITY REFORM
PRESENTATION TO GOLDEN GATE CHAPTER, LABOR PARTY
by Michael Eisenscher
3/23/97

Beginning in the 1970s, escalating during the Reagan/Bush Administrations,=
 and continuing unabated under Clinton, the assault on the standard of=
 living of the American working people continues unabated.  From the signing=
 of NAFTA and GATT to gutting the meager social safety net represented by=
 the welfare system, the Clinton Administration has been a willing,=
 cooperative, and even eager partner with the GOP in dismantling what=
 remains of the New Deal social contract.  Having had his way with welfare=
 recipients, Clinton and his Republican and Democratic partners have turned=
 their attention to the Social Security System. =20

Aided by a smokescreen of fear-stoking propaganda generated by a=
 multi-million dollar campaign cooked up by corporate interests and their=
 ideological storm-troopers in Washington think tanks, the public is being=
 softened up to accept "an end to Social Security as we know it."  Surveys=
 are conducted to demonstrate that most young people do not believe Social=
 Security will be there when they retire.  Baby Boomers are warned they must=
 save more if they want to retain their standard of living when they retire.=
  Pundits issue dire warnings that we face a "crisis" unless we do something=
 now to "fix" the Social Security program.  Editorial pages and nightly=
 newscasts echo the message without ever determining whether all this "sky=
 is falling" brouhaha has any real substance to it. =20

WHY THE DEBATE OVER SS REFORM?  IS THERE A CRISIS?

The SS Trust Fund runs a current annual surplus of $60 billion.  Based on=
 current projections there are sufficient reserves to cover all retirees=
 until 2029.

In 2012, with the retirement of baby boomers, benefit payouts will start to=
 exceed taxes collected. At that point, the Social Security Administration=
 will have to draw on interest earned to cover benefits. In 2019 benefit=
 payments will exceed taxes collected and the fund will have to start=
 drawing down its reserves. By 2029 the trust fund would be depleted. At=
 that point, FICA taxes collected would only cover about 77% of benefits=
 due.

To correct the gap, the Social Security Administration calculates that a=
 2.2% increase in payroll taxes would suffice. Alternately, a reduction of=
 15% in the value of benefits would accomplish the same goal.

However, these numbers are merely estimates. If any of the underlying=
 assumptions are off, these estimates are either inflated or too low. In=
 order to know for certain whether there is a problem and how serious it is,=
 one must accurately project into the future changes in demographics,=
 productivity, inflation, and wages -- as well as geopolitical events, like=
 the OPEC oil embargo of the 1970s or the Vietnam War, as well as the=
 consequences of natural disasters.

Assuming that these projections are reliable, we don't have to cover the=
 entire amount all at once. There are many alternatives for generating=
 additional revenue. A FICA tax increase on both employees and employers of=
 just 0.05% each year between 2010 and 2046 (totaling 3.6%) would maintain=
 current benefits into the foreseeable future.

 	The growth rate of the economy over the past twenty years averaged 2.8%=
 per year. It is conservatively projected to drop to 1.8% over the next=
 twenty years and then to 1.4%.=20

A slightly more optimistic protection, however, would require an even=
 smaller increase in taxes.

 In 1994, the Clinton administration appointed an advisory council on Social=
 Security composed of 13 members, including three from labor (Gloria Johnson=
 from CLUW and IUE, George Kourpias of the IAM, and Gerald Shea from the=
 AFL-CIO). The balance of the council members included a former Social=
 Security Commissioner, executives from the investment and finance=
 community, corporate benefits consultants, academics, and other members=
 from the business community, not one of whom is likely to depend on or need=
 Social Security to survive when they retire.

At the end of 1996, the council issued its report. It was divided into three=
 camps around three proposals with one common characteristic =97 each in its=
 own way called for investment of some portion of Social Security funds in=
 the private securities market.

 	The Ball Plan: Would gradually invest up to 40% of the trust fund in the=
 market, with investment managed by a government-appointed board of trustees=
 or fund managers. Investments would be in passively managed stock index=
 funds.

 	The Gramlich Plan: Proposes that 1.6% of each workers' taxable income be=
 set aside as an additional payment over and above the current employee=
 contribution into a mandatory government-supervised retirement plan similar=
 to a 401(k) savings plan. Workers would be offered choices of investments=
 from several broad categories.

 	The Schieber Plan: Would split Social Security into a two-tiered plan. The=
 first would offer a basic monthly benefit of up to $410 (in today's=
 dollars); the second would set aside 5% from the payroll tax for each=
 worker to personally invest tax-free for retirement in any way the worker=
 chooses.

All three proposals include some number of other changes, including payroll=
 tax hikes, taxing benefits that exceed contributions, shifting the Medicare=
 portion of the tax into the trust fund, increasing the computation period=
 from 35 to 38 work years, bringing state and local public employees into=
 Social Security, cutting future benefits by changing the percentage of=
 income on which benefits are calculated, raising the normal retirement age=
 to 69 and pegging it to life expectancy tables, and cutting spousal=
 benefits from 50 to 33%.  These have different impacts on income different=
 groups, but some are especially injurious to women, minority, and other=
 low- income workers, whose work histories, job retention and tenure, and=
 earnings already entitle them to much lower benefits.

The three labor members endorsed the Ball plan, and focused their fire on=
 proposals that shift investment responsibility to individual workers.  They=
 have embraced the notion that government- managed investment of trust funds=
 in the stock market would be a reasonably safe way to increase the earnings=
 of the fund to solve the problem of a predicted future shortfall.  They did=
 not offer a separate alternative, and thus the entire debate has been=
 framed around these three choices. =20

Few in the labor movement would argue that allowing individuals to manage=
 their own investments is a prescription for wholesale social disaster. =
 Even well trained investment professionals and fund managers have been=
 known to make lousy market investments that resulted in huge losses. =
 Millions of unskilled or unlucky individual investors, competing with the=
 likes of Ross Perot and Warren Buffett in the market,  would be playing=
 Russian roulette with their retirement funds.  As in every gaming=
 establishment, the odds favor the house not the gambler.

Needless to say, the Wall St. crowd are tripping over themselves to get=
 their hands on the trust fund, which could generate $100 billion in=
 management fees by 2020.  Free-marketeers are rushing to embrace and=
 promote the concept of privatization.  Investment houses, insurance firms,=
 and outfits like the libertarian Cato Institute have mounted a=
 multi-million dollar in support of privatization.  If the Ball Plan were=
 implemented, it is conceivable that a government-managed plan could end up=
 owning as much as 10% of the shares of major corporations, making the=
 public the largest single stockholder with potential influence over=
 corporate policy. This drives the free marketeers right up a wall.  If,=
 however, investments are made only in passive index funds, government=
 effectively forfeits that opportunity =97 one of the few possible arguments=
 for labor to support something like the Ball Plan

Thus, under any of these three proposals it is possible that Social Security=
 funds could provide the investment financing of the next wave of overseas=
 investment, mergers and buyouts, acquisitions, automation, corporate=
 reorganization and restructuring, and down-sizing, resulting in further=
 losses of stable permanent well-paid jobs and further threatening the=
 environment, both here and in the countries to which capital and jobs are=
 exported.
 =20
 	The present Social Security System has an administrative cost of just 0.7%=
 of benefits paid out. The operating costs of the life insurance industry=
 run in excess of 40%. Chile's completely privatized Social Security system=
 has an administrative cost of about 15%. Risk aside, investment in the=
 stock market would subject the fund to larger administrative costs,=
 potentially lowering benefits (but lining the pockets of brokers and=
 investment consultants).

		How risky is the market? Would the trust fund really be at risk?

We are presently in an over-inflated boom market, which many sober=
 investment analysts believe to be near its peak. The market has been=
 inflated by a wave of speculative investment which has no relationship to=
 the underlying value of  corporate assets. The ratio of stock prices to=
 dividends is at the highest level since modern record keeping began in 1871=
 (meaning that dividend yields are at record lows). =20

 	Currently the P/E ratio stands at 22 to one, a record high.  In order for=
 the market to maintain its record of about 7% inflation-adjusted return on=
 investment the price-to- earnings ratio of stocks must continue to soar. =
 The Economic Policy Institute (EPI) estimates that to generate a 7% return,=
 the market will have to rise over 60 to one by 2030, and 460 to one by=
 2070.


When compared to underlying profits, stocks are more expensive now than in=
 all but 12 of the last 125 years. This is what is known as a "speculative=
 bubble." We have been here before. It was in precisely this kind of=
 overheated market that innumerable people lost their life savings in the=
 1929 crash. Even if post-crash investment reforms could prevent that kind=
 of financial disaster, nothing can insulate the market from another radical=
 drop.=20

The market under even best of circumstances is highly volatile.  In 95 years=
 there have been 53 declines in the market of 10% or more.  Of the 53,=
 fifteen were losses of 25% or more.  In the bear market of 1973-74, stocks=
 were down 50-60%.  Would you be willing to bet your future retirement=
 income on the assumption that the market will perform in the next=
 seventy-five years as it has in the last 75?  Even if the market were to=
 yield 10.5% on average for all the years until the year you were to retire,=
 that average is irrelevant if the market takes a dive just when you are=
 ready to retire.  Market performance "averages" are just a statistical=
 expression -- handy for arguments; lousy for predicting the future.  But if=
 we want to look to the past, keep in mind that in the last ten bear markets=
 stock prices dropped on average to their level four years earlier, for an=
 average price drop of 48% for Dow Jones Industrials.  If that holds for the=
 future, a comparable drop from today's market peaks would result in every=
 mutual fund stock purchase or investment since 1992 showing jumbo losses.

We don't have to speculate about this.  There is a current example available=
 in the Japanese market.  Just over seven years ago the Nikkei stock index=
 (comparable to our Dow Jones) hit a record high, and most folks expected it=
 to continue to climb.  The index started tumbling in January of 1990 and=
 did not stop until it had lost 63% of its value by August of =9192.  It=
 continued to languish in the toilet and now stands at less than half its=
 1989 high.

 	One statistical model of market performance predicts that the stock market=
 is in line for a 68% decline over the next ten years.  Another less=
 pessimistic estimate is a real decline of 38% in stock prices over the next=
 decade.  The Social Security Trustees forecast of lower economic growth=
 over the next 75 years suggests that real returns on stock will average=
 only 4.36%, according to EPI. =20

Privatizing Social Security now means buying into the market at its highest=
 prices on an assumption it will continue to climb. If it does not =97 if it=
 takes a plunge =97 the investments would be sold at below the price at=
 which they were purchased. The consequence would be dire: benefits would=
 have to be reduced, taxes would have to be raised, and in the case of=
 individual investments, workers could find themselves without any=
 retirement income. We can take this gamble today, but if we are wrong, we=
 and future generations will pay the price tomorrow.  Those most directly=
 affected are those who are most vulnerable, the folks who depend on Social=
 Security for most or all of their retirement income.

Social Security has been substantially responsible for significantly=
 reducing poverty among the elderly and disabled.=20

 	Social Security benefits are a primary source of income for most elderly=
 Americans. It provides 53% of total income for all retirees 65 and older.=
 For 23%, it constitutes 90% of as or more of their total income; for 14%,=
 it is their only source of income.=20

By design, Social Security involves massive subsidies from the next=
 generation of retirees to this one, from single workers to married couples,=
 from two-earner families do one-earner families, from high-income earners=
 to low, from those who die early to those who die late.  It is also a=
 program designed to redistribute wealth.  Low income workers receive a=
 higher proportion of their lifetime earnings than do high income workers.=
 Privatization, even partial privatization, creates an incentive to abandon=
 this redistributive objective as workers with investment portfolios come to=
 resent even the small percentage of their income that is diverted to help=
 support lower paid workers. As such, privatization pits better paid workers=
 against the working poor.

		Other Impacts of Massive Market Investment of Social Security Funds

There are other consequences. Dumping billions of dollars into the market=
 would have the same effect as if the fund dumped Treasury bonds. Their=
 prices would be depressed, pushing interest rates up. This would diminish=
 the value of reserves held by many banks and other lending institutions,=
 reducing their ability to make loans and pushing up interest rates for=
 borrowers. As interest rates climbed, so too would the cost of servicing=
 the federal debt. Local and state government bond financing would face=
 higher interest rates and public bonds would have to be offered at lower=
 prices. =20

Right now the surplus in the trust fund is invested in Treasury bonds that=
 cover other government spending.  By diverting a large portion of the fund=
 into the market, funds would no longer be available to reduce the deficit. =
 That would mean further cuts in government programs, increased taxes, or=
 both.  If a "Balanced Budget" amendment to the Constitution were to become=
 a reality, further dramatic reductions in government services and aid to=
 the most vulnerable and needy populations would become inevitable, since=
 the well-connected wealthy will probably be able to resist any increase in=
 their tax burden.

Some have argued that market investment will pay off in growth created by=
 expansion of investment funds available for corporate construction of new=
 plants, and acquisition of equipment and expanded inventories.  Yet Federal=
 Reserve studies show that most  of that kind of corporate investment is=
 paid for out of profits and depreciation credits, not from stock sales. =
 Since 1952, internal funds have covered 95% of corporate expenditures on=
 new plant, machinery, and inventories.  As Doug Henwood (Left Business=
 Observer) observes, rather than being a corporate fundraising mechanism,=
 the stock market is an institution for organizing the ownership of large=
 corporations.  That privilege actually belongs to a tiny minority of=
 investors.  In 1992, the richest 1% of households owned 39% of stock owned=
 by individuals; the top 10% owned over 81%.  So much for shareholder=
 democracy and peoples' capitalism!

The poverty-reducing effect of Social Security is possible because it is a=
 system that was never designed to produce the highest feasible financial=
 return on each worker's contributions. It is not a pension plan. It is a=
 social program =97 a social contract between generations. It binds this=
 generation to the future.=20

			Is there an alternative?

At present FICA taxes apply only to the first $65,400 of income. Why not tax=
 all income?  By one estimate, that one reform could reduce Social Security=
 taxes by $53 billion. Why not tax other sources of income, unearned income=
 that feeds the wealthy who earn the majority of their money not from wages=
 but from interest and dividends? Why not place a small transfer tax on sale=
 of securities held as short-term speculative investments? This would=
 discourage speculation (market churning), discourage takeovers, and=
 encourage asset-building rather than empire-building.

But we could be bolder yet! Why not demand that a portion of the Social=
 Security Trust fund be invested in creating stable decent-paying jobs? The=
 fund could sell special bonds, the proceeds of which would be targeted to=
 rebuilding our inner-cities and national infrastructure, financing mass=
 transit, building low-income housing, and other projects with broad social=
 benefits. This would have a long-term impact on economic growth and social=
 stability. The jobs created could be made part of a major program designed=
 to put chronically unemployed and under- employed people to work. It could=
 develop marketable skills and extend job training for workers who are=
 victims of downsizing and corporate restructuring.=20

The real solution to any future problem with funding Social Security is=
 decently paid, stable, permanent full time jobs!  A fully employed working=
 class will increase FICA contributions that will prevent any shortfall. =
 The second most significant solution is organization!  Workers in unions=
 earn substantially more than those without union protection.  Higher=
 incomes mean higher FICA contributions.  The "problem" of Social Security"=
 (along with innumerable other social ills) can be readily solved not on=
 Wall St. but on Main St. with real jobs instead of McJobs and union=
 contracts rather than temp agency contracts.  Rather than invest in the=
 stock market, why not invest in the American working class and the quality=
 of life and future of our country?

Wouldn't this be a preferable program for the labor movement to advocate?=
 Shouldn't the Labor Party propose such an alternative?

 The relevant measure should not be the rate of return provided by Social=
 Security benefits relative to taxes paid in, but rather the improvements in=
 living standards over generations.

The fact that the three labor members of the Social Security Reform Council=
 embraced the idea of trust fund investment in the market should not be=
 taken as the final word from labor.  They acted without approval or=
 instruction from the General Executive Council of the AFL-CIO.  The=
 Federation can be moved to a better position if the affiliates demand it. =
 To achieve that, however, will require that union members press the issue=
 in their locals and labor councils, pass resolutions demanding real=
 worker-friendly solutions to any perceived future problems with Social=
 Security, and communicate their displeasure to their national unions.

The Labor Party has an opportunity =97 no a responsibility =97 to provide=
 leadership in this struggle.  If the LP claims to offer a better=
 alternative to that offered by the political status quo, it must speak to=
 the immediate as well as long-term needs of working people.  It ought not=
 tail the AFL-CIO by remaining silent while the Federation uncritically=
 embraces the stock market as a solution to the future problems of Social=
 Security.  This is one of what academics like to describe as critical=
 decision nodes for the LP.  As a political party it will be judged by how=
 it responds to this challenge.

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