Social Security Reform: The Rich Win, The Masses Lose


With its assault on Social Security, the Bush administration is once again creating a crisis where none needs to exist. In essence they want to "outsource" the one safety net this nation provides for the elderly, and they want to do it for one primary reason: To keep the federal government from quietly borrowing and spending the annual Social Security surpluses.

The conservatives behind this plan want to put government on a fiscal diet, and their approach is to starve the system that feeds retirees -- many of whom are already on starvation diets. In other words, to keep the Congressional porkers (and their lobbyist buddies) from overeating, they are designing a Social Security overhaul that will cut benefits to the elderly by perhaps 60 percent in real terms over the next few decades.

Does Social Security need adjustments? Yes. Does it need to be trashed? No way! Here are some facts:

The Social Security trust fund has assets of more than $1.5 TRILLION, and is currently running a hefty surplus that builds assets every year until 2018. Then with the retirement of baby boomers, it will start digging into that mammoth surplus. That trust fund at present is entirely invested in U.S. government treasury securities, so the U.S. government owes the trust fund what it borrows from it, and that debt mounts every year.

Based on the Social Security Administration's 75 year projections, the system as it stands today, could be adequately funded by either a 1.89 percent increase in the 12.4 percent payroll tax (6.2 percent each from the employer and the employee) or a 13 percent cut in benefits. However, there are a lot of other alternatives and here are a few:

1. To use former Vice President Gore's phrase, put "a lock box" around inclusion of the surplus in government budget computations. Remove that lame excuse for their lack of fiscal discipline.

2. Reduce the rate of Social Security taxes on employer and wage earners, but remove the lid on wages subject to those taxes (now $87,000) so that the effect is to make up that 1.89 percent difference. Today, a person making $2 million a year (and there are quite a few) are finished paying their annual Social Security taxes by Martin Luther King's birthday in January. At $200,000, they're done before Memorial Day. Does that seem fair?

3. If the system is facing financial challenges, it would seem reasonable to have Social Security benefits be means tested. The purpose is to provide a safety net of minimum income to those who most need it; why should it go to those who are already wealthy?

4. The administration also wants to cut Social Security's costs by indexing it to the Consumer Price Index (CPI) instead of wages. Anyone who shops for themselves intuitively knows that the CPI is dramatically understating true inflation. That's because it has been reduced by so-called "quality adjustments" since midway through the Clinton administration. Some experts have put the understatement of true inflation at 1.5 percent to 2 percent per year over the past five years. This proposed change is a key reason why benefits could be cut by 60 percent in real terms over the next few decades.

5. As someone who has been active in most facets of the investment business for the past 40 years, I think the plan to privatize a part of Social Security contributions will be an abject failure for this reason: The people who will need Social Security payments most are the least prepared to handle investing it. They are also the ones most likely to get fleeced by the financial predators that will live off that system. If you want to see who's salivating over "privatization," just look at the brokers and banks who contributed to the Bush campaign and are funding the inauguration!

Indeed, if investing in stocks and corporate bonds is such a good idea, perhaps the trust fund itself should allocate some funds to investment in a few important stock and bond indexes and let's see how it works. Then all could share in the outcome -- for better or worse.

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