Posted: February 07, 2005

Social security privatisation

I am currently in the Caribbean on CofFEE business - spreading the Job Guarantee message and building more international collaboration. I have been on the island of St Croix, which is a US Territory although you wouldn't know it - ramshackle, under-maintained and beautifully quiet and understated! Anyway, the news coverage is all American. This week the President delivered his State of the Union speech and outlined the plan to privatise social security in the US to save it from collapse. Bush said "By 2018, Social Security will owe more in annual benefits than the revenues it takes in, and when today's young workers begin to retire in 2042, the system will be exhausted and bankrupt". Ever heard so much nonsense?

The social security system (which for Australians is equivalent to our old-age pension system) was introduced by President F.D. Roosevelt in the late 1930s. In his 1937 inauguration speech he was intent on an America which did not have a "dulled conscience, irresponsibility and ruthless self-interest ... In this nation I see ... millions of families trying to live on incomes so meager that the pall of family disaster hangs over them day by day ... We are determined to make every American citizen the subject of his country's interest and concern ... The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little ... Overwhelmingly, we of the Republic are men and women of good will [who] will insist that every agency of popular government use effective instruments to carry out their will ... They will demand a nation uncorrupted by cancers of injustice and, therefore, strong among the nations in its example of the will to peace."

Fast forward to 2005 and the current President. Instead of FDRs vision, the current regime, reflecting the mean-spirited nature of modern neo-liberalism constructs individual freedom in an entirely different way. In his inaugural speech he said that "In America's ideal of freedom, citizens find the dignity and security of economic independence, instead of laboring on the edge of subsistence. This is the broader definition of liberty that motivated the Homestead Act, the Social Security Act and the G.I. Bill of Rights. And now we will extend this vision by reforming great institutions to serve the needs of our time. To give every American a stake in the promise and future of our country, we will ... build an ownership society. We will widen the ownership of homes and businesses, retirement savings and health insurance" (emphasis added).

The current agenda is to broaden this concept of independence and private ownership to the traditional responsibilities of government - social security, broad access health care and education. The belief is that only if these areas of life are 'privately owned' can freedom being truly said to manifest. We should not be fooled by the gentle sounding rhetoric of an 'ownership society'. As Joel Bleifuss writes in R.I.P. FDR?, published In the Times on January 31, "Ownership society is a pleasant-sounding euphemism for privatization. And top on the list for privatization is Social Security, the program that allows the government to guarantee an income for those in old age, those whose breadwinner has died or those who have been seriously injured and are unable to work. The program was established as an acknowledgment that we as a people have a collective responsibility to provide for our fellow citizens." But Bush has a different take on it - he said that it will ensure that Americans, of any socio-economic capacity will be prepared "for the challenges of life in a free society [by] making every citizen an agent of his or her own destiny." The neo-classical economic ideal - individual maximising agents determining all the economic outcomes - including how well you can fund your old-age non-income years. It does not matter whether you have had a life of unemployment (due to ill-conceived government macroeconomic policy) or have been among the growing number of working poor constrained by low wages or inadequate working hours) - and hence have been unable to 'provide' for yourself via an accumulation fund.

The 'ownership society model' requires that individuals have the primary responsibility to look after themselves after their income-earning days are finished and they enter retirement. The President's plan is to privatise social security in the US by creating individual retirement accounts. The plan, announced in the State of the Union speech, will mean that a portion of the payroll tax contributions paid by workers and firms which currently notionally form the 'fund' that purchases the bonds for the trust fund will now be used to finance the individual investment accounts. Then each worker will choose how they will invest these funds across a variety of investment options each of which will vary in risk and return. The claim is that these funds will eliminate the 'fiscal burden' of providing pensions for retirees and ensure the system does not become 'bankrupt'. Ever heard anything more nonsensical? For a full (critical) account of the plans to privatise social security in the US, see Dean Baker's article Cutting Our Benefits although readers should be aware that Baker also enters the mirky and plainly-wrong world of government budget constraints - the substantial point which I elaborate on below.

The critics of the plan are often equally mis-guided. On the misguided front, they seem to want to argue 'as if' social security can become bankrupt. In this light they vigorously work out ways it can raise more revenue or reduce outlays. They deny the existence of an 'immediate crisis', pointing out that the security trust fund has an accumulated reserve of $1.5 trillion which is held in the form of government bonds. They say that any (alleged) long-run financial gaps are less than the planned (cumulative) tax cuts proposed by the current regime. They indicate that taxes could slowly rise to 'finance' any short-falls. Finally, (as a broad representation of the criticisms), they claim that indexing against price deflation could replace the current linking of pensions to real wage increases to make it 'more affordable'. All these claims are erroneous and weaken the ability of the 'progressives' to attack the privatisation at its root cause - the fallacy that there is a government budget constraint.

Among the valid criticisms raised by the opponents of privatisation, is their claim that the changes will hurt the elderly poor. In Chile (where a similar scheme is compulsory) management fees imposed by the private investment funds absorb around 20 per cent of the social security incomes and penalise small accounts. It is noted that the current public US system incurs 1 per cent management overhead costs. On Bloomberg financial news this week, I saw an interview with a Wall Street analyst (commenting on Bush's plan) who said that the big investors will not see enough return in the private social security investment accounts. Management fees will thus rise.

In relation to the alleged bankruptcy issue, Baker says "One such claim that gets frequently repeated is that the Social Security trust fund has been 'raided,' 'spent,' or is just worthless pieces of paper. In fact, the Social Security trust fund holds almost $2 trillion of government bonds. Under the law, the government must repay these bonds to Social Security from general revenue - this means it will be repaid primarily from progressive personal and corporate income taxes, because workers have already paid for their Social Security benefits. In other words, the government is obligated to tax wealthy people like Donald Trump and Peter Peterson (the founder of the Concord Coalition) to pay for the Social Security benefits that the rest of us have already earned ... The Social Security system lent money to the government to buy these bonds. (This is by design - the trust fund was built up to help pay for the retirement of the baby boomers.) The fact that the government spent the money is meaningless - just as it is meaningless if the government spends the money it borrows by issuing any other bond. The government is still legally obligated to repay the bond. In short, the people who say 'there is no trust fund' are misleading the public. There is a trust fund with $2 trillion (growing at the rate of $200 billion a year) unless we let Congress eliminate it."

Sorry Dean, you are falling into the neo-liberal trap in your erronous suggestion that government spending is revenue-constrained. It is not! Net government spending underpins the ability of the private sector to pay taxes and to save. The vital point is that the government will always be able to spend the required fiat currency (whatever applies in any particular country) to provide social security payments for its elderly population. The only 'costs' of keeping old people alive (excuse my turn of phrase) are the 'real resources' they consume. Whether the spending required to purchase these resources comes from private or public means is of no particular import to deciding whether a nation can 'afford' these real resources. If they are available, then public spending can always purchase them without any consideration of 'raising revenue'.

So what is the real issue? The debate about whether social security should be private or publicly-provided is not an economic one. It is am outcome of political choice. We can easily provide a public scheme without it ever becoming bankrupt. The concept of bankruptcy has no application to a government which is the monopoly provider of the fiat currency. As the demands of the aged for health care and whatever increases it becomes a political choice mediated through the electoral process as to how far public spending accommodates these demands. It requires that we convert primary schools into aged care facilities and similar demographically motivated shifts in the emphasis of public spending as our population ages. We might decide as a nation not to do this. We might decide that we will not provide satisfactory public services for the aged members of our population. But there will never be a financial (government budget) reason for not doing this - only the political choice.

The proposed privatisation of the US social security system is just another example of how the economic debate operates in the wrong paradigm - that of a government budget constraint. It shares the same erroneous analysis that impoverishes the Australian government's claims about the intergenerational debate and the need to run 'budget surpluses now' to 'save for the future'. Unmitigated nonsense. For a complete critique of this debate see my paper with Warren Mosler which can be downloaded from HERE.

I have to catch a plane now ... back to reality after working all this week on the beaches of St. Croix. Seriously, I was working. I might post a photo to prove it.

Blog entry posted by bill