Tuesday, June 17, 2008

John McCain and Social Security “Privatization”

Recently, Sen. McCain found himself in a bit of a pickle when he said he opposed "privatizing" Social Security, only to be confronted with a video from several years back in which he referred favorably to privatization. The question regarding Social Security nomenclature has been around for a while, as the 2002 op-ed reprinted below makes clear.

Given the time lapse, there are definitely things in the piece I wouldn't write today, but I think the general points still hold reasonably well (including the fact that Sen. McCain isn't one to be forced to a script). The general policy debate would be made better off if terms like "privatization" were better defined or, better yet, we simply focused on policy details.

For instance, Medicare is rarely described as "privatized," yet there's more private sector interaction in Medicare than there would be in a system of personal accounts for Social Security. Moreover, it's possible to have private investment in Social Security without being defined contribution – as in plans to invest the trust fund in equities – just as it's possible for the program to be defined contribution without having private investment, such as in Sweden's system of "notional personal accounts." Policy debate will benefit if advocates make clearer what aspects of different reforms they favor or oppose rather than simply what labels.

May 30, 2002

Just Who Is Afraid of Privatization?

by Andrew Biggs

What's in a word? Plenty, if that word is "privatization." The latest election-year battle over Social Security reform has Democrats demonizing the term "privatization" and applying it to Republican proposals to let workers invest part of their Social Security taxes in voluntary personal accounts. Republicans, predictably, insist their plans are anything but privatization.

In one sense, this debate is a tempest in a teacup: what matters are policies, not the label attached to them. But words influence how people think about issues, and the public deserves to know what personal account proposals actually entail. And the truth is much less scary than account opponents would have us believe. Like most things in politics, the brouhaha over the P-word begins with pollsters. Roughly two-thirds of working-age Americans favor the option to invest part of their Social Security taxes in a personal retirement account. However, apply the "privatization" label to personal accounts and support falls, particularly with older voters who loom large in off-year elections. Knowing this, Democratic strategists are playing the P-word to the hilt.

Republicans, being no fools, describe their plans as "reform," "choice," "voluntary personal accounts," or simply "strengthening Social Security." (Though Sen. John McCain, R-Ariz., always the lone wolf, continues to use the P-word.) The GOP may even have a formal vote in Congress against "privatization" to inoculate themselves against campaign attack ads.

In fact, actual reform proposals such as those from the President's Commission to Strengthen Social Security entail almost none of the laissez-faire, dog-eat-dog, sink-or-swim capitalism the word "privatization" conjures. The Cambridge International Dictionary defines "private" as "not connected with, controlled by, or paid for by the government." Would a reformed Social Security program remain "connected with, controlled by, or paid for by the government"? For better or worse, the answer is yes.

For instance, would personal account reform plans shut down the current program, leaving today's seniors to fend for themselves? No. All reform proposals from the president's commission guarantee benefits for all retirees and near-retirees. For anyone aged 55 and over, nothing would change -- nothing.

Likewise, would personal account plans undermine Social Security's safety net? No. Under plans from the president's commission, the safety net would be strengthened. Minimum-wage workers would be guaranteed to retire above the poverty line, lifting up to one million seniors out of poverty, according to Social Security's actuaries. Commission proposals also increase benefits for as many as two million to three million below-average-wage widows. The commission proposals mean fewer seniors in poverty, not more.

Would personal accounts reduce Social Security's progressivity? Again, no. Commission plans offer progressive personal accounts giving larger account balances to lower-wage workers. Combined with the enhanced safety net, progressivity would increase. Here's the proof: Today, a low-wage retiree's monthly benefit equals 46 percent of a high-wage retiree's. Under one commission plan, that figure would rise to 56 percent, substantially increasing progressivity.

Could workers with personal accounts stop paying into Social Security, or gamble their savings on risky stocks, or withdraw their savings prior to retirement? Hardly. All covered workers would continue to pay into Social Security. Unlike today, though, workers could create true savings and wealth in personal accounts that they own and control.

Accounts would be modeled after federal workers' Thrift Savings Plan, allowing only simple, diversified, low-cost mutual funds, not day trading in individual stocks. Withdrawals would be restricted to retirement, except in the case of the death of the worker.

So what would personal accounts mean? Social Security's nonpartisan actuaries confirm that commission personal account plans would restore Social Security to solvency and pay substantially higher benefits than the current system could afford. Moreover, workers and retirees would have a true legal right to their retirement savings, in an account that can't be "raided" by the government to pay for other programs. Accounts give all Americans the chance to build wealth and to pass it on, turning a mere entitlement into a true asset. Personal accounts mean more safety and security, not less.

Americans should forget about labels and insist that both sides explain in detail how they would strengthen Social Security for the future. Account opponents decry "privatization." But will they raise taxes? Cut benefits? Increase the retirement age? Let the government itself invest in the stock market? We can only guess because they refuse to disclose their own reform proposals. Until account opponents put their own plans on the table, there is only one label that can accurately describe their Social Security proposal: "bankruptcy."

This article originally appeared in the San Diego Union-Tribune on May 30, 2002.


Steve Selengut said...

Guaranteed Social Security Benefits: Make It So

The comically complicated PSA (Personal Savings Account) legislation bouncing around Congress will raise taxes, increase investment risk, and expand the size of government. Let's stop applying Band-Aids to spouting arteries. We are looking for a guaranteed retirement benefit program, and organizations capable of providing one. Additionally, we want the new program to reduce taxes, create jobs, boost the economy, cut prices, and increase salaries. Difficult? Not really.

This is the conceptual outline of a five-year implantation plan, a starting point for the brainstorming needed to develop the nitty-gritty details, rules, regulations, laws, and agencies. All that is needed is the will to change things productively. Politicians like to debate changes to determine why new ideas can't be implemented. Here's a plan that must be implemented. Have a listen, throw out an incumbent, and protect your future.

Guaranteed benefit programs have been around for over 100 years, and millions of people throughout the world enjoy the benefits they provide. Here's how they do it. Every month, they deposit money into a trustee-managed investment account. The money avoids the stock market (for the most part), index funds, commodities, or MLM-like derivatives and is carefully invested in high quality debt securities, many privately placed for better yields.

All earnings are reinvested in similar securities, and the fund eventually produces more in earnings than the participating investors contribute; the trustee manages the portfolio. At retirement, the deposits stop and the guaranteed benefits begin. The benefit is guaranteed for life--- extraordinary concept, older and wiser than any living congressman or presidential candidate.

What if, instead of donating 7.6% of your salary (15.3% if you are self employed) to support the war de jour: (a) you could choose to deposit from 3% to 5% of your salary in a guaranteed retirement program maturing anytime after age 60, (b) the lifetime benefit is totally income tax free, and (c) your employer uses his savings to either create jobs, raise non-executive salaries, reduce prices, or increase shareholder dividends. Interested?

The SSRIA (Social Security Retirement Income Annuity) is a new and improved version of the ancient Deferred Fixed Annuity--- a boring but guaranteed fixed-amount-only retirement vehicle. (Wrong, I don't sell annuities--- they just happen to be the perfect Social Security problem solver.) There are a bunch of new wrinkles: (1) The minimum contribution is mandated for all employed persons, but anyone with a Social Security number can have a SSRIA.

(2) Qualified (15 years of Fixed Annuity experience) SSRIA providors are assigned to participants randomly by SS#--- only one per participant, per lifetime, please. Since the "qualified-by-qualified-people" providor companies have no acquisition, retention, or advertising expenses, there are no sales commissions; administrative expenses and investment management fees are capped at .5% of the total fund Working Capital.

(3) All SSRIA contracts, regardless of provider, will contain the same terms, interest guarantees, retirement benefit choices, and pre-retirement death benefits, thus eliminating any incentives for internal fraud and manipulation of statistics.

(4) Qualified providers will establish separate tax exempt, "mutual" subsidiaries to manage and control operations, assuring that profits are distributed to contract holders. Profits are allocated 50% to active contract holders and 50% to a health insurance trust fund for retired participants (HITF). (5) All providers will use the same mortality, investment earnings, and expense assumptions in their annuity benefit calculations, and only Life and Life + One Annuities are available. (6) Benefit payments will be jointly guaranteed by the parent companies and the Federal Pension Benefit Guarantee Corporation. Parent Company income taxes would be reduced by 50%.

Implementation would be completed over a five-year period, and interpreted with an "intent of the law" bias:

In Year One, the Federal Government would purchase single premium SSRIAs for all active Social Security recipients--- hey, they squandered the money. Also in year one: (1) all employee and employer contributions would be cut by 25% (the first of four such annual cuts) and deposited to individual SSRIAs. (2) All Federal, State and Local income taxes on SSRIA payments would be declared illegal and forever prohibited. (3) A private company would be chartered to audit the disposition of corporate tax savings within all public companies and private companies employing 10 or more persons 18 months before enactment.

In Years Two through whenever, the Federal Government would add to retiring persons SSRIAs to bring the annuity benefit to the level guaranteed by the OASI plus COLAs. Once an equalization level is achieved, federal responsibility would cease for that retiree.

In Years Three through Five, all Federal, State and Local Income taxes on all forms of private retirement accounts (IRA, 401(k), 403(b), etc.) would be reduced by one third per year, and would be declared forever illegal at the end of year Five. A Federal Sales Tax of 1% or 2% (on all final-product-sales, not a VAT) could be enacted after the second year's cut. From Year Three forward, SSRIA holders would be able to view their projected monthly benefit at various retirement ages, based on contract provisions and their deposit and earnings history.

By the end of the Year Five: (1) Employers would have no Social Security tax responsibilities, but would be responsible for either employing more people, reducing their product prices, raising non-executive salaries not subject to the minimum wage, or paying higher dividends to shareholders. Any manipulations of their operations or executive compensation packages clearly intended to circumvent the intent of these reforms would be fined appropriately within the Board of Directors, senior officers, and legal council of the Company--- personally, and in each capacity.

That's right, if a senior officer is also on the Board, and responsible for controlling jobs, product prices, or dividends, he or she would be personally responsible for three separate fines. (2) Employees would select their level of salary deduction for year six; the election can be changed once in any twelve-month period. No employee can contribute more than the maximum 5% of salary to an SSRIA.

Of course there are a lot of ifs, ands, and buts in here, but it is a clearly doable program within an established professional infrastructure. It will increase jobs, reduce taxes, boost the economy and reduce the role of government--- in 50,000 less words and 25 fewer years than any approach even being considered in Congress.

Make it so--- yeah, you!

Steve Selengut
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Bruce Webb said...

"Moreover, workers and retirees would have a true legal right to their retirement savings, in an account that can't be "raided" by the government to pay for other programs. Accounts give all Americans the chance to build wealth and to pass it on, turning a mere entitlement into a true asset."

Well in the real world it is hard to see what actual legal protection anyone would have for their retirement savings if those accounts remained in government custody, in practical terms what recourse would you have if a Congress a decade or two down the line decided to change the rules of the game? Plus despite a lot of talk about "ownership society" the most prominent plans out there require annuitization and have no provision for inheritability. If you have only limited control over allocation (a la the TSP model), no powers to opt out, and limited options on withdrawals, and no right of transfer either before or after death then the idea that somehow you "own and control" this account starts to fade.

There is a substantial faction out there that simply never accepted Social Security in the first place, just as there are people who don't believe in government supplied health insurance. Given the historical record of organized opposition to the introduction of both Social Security and Medicare (we know who voted against each) it is not paranoia to see the efforts of ideological successors of that same opposition to offer personal accounts and health insurance tax credits as being the opening moves in a campaign to eliminate programs these people never liked to start with.

People are leery of the word 'privatization' because they know that there really are ideological heirs of Alf Landon who would, if they could, eliminate Social Security and Medicare outright. I mean Grover Norquist and the Wednesday meeting are not products of some lefty's fever dream, powerful people meet on a regular basis to strategize on how to roll back the Great Society and the New Deal. Not every suggestion for 'reform' of Social Security is motivated by a secret desire to kill it outright, but this is the perfect exemplar of the notion that "even paranoids have real enemies".

I know who my enemy is. He has an office on L Street. 'Field Marshal' of the Bush Plan. Somehow I don't suspect that Mr. N et freres have given up their bathtub drowning dreams.

Anonymous said...

I agree we should debate policy not semantics, but those who are running away from the privatization label are doing it to find a better shade of lipstick for their pig, they are not re-thinking the policy in the face of public rejection.

Also, the side complaining is the side that has put the greatest effort into packaging their otherwise unpopular policies by using benign sounding names.

Patriot Act, Clear Skies. Death Tax
Any compassionate conservatives out there?