The Battle of 2016

Progressives and Bush’s Wall Street Go to War Over Your Social Security Benefits

WASHINGTON, D.C.—Generational warfare broke out last Wednesday morning on a scorching plaza in front of a posh Washington, D.C., hotel. As his buddies stood by him smiling in support, a young man in khakis and shades told a white-haired older woman, "You obviously don't understand the capital markets."

"How much you want to bet you'll feel the same way six months from now, when the market really tanks?" she shot back.

"It's a bet!" came the reply, but neither extended a hand to shake.

Nor was their conversation really about the stock market. It was taking place outside the Loews L'Enfant Plaza Hotel, where George W. Bush's President's Commission on Strengthening Social Security was about to open its third meeting.

Official estimates say the system's trust funds will start to pay out more money than they take in by 2016, and by 2038 they will run out of funds to pay Social Security's millions of beneficiaries. Bush's commission is charged with developing a solution to this problem. Its 16 handpicked members are pledged to include in their recommendations a Bush campaign promise allowing workers to take some of the payroll taxes they normally contribute to Social Security, and instead invest them in the stock market through personal retirement accounts (PRAs). The young man and his eight or so buddies outside on the plaza were recruited—and equipped with matching T-shirts—by Citizens for a Sound Economy, a conservative advocacy group, to put on a mini-demo in support of PRAs.

Rushing out to meet them were the older woman and about 25 other Social Security supporters, who were carrying signs that read "Phony crisis, phony commission."


If they're right, in 2038 the Social Security trust fund will only pull in enough payroll taxes to cover 73 percent of its present level of expenditures.


This clash, although fairly typical for Washington, had extra urgency, because the Bush commission has gotten off to a stumbling start. Even some mainstream media blasted its interim report for exaggerating the Social Security system's problems. Senior Democrats including Representatives Charlie Rangel and Bob Matsui denounced the Bush commission—whose chief of staff and one of its members are from the pro-PRA Cato Institute—as a "sham." They called on Bush to scrap the commission and negotiate directly with Congress if he wants to "reform" Social Security.

White House policy adviser Karl Rove is reportedly calling for a full court press to rescue the commission, including news conferences, poll releases, instant demos, and a sharper message from conservative supporters of PRAs. In response, The AFL-CIO and its allies are gearing up their own offensive. The commission's public hearing in San Diego on September 6 will set in motion a conflict that's likely to continue well past the release of the commission's final recommendations this fall.


Once a fringe idea kept alive mainly by the Cato Institute, a libertarian think tank, PRAs are now endorsed by the president, the entire Republican congressional leadership and some conservative Democrats. Younger workers would be better off with PRAs, the argument goes, because they could earn higher returns than the Social Security system now provides.

Defenders of the current system contend that such a plan would undermine Social Security financially by siphoning off payroll taxes that are needed to pay current beneficiaries. All that the government would accomplish by allowing workers to carve PRAs out of their payroll taxes would be to enrich Wall Street, which has been clamoring for years for a piece of the $500 billion-plus of payroll taxes that flow annually into the system.

But PRAs have as much to do with ideology as with profit. The mammoth Social Security system, America's biggest benefits program, pays out guaranteed old-age, disability, and survivors' benefits to some 45 million Americans a year, pumping over $450 billion annually into the economy. To politicians and policy wonks both liberal and conservative, the immensely popular 65-year-old program remains the crown jewel of FDR's New Deal legacy and the best argument that a benefits program based on collective social obligation can work in this country.

Partially privatizing Social Security by turning over some payroll taxes to private money managers would transform the system from a benefits program to a wealth-creating vehicle like a 401(k) plan. Supporters like former senator Daniel Patrick Moynihan, who co-chairs the Bush commission, say this would help working-class Americans share in the wealth that Wall Street creates. Critics say it would invite unsophisticated, less-affluent workers to gamble away their benefits and put them at risk of living in poverty after they retire.

PRAs wouldn't have emerged as a politically viable proposal if it hadn't been for a series of estimates by the Social Security system's trustees predicting that the upcoming retirement of the 60 million to 70 million-strong Baby Boom generation will put the system in a demographic squeeze. By 2016, the trustees' estimates say, the system's funds will start to pay out more money than they take in; by 2038 the trust funds will be exhausted. These are only estimates, of course. But if they're right, in 2038 the Social Security trust fund will only pull in enough payroll taxes to cover 73 percent of its present level of expenditures. Unless Congress approved a tax increase or covered the shortfall with other revenues, retirees, widows, and survivors under 18 would have to swallow benefits cuts and possibly do without inflation adjustments. Many could be forced into poverty, reversing Social Security's greatest achievement—the drastic reduction of old-age poverty in America.

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