Friday, July 29, 2005

Costs of private accounts

Bush's Massive New Spending Plan Dwarfs Military:

A new study by Jim Horney and Richard Kogan at the Center for Budget and Policy Priorities (CBPP), a Washington-based research organization focused on fiscal and poverty issues, has found that the borrowing needed to fund President Bush's Social Security plan would cause the national debt to increase by a staggering 19.5 percent of gross domestic product by 2038. The borrowing doesn't represent a temporary transition cost, according to the study, and would lead to higher national debt until 2067…

Over those 39 years, these interest payments would total $6.5 trillion, again adjusted for inflation. In the decade starting in 2031, the U.S. would spend more servicing debt from the Bush Social Security plan than on the U.S. Army, Navy or Air Force.

Indeed, from 2011 to 2050, these interest payments would be more than the expected spending on all veteran benefits, child tax credits and the Earned Income Tax Credit combined, or more than three times the projected cost of homeland security - assuming all these programs grow roughly in line with the economy.
Source is Meteor Blades at The Next Hurrah.

I notice that the Republicans are not discussing the costs of the plan at all. But these are the deficit-loving politicians we fondly know as Republicans and their leader G. W. Bush.

Monday, July 25, 2005

The Galveston Plan is too risky

Are private retirement accounts such as those in the Galveston Plan really superior to the existing Social Security system?

According to Michael Hiltzik, writing in Kevin Drum's Political Animal, the next propaganda push for private accounts by the Bush administration will focus on the benefits provided by the "Galveston Plan." His discussion, based in part on a study of the Galveston Plan by a researcher from the Wharton School of Management provides examples of the trade-offs for both the individual and for society if private accounts are used to replace the Social Security system.

Under an older law that no longer exists, Galveston in 1979 replaced Social Security with private investment accounts. This is a plan established under section 403(b)of the IRS code. In 1999 a researcher from the Wharton School of Business compared the Galveston Plan to Social Security. Key points from the Wharton study (PDF file) are:

  • The Galveston Plan offers higher initial benefits than Social Security offers to individual workers who paid contributions on higher earnings. The benefit is not likely to be so good for workers who have dependents who qualify for benefits under Social Security.
  • Workers with lower earnings will generally get higher initial benefits under Social Security than under the Galveston Plan. Also, as indicated above, retirees with dependents who qualify for Social Security benefits generally get higher benefits under Social Security.
  • The worker has to pay higher contributions under the Galveston Plan than under Social Security.
  • There are no spousal or dependent benefits under the Galveston Plan.
  • A worker who has lower earnings or has dependents (such as a spouse or children) who would qualify under Social Security tends to get lower benefits under the Galveston Plan than under Social Security.
  • Benefits are not adjusted for inflation. The individual worker may get higher initial benefits under the Galveston Plan, but they lose value relative to Social Security over time. This would be especially bad in periods of inflation. The inflation indexing of Social Security was added during the period of high inflation in the 1970's and would have to be added to the private accounts in a similar period.
  • Unlike many other 403(b) plans, The Galveston Plan does not have a waiting period for coverage. Coverage begins the first pay period of employment. Many other 403(b) plans do not provide coverage until an employee has worked for the company for a year.
  • The Galveston Plan offers more pay-out options than Social Security does. Social Security offers only a life-time annuity. The Galveston Plan offers payment in a lump-sum or various annuities lasting different periods of time. - The risk is that the beneficiary can outlive the benefits under the lump-sum or certain fixed annuity payout options. [Note: this is the cost of taking higher risk. You give up the guaranteed life-time benefits offered under the current Social Security system, and there will be losers that society has to deal with.]
  • Benefits are paid to a named beneficiary. While this may give greater control to the worker, it will leave out some spouses/divorced spouses or dependent children. These people will have to be otherwise provided for by society. The price of the greater control given to the worker is higher cost to society overall. This is cost-shifting in order to provide winners and losers at the whim of the worker.

The Social Security system is a plan to provide a guaranteed floor of income to workers (and their dependents) who lose income through retirement or disability. It is also a planned and budgeted system that keeps those people covered under Social Security from being thrown onto the welfare rolls or becoming burdens to their families to the detriment of the children those families are also trying to support. As such, Social Security is a system that provides benefits to both individuals and to society overall.

The Galveston Plan provides greater choice and potentially greater benefits for some workers. That flexibility costs significantly more while it also adds to the risk the worker is taking on. Some of the risks include loss in investments, loss due to inflation, and outliving benefits.

The Galveston Plan also creates new classes of people who are not covered, some of whom will be thrown onto welfare rolls. These include dependents such as spouses and children as well as people who outlive their benefits and people who take higher initial benefits which are cut down by inflation. These additional social costs are not discussed by the Bush administration, but they need to be considered against the apparent possible (but not guaranteed) benefits of private accounts. The people who benefit will the the same people who already are financially able to supplement their Social Security benefits with other retirement plans and with rent and investment income. This is a bad social trade-off.

Private accounts similar to the Galveston Plan will eliminate the social safety net. By doing so, it will create new classes of poor people. The numbers of the people reduced to poverty will be significantly greater than those made more wealthy. A few people will get to drive better cars and live in larger homes -- at the cost of a greater number of people who have no homes and no cars at all. This is the equivalent of abandoning a social safety net for a lottery.

When making a cost/benefit analysis of replacing Social Security with private accounts, the alleged benefit has to also be looked at carefully. Michael Hiltzik makes the following very important point:

The Galveston gang's claim of a rate of return superior to Social Security's also needs a caveat. The figure is pumped up because Galveston doesn't provide benefits that are routinely provided under Social Security, but aren't normally calculated as part of its return to individual retirees.
In other words, the benefits of the Galveston plan are not as good as alleged. Compare this to the costs to society and to the impoverishment of the many individuals that are being ignored by the Bush administration propaganda.

The added burden of private accounts on society will make society overall less wealthy. Even most of the wealthy will suffer in the long run. This is a really bad trade-off.

The following sources provide further information.
  • Does Galveston Offer a Model for Social Security Reform? The Center on Budget and Policy Priorities looks at the negative aspects of the Galveston plan.
  • No Plan is an Island A description of the Galveston Plan from the Christian Science Monitor.
  • Pensions and Penury: The Galveston experiment Prepares to go National. An article from the Guardian on the Galveston experiment. It overlooks the many negatives which the Wharton study referred to above takes into account.
  • Galveston County: A model for Social Security Reform. This is an article by Judge Ray Holbrook. Judge Holbrook was the Galveston County chief from 1967 until 1995, so he is the person who chose the 403(b) system and replaced Social Security with it. It is probably the single most significant decision he made as Galveston County Judge, so his objectivity is nonexistent. He is also not an expert on retirement systems or on Social Security.

    In addition, Judge Holbrook's sole focus is on the success of the plan for (some) workers. He does not consider the requirements of the Social Security system to overall society at all. There is no reason for him to have looked at a such considerations in creating and implementing the plan for the 5,000 workers of Galveston County, nor is there any indication he has the training required to make such judgements for society. Judge Holbrook is very much an amateur in the area of pension planning and social security systems.

Tuesday, July 19, 2005

House GOP offers its version of Social Security phase out plan

The House GOP has presented its ideas on how to phase out Social Security.

Manufacturers of smoke machines and mirrors anticipate rapid increases in the price of their stocks.

The New York Times published an AP story on the new proposals from the House GOP.

WASHINGTON (AP) -- The House Republican plan to overhaul Social Security requires retirees to give up their guaranteed benefit level if they want a personal account that can be passed on to heirs, GOP aides said Monday.

Only those who invest the accounts in government securities while they are working and in an annuity when they retire can be certain of receiving the full Social Security benefit they are promised, the aides said.

Other investment decisions would expose individuals to the ups and downs of the financial markets. That means their monthly benefit could wind up lower or higher than now envisioned.
In other words, you are giving up any guaranteed benefit and depending on luck to provide a decent return.

There is also no discussion of the fact that merely creating individual accounts will sharply increase the cost of administering Social Security. The current total cost of administration is less than 1% of the annual benefits paid out. Proposals to create individual accounts are expected to require hiring up to 100,000 additional employees to handle them. This is more than double the current workforce. This is guaranteed to lower the return to beneficiaries. The very best private companies have administration costs of 10% or more of annual benefits paid.

But there is more in the story.
The program envisions individuals receiving a monthly benefit that consists of a blend of traditional Social Security -- from the program's trust funds -- and money from personal accounts.

Aides also disclosed that in many cases, a personal account that is inherited by a spouse would be used to pay a portion of the survivor benefit they are entitled to.

The effect over time would be to reduce the amount of money in the inherited account while easing the burden on the Social Security trust funds.

If surviving spouses lack an account of their own, they can decline the inheritance and receive the benefit that current law provides, according to the aides.
In other words, there is no real benefit to the surviving spouse. Any benefit they get will be lowered by what the investments return.

Also (see below) the cap on possible funds to go into the private accounts. The private accounts under this plan are guaranteed to be small. There is no real possibility that the private accounts can pay survivors better than the current system does. But the price of changing to these accounts will be very high.
Unlike Bush's proposal, the House GOP measure uses surplus payroll tax funds to establish personal accounts rather than allow each worker to divert a portion of their payroll taxes.
What this means is that the money that is currently in the trust fund to pay baby boomers from 2017 to 2041 will have been used to pay for this plan. In exchange for increasing the total cost of administration and giving up guaranteed benefit amounts, they will cause the predicted problem (that only might occur) to be moved form 2041 back to 2017 when it will certainly occur.

What a deal!! Give up the benefits of a guaranteed floor for your retirement in exchange for a much more expensive system that that offers NO GUARANTEES but if you are really, really lucky, just might provide a few dollars more in benefits for a few people that happen to be in the correct categories at the right time.

Why don't we just keep the current system and hand every worker a lottery ticket twice a week. It is more reliable for all retirees and a lot cheaper as an overall system.

Oh yeah! There is one more neat little trick included in this plan. The investment accounts are limited to a very small amount. This is what I meant when I said they were "Capped."
The bill would make a major change [...] by taking money from the trust funds and distributing them into personal accounts set up in the name of individual workers. The distributions would stop when the trust fund surplus is exhausted, in about a decade, but the accounts would remain in place.
That limits the total amount in any private account to about $3500 at most over the next 12 years and nothing after that.

See? If you buy this very expensive luxury(?) and accept the lowered benefits and higher administration costs it will require, the only money that goes into your retirement account is the excess of about 10% or so of your FICA tax that is being used to increase the trust fund between now and about 2017. That means that your very expensive and risky 'private account' cannot include more than about $3500 by 2017 if you are paying the maximum FICA tax between now and then. It also means that the benefits the current trust fund was intended to pay must instead be paid by higher taxes. The alternative to higher taxes after 2017 withthis plan is that the benefits must be reduced.

In short, this is a scam to fool voters into switching from the current effective system to one that will cost a lot more to pay lower benefits to almost everyone.

Let me restate the GOP proposal. If you will buy this expensive pig-in-a-poke now and give up the rights to a guaranteed benefit with automatic inflation protection for beneficiaries (not included in any GOP alternative) it is possible that you just might find that you have a slightly higher retirement benefit -- if you are very lucky. No guarantee that you will be lucky. There is a guarantee that replacing the trust fund that is currently being built up will have to be replaced by higher taxes or lower benefits after about 2017.

But you will make some investment managers very rich when they get the contracts from the government to manage your (overpriced and underpaying) accounts.

Oh, yeah. You will also offer those brokers the possibility of stealing millions along the way. This has happened in both Chile and Great Britain. It has never happened to the American Social Security System.

How will they steal the money? There is a simple process. The brokers will bid below their own cost of operations in order to win the contract to manage the accounts. Only a crooked bidder can bid that low, so they will get the contract. Then, since they will be losing money from day one, to stay in business they will have to steal from the account holders. This is easy to conceal in confusing reports to account holders. It is as predictable as the sunrise in the east tomorrow morning.

Expensive pig-in-a-poke, anyone? Here it is. All costs and risks hidden behind smoke and mirrors.

Also in the July 18th New York Times is an editorial.Here are some key paragraphs:
The bill would include a proposal to establish private accounts, ostensibly with money diverted from the surplus in the Social Security trust fund. In reality, every penny of the trust fund is already promised for future benefits, so Congress would need to borrow the money to establish the accounts. As a result, the proposal would increase the budget deficit by some $80 billion next year and about $1 trillion over 10 years, based on numbers from Social Security's chief actuary.

As if that's not bad enough, the proposal omits the benefit cuts and tax increases that would be necessary to improve Social Security's finances in a fair way.[...]

House Republicans are betting that their Social Security ploy will be smart tactics. If the Senate passed a Social Security reform bill - a big if - input from Senate Democrats would ensure that it would not include private accounts. But if the House and Senate pass different bills, they'll go to a conference controlled by the Republicans. In that forum, the leadership could force the House's private accounts into the legislation's final version. This all remains theoretical, but in the minds of Republican strategists it at least raises the possibility of enacting private accounts this year.

Corrections for White House talking points

US News & world Report fills a slow news week by interviewing White House Budget Director Josh bolton about the status of the Social Security benefit reduction and phase out plan. Michael Hiltzik (Author of “The Plot Against Social Security: How the Bush Plan is Endangering our Financial Future.” - see link below.) debunks Bolton's talking points over at Kevin Drum's Political Animal.

Read it. He explains how you are being lied to. Then get his book. The Plot against Social Security: How the Bush Administration Is Endangering Our Financial Future
The Plot against Social Security: How the Bush Administration Is Endangering Our Financial Future

It matters to you and to America.

The Bush administration lied their way into an unnecesary war primarily to get a bump in the polls and keep Republican control of Congress. It worked. They think they can do anything to Americans. But rember what Dwight D. Eisenhower said:
"Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes that you can do these things. Among them are a few Texas oil millionaires, and an occasional politician or businessman from other areas. Their number is negligible and they are stupid." -- President Dwight D. Eisenhower, 1952"
The exact people Ike described have taken over the government and are attempting to destroy Social Security. They have already stopped enforcing labor laws. The Texas oil millionaires and an occasional politicians or businessmen are running America into the ground and laughing as they do it.

Educate yourself and work to replace the stupid conservative Republican oil people and politicians with educated grown-ups.

Monday, July 18, 2005

An example of the failed American healthcare 'system.'

A Social Security system provides protection against the loss of income caused by retirement, serious illness and unemployment. As a pert of that we must have a healthcare system that provides care for serious illness. The American system of "pay-up-front or employer-provided health care insurance" is rapidly breaking down. The so-called free market is inadequate and cannot provide a solution to the problems of adequate healthcare for everyone.

This Daily Kos Diary provides an example of the current lack of a healthcare system. It describes a person who has healthcare insurance but is in fact priced out of access to health care that it is clear he needs.

Thursday, July 14, 2005

It's official. Social Security reform on back burner.

It's official. Has to be, because it is in the Washington Post.

Social Security Fades Into Fall

"House Ways and Means Committee Chairman Bill Thomas (R-Calif.) now thinks he may not begin consideration of Social Security legislation until September, an aide said. Thomas told an Associated Press reporter yesterday that, "The issue is dealing with more time-sensitive legislation first." He said Social Security "is not time-sensitive, and we are going to pass CAFTA," the Central American Free Trade Agreement, before Congress begins its summer break. Thomas, referring to a congressional trip to Cape Canaveral, Fla., that canceled votes yesterday, said: "There's no hang-up on contents. It's just how many days we got and how many space shuttles don't get off the ground."

This report is provided thanks to Bilmon who also goes on the explain why Bill Thomas can't get the bill out of committee.
"It appears the Keystone Cops running our heroic Chamber of People's Deputies haven't been able to decide with version of "reform" to get behind -- "ponies for everybody" (private accounts without benefit cuts or tax increases) or "root canal work for the middle class" (benefit cuts and tax increases with private accounts.)

Thomas's stealth approach -- SS privatization would have been packaged with a grab bag of private pension goodies -- was the last hope for getting any kind of legislation this year that Bush could sign without putting a paper bag over his head."
This is good news for defenders of Social Security, but it isn't the end of Republican efforts to destroy the system. The one real positive factor is that I really doubt that the Republicans in Congress who have to run for reelection in November 2006 will have the stomach to resurrect any privatization bill next year. They may be misguided ideologues, but sadly they aren't Stupid and politically suicidal misguided ideologues. Not usually, anyway.

Social Security phase out side tracked, not dead

There hasn't been a lot of public activity on the Social Security phase out front recently. Josh Marshall has referred us to Iowa's Daily Nonpareil online. Karl Rove told employees of Ameritrade:
"Over the years, Social Security has been a huge success, but the system has grown "creaky with age," said Karl Rove, deputy White House chief of staff on Friday.

Unless changes are made, it's only going to get worse and in a hurry, he said Friday in Bellevue, Neb.

"In 2008, we'll see the system go south," Rove said at the Ameritrade Holding Corp. facility at the Southroads Mall. "We've got to solve the problem now."
This was the last public sighting of Karl Rove. He was speaking to employees of Ameritrade Holding co. with "no reporters and not open to the public. The questions were pre-screened and I think limited to questions about Social Security" according to Josh Marshall.

It would be hard to find a more favorable audience for a message that the flow of money into Social Security should be redirected to investments handled by stock brokers. It is like telling tobacco company executives that smoking is good for you.

The only real problem with the Social Security System is Republican efforts to destroy it because they don't believe it should exist. The 70 year succesful history of the finest single program the federal government has ever established merely infuriates them. They latch onto the minor tweaks the system may need in the future as proof that the program is doomed, and then they present their ideology and scare statements to audiences of stock brokers who will become much more wealthy if they can prevail over the good sense of the American people.

America knows never to trust a tobacco company executive when they speak glowlingly of the positive aspects of smoking and down rate its negative aspects. When Republicans speak of the problems in Social Security and the necessity of replacing the system, ignoring the cost of such replacement and the history of success of the program they rate the same skepticism that the tobacco company executives received as they stood in front of the U.S. Senate and claimed they did not know of any health dangers in smoking. Let's not forget that the tobacco company executives were Republicans also.

Besides, Karl Rove committed treason when he exposed a CIA officer. Why should anyone trust a traitor to America? He and the Republican Party generally are flawed carriers of any message to change Social Security.

Tuesday, July 12, 2005

The cost of the American Health Care "system"

Social Security is only part of the social safety net. Another very large part is health care. I have a new article on the American health care system at my News magazine Politics Plus Stuff.

Our current insurance company controlled system simply costs too much and offers too little in return. This is a problem both for individuals and for America's global economic competitiveness. Lawyers and malpractice suits are NOT the problem. Go look at the article.

Sunday, July 03, 2005

Private accounts are far from dead!

Christian Science Monitor June 27, 2005 describes the new effort by Republican ideologues to carve out private accounts to replace Social Security.

The new idea redesignates the treasury bonds already held by the Social Security Trust fund to specific named accounts. Taxpayers could then cash in those bonds and purchase other investment in their private accounts. Since those bonds have already been designated to pay benefits for retirees up until 2041, that means that Social Security benefits will have to be sharply slashed in the near future.

The cost of administration of the current system is less than 1% of benefits paid out per year, but the private accounts would sharply increase the administrative costs. One estimate is that an additional 100,000 federal employees would have to be hired to deal with the private accounts. This is even before the additional costs of buying and selling investments is included.

Since this plan sharply increases currentcosts to the system while redirecting funds in the current trust fund away from paying benefits in the near future, it will require an increase in taxes or sharply reduced benefits for all beneficiaries a lot sooner than even the worst-case projections using the most conservative assumptions. No one comes out better from this plan except the wall street brokers and the insurance companies who handle the investments.

If you are having trouble understanding these various proposals being thrown out by the enemies of Social Security, I strongly suggest that you go to the right hand column in this news magazine and click through the book entitled "The Plot against Social Security: How the Bush Administration Is Endangering Our Financial Future." The author, Michael A. Hiltzik, is a financial columnist for the Los Angeles Times. He has the training to understand the issues and the writing ability necessary to explain them to people without his background.