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Social Security, the Stock Market, and the Elections

Social Security was the crowning achievement of Roosevelt’s New Deal. It has been the most successful and still remains the most popular of all U.S. government programs. More than a pension program, Social Security provides for workers and their families in the case of early death and disability, in addition to retirement. In 1997, it provided about twelve trillion dollars worth of life insurance alone, more than that of the entire private life-insurance industry. Furthermore, it does all of this in the form of social insurance, in which the distribution and the amount of benefits provided are determined by family relationships and basic economic rights—factors that private insurance and pension plans ignore. Nearly one-fifth of the elderly in the United States rely on Social Security as virtually their sole source of income, while two-thirds of all recipients depend on it for at least half of their income. Almost half of all white seniors would be classified as poor without their Social Security benefits; nearly half of all black and Latino elderly depend on it for 90 percent or more of their income (Business Week, June 26, 2000, p. 34). For many years it was drummed into the heads of the working population that their Social Security benefits were sacrosanct; they had paid for them and they were owed them. Beware the politician who attempted to take them away.

Yet, in what is surely the most momentous development in the current presidential elections, Social Security is being presented as a system that is on its last legs, as a bad investment deal for individuals—supposedly justifying its privatization. In Republican presidential candidate George W. Bush’s plan, the first decisive steps would be taken toward Social Security’s privatization, with 2 percentage points of the Social Security payroll tax (16 percent of what the worker and his/her employer are taxed) being diverted to individual retirement accounts to be managed by private investment firms. This would mean that Social Security would lose an estimated trillion dollars in revenue in the first decade after the institution of the Bush plan, preparing the way for drastic curtailments of benefits and the further dismantlement/privatization of the system (Wall Street Journal, July 28, 2000). True, Bush claims that there would be no immediate cutbacks in benefits to present Social Security recipients. But the Bush proposal would leave Social Security permanently lacking a substantial portion of its revenues and therefore would create a severe long-term crisis for the system—as long as it continues to be treated as a self-supporting entity, to be funded entirely out of its own payroll tax revenue. The logic of Bush’s approach is therefore aimed at reducing future benefits for today’s workers and promoting the system’s complete privatization.

The plan that Democratic presidential candidate Al Gore has presented to counter the Bush plan would establish government-subsidized investment accounts for working people that would consist of individual savings with matching income-tax credits, costing the federal government two hundred billion dollars in lost revenue over the next decade (New York Times, June 25, 2000). These accounts would not divert funds from Social Security—and are designed to counteract the greed factor in Bush’s plan while protecting Social Security. Gore proposes to pay off the national debt with the current Treasury surpluses and then use the savings on interest payments on the debt to shore up Social Security. Nevertheless, leading Democrats in the Clinton era have increasingly bought the idea of Social Security privatization. Among its most vociferous advocates in Congress has been Gore’s Vice Presidential running mate, Joseph Lieberman, Chairman of the Democratic Leadership Council. (Although he changed his tune the moment he was added to the Democratic ticket.) Under the Democrats, too, then, the future of Social Security is far from secure.

The New Deal and Social Security

In order to understand why Social Security is now on the chopping block, it is necessary to go back to the New Deal and the conditions under which it was conceived. In the social insurance schemes pioneered in Europe and existing in most industrialized countries, retirement benefits (and benefits associated with early death and disability) are paid to a considerable extent out of the general revenues of the government on a pay-as-you-go basis. But in the United States, the political climate during the New Deal forced the Roosevelt administration to concede to conservative demands that the costs of the system be borne entirely by workers and their employers through a regressive payroll tax specifically created for that purpose, and that a trust fund be set up to cover the resulting Old Age and Survivor’s Insurance. A separate, jointly administered trust fund for disability was added later. The Social Security trust fund was to be calculated with the view of accumulating a reserve fund, based on actuarial principles. Annual projections of its financial condition seventy-five years into the future were to be provided. For Roosevelt, these conditions (particularly the payroll tax), although insisted upon by capital, were seen as a means of safeguarding the system. “Those taxes,” he explained in a private exchange, “were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program” (quoted in Arthur M. Schlesinger, Jr., The Coming of the New Deal, pp. 308-309).

The Roosevelt administration’s Committee for Economic Security, which crafted the Social Security program, never intended that the payroll tax should remain the sole source of revenue for Social Security, which they believed would have to be supplemented eventually from the general funds of the government. This has been made clear by Thomas H. Eliot, the principal drafter of the Social Security Act, who wrote in the 1970s—in support of Congressional efforts to supplement Social Security with money from the general funds—that

In 1935 as counsel to the President’s Committee on Economic Security, I drafted the bill which, with some revisions, became the original Social Security Act. I now applaud your effort to supplement old age insurance funds with general revenues, and thus to get rid of the notion that the system should be forever “self-supporting.”

All the members of the committee and its large staff of experts agreed on the contributory principle: the ultimate beneficiary should contribute a part of the cost of his eventual old age annuity. They agreed too, that for a while the rest of the cost should be borne by the employers, through payroll taxes. But they assumed that before long, others than employers would also contribute—in other words, that both payroll taxes and income taxes would supplement the employee’s contributions.

All, that is, agreed, except the Secretary of the Treasury, Henry Morgenthau. When he saw a proposed press release saying that no general fund contributions would be required before 1965, he objected, and persuaded the President that the rates of payroll and earnings taxes should be raised, to make the system forever “self-supporting.” The rest of the Committee and the staff greatly regretted this, for the earnings tax, while necessary to effectuate the contributory principle, is a regressive tax that should be held at a very low rate (Eliot, Recollections of the New Deal, p. 103).*

Enter Reaganomics

The first major confrontation over Social Security occurred in the early 1980s during the Reagan presidency. Reagan had promised to balance the federal budget. But the budget that he sent to Congress in 1981, because of the heavy expenditure on the military, would have led to record deficits, despite deep cuts in social expenditures. David Stockman, Reagan’s budget director, decided that the only possibility of avoiding these huge deficits would be to raid Social Security. Rather than state this openly in the budget, however, he included forty billion dollars in “future savings to be identified.” As Stockman later admitted, this was nothing but a euphemism for budgetary reductions to be won by “storming the twin citadels of Social Security and Medicare” (Stockman, The Triumph of Politics, p. 124-125). The Reagan administration’s frontal assault on Social Security began on May 12, 1981. It included substantial reductions in benefits for those seeking early retirement at age sixty-two, plus cuts in basic benefits—altogether forty-five billion dollars in “savings.” The Democrats, looking for political capital, rallied within days in defense of Social Security and, with public opinion solidly behind them, were able inflict the first major defeat on the Reagan administration.

But while a frontal assault on Social Security was no longer feasible, the Reagan administration continued to chip away at the system, with the complicity of leading Democrats, under the guise of “reform.” Social Security in the early 1980s was commonly seen as facing a minor, short-term crisis, plus a more severe long-term crisis. The short-term crisis was an expected shortfall in the trust fund for Old Age and Survivor’s Insurance (OASI) from the mid-1980s until the golden age of the 1990s—when Social Security surpluses would materialize, in the employment heyday of the baby-boom generation. This short-term crisis was accentuated by the provision made earlier on to link Social Security benefits to inflation. Since, in the stagflation years, wage increases fell well behind price increases, the Social Security payroll tax became insufficient to cover the rising benefit costs.

Yet, the short-term crisis was hardly a crisis at all, since it could have been largely remedied through reallocation of funds from the Disability Insurance Trust Fund (DI), which had reserves to about an equal extent. In other words, there was no genuine short-term crisis if OASI and DI were taken together (see Jacob Morris, “Social Security: The Phony Crisis,” MR, February 1983).

The long-term crisis was one that was expected to occur sometime in the twenty-first century and was the real basis for claims of Social Security’s impending insolvency. Social Security was bound to be exhausted, it was argued, during the years of retirement of the baby-boom generation, some fifty years down the road, when a growing number of retirees would have to be supported by a much smaller number of active workers. With Social Security going belly-up, the children and grandchildren of the baby-boom generation could be expected to be cheated of their retirement benefits. The fact that Social Security is a basic economic right as well as a human right, and not a business that could go bankrupt, has been consistently ignored in the rhetoric of its opponents.

The situation was ably summed up by Jacob Morris in MR in February 1983:

The main purpose of the Reagan Social Security crisis-mongers (and their all too many Democratic Party helpers) in grossly exaggerating the “crisis” of the 1980s, is to demoralize our retired workers and soften them up, politically, for an immediate cut in cash benefits….The main purpose of the gross exaggeration of the Social Security crisis of the twenty-first century is to demoralize the active workers who pay the current taxes which provide the current benefits for the retired workers, who are their parents and grandparents. The crisis-mongers want to drive a wedge between the generations; they want to weaken the political opposition of the younger workers to the current attack on the benefits of their parents and grandparents. But beyond that the enemies of Social Security want to soften up the many millions of younger workers for a dismantling of the whole system and for its partial replacement by individual insurance and private company pensions (12).

The Reagan administration and the Democrats came to an agreement in relation to the crisis of the 1980s, which included accelerating previously designated payroll-tax increases, forcing federal workers into the system, making Social Security benefits for those in higher income groups subject to income tax, increasing the Social Security tax for the self-employed, delaying cost-of-living adjustments for the currently retired, and gradually moving the retirement age from sixty-five to sixty-seven. In effect, the cost of Social Security’s short-term problem was paid for by Social Security recipients themselves, partly through significant reductions in benefits.

The Social Security Surplus

A vast propaganda campaign over the past two decades, emanating from rightwing thinktanks such as the Cato Institute, has made the notion that Social Security is a dinosaur facing extinction an unchallenged axiom in media and political discourse. Yet current reality tells a different story. Today, Social Security is generating enormous surpluses. There is no question of a crisis in the system—if left alone—in the next few decades. Rather, all of the claims regarding its downfall are based on the long-term projections of the Board of Trustees of the Social Security system that the trust funds will be exhausted around 2037. This can be seen in Table 1.


The enemies of Social Security often argue that the system will enter a severe crisis in 2015 when benefits paid out (Outgo in Table 1) are expected to exceed the income from the payroll tax (Income Excluding Interest). But Social Security is projected to have more than four and a half trillion dollars in assets at the end of that year as a result of its enormous—and growing—interest income. In 2025, the trust funds are projected to have six trillion dollars in assets, as compared to two trillion dollars in benefits payments. The Social Security trust funds are fully funded for nearly forty years, as the data in Table 1 demonstrate. At that time, a financial shortfall is projected, but it amounts to only 2 percent of total payrolls, or less than 1 percent of Gross Domestic Product (GDP) over the next seventy-five years, and hence is easily manageable (Business Week, June 26, 2000, p. 32).

These figures are, of course, based on forecasts that project decades into the future. Economic forecasts are notoriously bad, even when making predictions only a year or two in advance. The Board of Trustees of the Social Security system provides projections based on low-cost, intermediate, and high-cost assumptions. The intermediate assumptions (upon which Table 1 is based) are generally considered to be the most realistic ones, and represent the best-guess assumptions of Social Security’s Board of Trustees. These forecasts are seldom questioned, since they are based on extremely conservative assumptions. Thus the intermediate-cost assumptions forecast that the economic growth rate will drop to 1.7 percent between 2020 and 2040, compared to around 3 percent over the last seventy-five years. Such a pessimistic estimate implies severe economic strains, hardly enough economic growth to keep pace with the growth of labor supply and the jobs displaced by advancing productivity. A growth rate much closer to the long-term historical average would mean that not only would the Social Security funds not be exhausted forty years down the line, but that the crisis would be staved off indefinitely.

Even within the establishment framework assumed here, there is plenty of time to “fix” Social Security, if it appears to be running into trouble. But even in that far-fetched eventuality, why rely even on a 1 percent increase in the regressive sales tax (which would surely do the trick)? If there is a shortfall in the funds, it can be made up from the general revenue flowing to the Treasury which, as noted above, was part of the originally conceived Social Security program. Social Security can no more run out of money than the U.S. government itself can.

From Fear to Greed

Wall Street has consistently been the main force in the campaign to privatize Social Security. The Investment Company Institute, the trade association for the mutual-funds industry, has made the privatization of Social Security its top priority. The Cato Institute has been receiving millions of dollars annually from finance capital to support its relentless drive for Social Security’s privatization. The Bush campaign received its largest contributions (5.9 million dollars as of July 2000) from the investment (securities) industry, which has made privatization of Social Security its primary political goal (Wall Street Journal, July 31, 2000). There is, of course, no mystery behind Wall Street’s intense interest in Social Security’s privatization. With a half trillion dollars in income this year from the payroll tax alone, and a trillion dollars in assets, Social Security is quite simply the biggest pot of gold around. The prospect of 140 million new investment accounts, from which financial interests can extract fees and commissions, is a potential gravy train that capital simply can’t resist. Most of these new accounts could be expected to go into mutual funds, which is the reason why the mutual-funds industry is lobbying so hard for privatization. The flood of money coming into the market would also give an enormous lift to stock prices and further stimulate financial speculation. From the standpoint of insurance companies, the privatization of Social Security would remove government competition, allowing them vastly to expand their field of operations and profit-making opportunities.

Nevertheless, a big roadblock for capital’s privatization campaign has been the growing difficulty of continuing to convince the public of Social Security’s nonviability. With Social Security currently showing assets in excess of a trillion dollars, the idea that it is in crisis carries little immediate weight. Moreover, the populace has tended to respond to the threat of the system’s demise not by jumping on the privatization bandwagon, but by demanding that Social Security in its original form be preserved and even expanded. Consequently, the argument based on fear has been supplemented in recent years by one based on greed. The contention is that individual accounts invested in private securities would provide superior rates of return, and thus would be a better way of providing for retirement security. Due to the illusion created by the present period of historically high stock valuations, people are led to believe that stock values almost always go up, almost never down, and thus constitute a means for getting rich quick—if only the funds they paid into Social Security were instead channeled into individual private accounts.

There are at least five things wrong with this logic. First, as we have seen, Social Security is not a pension or investment fund for individual workers but rather a system of social insurance designed to meet the needs of the disabled, the spousal survivors of workers, and the retired—as well as their families.

Second, the stock market is about risk and speculation, not about guaranteed high returns, and it is not to be counted on when it comes to something as basic as retirement income for working families. Stock market booms, such as the present one, are “bubble economies,” which are normally followed by extended periods of much lower returns. Claims that investment in the stock market will automatically lead to rapid growth in retirement accounts are thus to be regarded as false promises, if not outright lies.*

Third, calculations on the return on private accounts fail to factor in unemployment and periods of financial distress for workers. As Michael Mandel, economics editor of Business Week explains in his book The High-Risk Society (1996), “workers could lose their job or suffer some other financial calamity in their later working years, so that they couldn’t save for retirement” (195).

Fourth, a recent study by Henry Aaron and others for the Century Foundation (formerly the Twentieth Century Fund) has shown that cuts in benefits in Social Security, necessitated by the diversion of tax revenues, would drastically reduce the total benefits (both from Social Security and individual accounts) going to the average worker-pensioner. Even if the stock market were to perform equally well in the future as it has in the past—a highly dubious assumption in light of current historically high valuations—after thirty-five years of diverting 2 percentage points of his or her Social Security payroll tax into a private investment account, the average retiring worker’s combined benefits from both that account and Social Security would be around 20 percent lower than the benefits guaranteed by Social Security under current law. Losses would be even higher for low earners. For a thirty-year-old, married worker with a nonworking spouse earning 14,258 dollars in 2000, and retiring at age sixty-five, average total retirement income (from both Social Security and individual accounts) would drop, according to the Century Foundation, by 38 percent.*

Fifth, one advantage of Social Security is its low administrative costs—around 1 percent of total benefits paid each year. Much higher administrative costs, however, can be expected in a privatized system.* This was explained by Arthur Levitt, Chairman of the U.S. Securities and Exchange Commission (SEC), in a speech delivered to Harvard’s John F. Kennedy School of Government in October 1998. According to Levitt, “In Chile—considered the grandfather of Social Security privatization—one study found that fees shaved off almost one-third of the annual return in the first ten years of the system. One-third of these fees came from marketing and sales costs. This is not surprising since another report found that there were more than 20,000 selling agents going from house to house selling funds. Consequently, three out of ten Chilean investors switch fund companies every year.” This produces much lower rates of return on investments, and hence lower benefits.

But Chile is not the only such example. “One need only look,” Levitt observed, “at England’s experience with Social Security reform. In 1998, the U.K. allowed individuals to opt out of their national public pension system and into private accounts. In what has become known as the ‘mis-selling’ controversy, high pressure sales tactics were used to persuade people to switch into unsuitable personal pension schemes….These abusive sales practices, coupled with inadequate regulation, led to billions of dollars in losses for investors” who had their retirement benefits correspondingly reduced.

Some of the enemies of Social Security have tried to bolster their case by arguing that the spread of stock ownership resulting from privatization of Social Security would create a nation of capitalists. Yet, this should be dismissed as the smoke-and-mirrors scam that it is. “Consider,” SEC Chairman Levitt explains, “a system of 140 million accounts—one for every American worker. Some plans [such as George W. Bush's] would put 2 percent of the payroll tax into an individual account. But for the roughly 40 million workers who earn less than $8,500 a year, that equals $170 or less per year. This is not a lot of money from which to build up a portfolio. And, administrative costs may quickly eat into any higher return from individual accounts for lower-income workers.” In other words, accumulation of substantial retirement benefits would be almost impossible for tens of millions of workers under the payroll-tax diversion scheme. A more likely result would be the disaccumulation of retirement benefits in comparison to what would have been guaranteed by Social Security alone.

The foregoing analysis points to a reality often obscured by the debate about Social Security’s financial integrity: that it is a question of class and social justice, not economics. Why should Social Security have to meet the test of financial integrity, paying for itself through its own revenues rather than relying on the general fund, while the gargantuan military budget does not? Why should shortfalls in payroll-tax revenue justify a failure on the part of government to keep its promises to the working population? Merely to ask these questions is to address fundamental relations of power in U.S. society. The fate of Social Security will be decided, in the end, not by financial ingenuity, nor by the promises of the Democratic party, but by the respective powers of the combatants, i.e., the class struggle.

Reference notes to this essay may be obtained by contacting the assistant editor (contact form here).