From: "DeFazio, Peter"
Subject: RE: Your recent email (Ref: 6022807)
Date: Mon, 6 Dec 2004 13:03:05 -0500
Thanks for your message in opposition to President Bush's plans to partially privatize Social Security. I have long been a vocal opponent of proposals to undermine Social Security via privatization.
Although critics of Social Security claim the program is going "bankrupt" and is in "crisis," the report from the Social Security Trustees proves otherwise. Demographic changes (a growing number of retirees, fewer workers, and longer life-expectancy) create manageable challenges for Social Security. However, the program is fundamentally sound and can remain so for the next 75 years and beyond with relatively minor changes.
Currently, Social Security is collecting more in payroll taxes than is needed to fund benefits for today's recipients (70 cents of every dollar in payroll taxes collected is paid out immediately to current beneficiaries). These excess payroll taxes are credited to the Social Security Trust Fund and then invested in government bonds that pay interest to the Trust Fund. The Trust Fund already has assets of more than $1 trillion, which will grow to around $6.6 trillion by 2027.
The bottom line is that payroll taxes, in combination with the Trust Fund, are sufficient to pay 100 percent of promised benefits through at least 2042, nearly four decades from now. Even after 2042, Social Security will never be "bankrupt" in the sense that it couldn't pay any benefits whatsoever. Because future workers will still be paying into the program after 2042, even without any changes whatsoever, Social Security will still be able to pay 75 percent of promised benefits after 2042.
That said, I believe it is prudent to plan now how to close this 25 percent gap between projected revenues and benefits. I have drafted my own proposal to stabilize and improve Social Security that has been certified by the Social Security actuaries as keeping the program on sound financial footing for the next 75 years without privatization. My proposal protects and enhances the existing Social Security system by: lifting the cap on wages subject to the Social Security payroll tax so that individuals making over $89,000 a year will pay the same tax rate as the average worker in Oregon making $30,000 a year (currently, income above $89,000 is not subject to the Social Security payroll tax); allowing the assets in the Trust Fund to be diversified into investments other than just government bonds; improving benefits for widows and widowers; and creating a minimum benefit guarantee for low-wage workers.
Finally, despite political rhetoric to the contrary, it is important to understand that by siphoning money from the current program to fund private accounts, the President's plan to partially privatize Social Security actually makes the projected financial challenge facing the program worse, not better!
Let me briefly explain the pitfalls of privatization as I see them:
1. Transition Costs
Because the vast majority of payroll taxes coming into the system go out immediately to pay benefits, diverting a portion of payroll taxes into private accounts creates a huge gap in financing of $1 trillion over the next ten years, $3 trillion over the next twenty. This gap can only be filled one of three ways: cutting benefits (discussed below), raising taxes (meaning young people would be double-taxed: once to fund benefits for current retirees and once to fund their individual accounts), or borrowing trillions of dollars, which will exacerbate the record budget deficits and our reliance on foreign investors. The President has not said which of these options he would choose. Further, diverting payroll tax revenue to private accounts actually accelerates the financial challenges facing Social Security. Privatization would accelerate depletion of the Trust Fund by 21 years to 2021.
2. Benefit Cuts
Numerous studies have placed the necessary benefits cuts in Social Security at 40-54 percent under a partially privatized system. While an individual's private account could offset some of these devastating cuts, experts believe the total benefit cut would still be at least 20-40 percent. Under the plans proposed by the President's privatization commission, benefits cuts would apply not just to retiree benefits, but also to survivor and disability benefits. The cuts would also apply regardless of whether an individual chose to set up a privatized account.
3. Rates-of-Return
Proponents of privatization argue that individuals will make lots of money investing their Social Security dollars in the stock market rather than having the government invest their money in stodgy old Treasury bonds. However, while the stock market, over time, has yielded higher returns than U.S. Treasury bonds, that general upward trend is full of lengthy downturns and high volatility. For example, there were fifteen years in the past century in which the real value of the stock market fell by more than 40 percent over the preceding decade.
In addition, proponents have not been able to show how the stock market would be able to yield seven percent returns in the future when economic growth is projected to only be around half of what it's been in the past and when corporate profits can barely support existing stock prices.
It is also important to keep in mind that the rate-of-return argument is essentially irrelevant to a social insurance program like Social Security. You don't complain if your rate of return on your fire insurance policy is zero, because that means your house didn't burn down. Social Security is an insurance program, not an investment program. In addition to retirement benefits, it provides the equivalent of $300,000 in life insurance and $200,000 in disability insurance for every family to protect men, women, and children against the death or disability of the primary wage earner.
4. Administrative Costs
Administrative costs would further reduce the meager return from private accounts. Administrative costs for Social Security are less than one percent of total expenditures. By contrast, under a privatized system, individuals would likely lose at least 20 percent of their benefits to administrative costs.
I have posted a lot of other information about Social Security on a special section of my web site. I hope the information on my web site will help debunk a number of the myths spread by proponents of dismantling the current system via privatization. The address is:
http://defazio.house.gov/SocSecIndex.shtml
Thanks again for contacting me. Please keep in touch.
Rep.Peter DeFazio
Fourth District, OREGON
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