GOP Social Security Schemes Would Only Harm Retirees

August 11, 2011 6:40 pm ET

As the anniversary of Social Security nears, it's important to remember how Republicans have approached the program. Beginning with a Bush-era commission on Social Security reform and continuing up through Budget Committee Chairman Paul Ryan's (R-WI) "Roadmap for America's Future," Republicans have sought over the last decade to disrupt the Social Security system via a variety of schemes. Their proposals, which have often included privatization plans and "progressive price indexing," would introduce uncertainty into retirees' lives by attaching payouts to the ups and downs of the market, and would amount to substantial benefit cuts for many Americans.

Bush-Era GOP Proposals And 2010 "Roadmap" Included Social Security Privatization Measures

President George W. Bush's Social Security Commission Outlined Three Reform Models, All Including "Voluntary Personal Account" Options. According to a report from President Bush's Commission to Strengthen Social Security:

Reform Model 1 establishes a voluntary personal account option but does not specify other changes in Social Security's benefit and revenue structure to achieve full long-term sustainability. [...]

Reform Model 2 enables future retirees to receive Social Security benefits that are at least as great as today's retirees, even after adjusting for inflation, and increase Social Security benefits paid to low-income workers. Model 2 establishes a voluntary personal account without raising taxes or requiring additional worker contributions. It achieves solvency and balances Social Security revenues and costs. [...]

Reform Model 3 establishes a voluntary personal account option that generally enables workers to reach or exceed current-law scheduled benefits and wage replacement ratios. It achieves solvency by adding revenues and by slowing benefit growth less than price indexing. [President Bush's Commission to Strengthen Social Security, Strengthening Social Security And Creating Personal Wealth For All Americans, December 2001]

President Bush Proposed Privatized Accounts That Would Have Reduced Benefits. According to the Center for Budget and Policy Priorities:

Under the private accounts that the President has proposed, the cost of the accounts would be offset by reducing the Social Security benefits of those electing the accounts.  For every dollar in payroll taxes that a worker diverted from Social Security to an account, the worker's Social Security benefits would be cut a dollar plus an interest charge equal to three percent above inflation.  Thus, under the proposal to combine progressive price indexing with private accounts, Social Security benefits would be lowered twice- once due to the indexing changes, and a second time to pay for the private accounts [, 5/2/05, emphasis original]

Rep. Paul Ryan and Sen. John Sununu 's 2005 Plan Promoted Personal Savings Accounts Whose Assets Would Be "Invested By Individual Workers." In a memo to Rep. Paul Ryan (R-WI and then-Sen. John Sununu (R-NH), former Chief Actuary of the Social Security Administration Stephen C. Goss, wrote:

This memorandum provides estimates of the financial effects of the plan you have developed for modifying the benefit and financing provisions of the Social Security program. ... This plan would establish voluntary, progressive individual accounts for workers who are under age 55 on January 1, 2006 and would provide for a reduction in the Social Security retirement and aged survivor benefits for those who participate. All participating workers would be guaranteed that the total benefits available from the combination of the OASDI program and their personal account would be at least equal to OASDI benefits scheduled under current law, regardless of the investment option and portfolio allocation they choose. Those who never participate in the personal account option would be provided present-law scheduled benefits, but would not be guaranteed at this level. [, 4/20/05]

Rep. Ryan's 2010 "Roadmap For America's Future" Revives Personal Savings Accounts Idea. From the "Roadmap for America's Future" plan on the House Budget Committee website:

This proposal addresses the shortcomings of the current system and strengthens the retirement safety net by providing workers with the voluntary option of investing a portion of their FICA payroll taxes into personal savings accounts. Due to the higher rate of return received by investments in secure funds consisting of equities and bonds, these accounts would allow workers to build a significant nest egg for retirement that far exceeds what the current program can provide. Each account will be the property of the individual, and fully inheritable, which will allow workers to pass on any remaining balances in their accounts to their descendants.

Individuals 55 and older will remain in the current system and will not be affected by this proposal in any way: they will receive the benefits they have been promised, and have planned for, during their working years. All other workers will have a choice to stay in the current system or begin contributing to personal accounts. Those who choose the personal account option will have the opportunity to begin investing a significant portion of their payroll taxes into a series of funds managed by the U.S. government. The system would closely resemble the investment options available to Members of Congress and Federal employees through the Thrift Savings Plan [TSP]. As these personal accounts continue to accumulate wealth, they will eventually replace the funding that comes through the government's pay-as-you-go system. This will reduce the demand on government spending, lead to a larger overall benefit for retired workers, and restore solvency to the Social Security Program. [, accessed 8/11/11]

If Privatization Schemes Had Become Law, The Recession Would Have Harmed Seniors' Retirement Accounts

CBO: There Would "Uncertainty" With Private Accounts Because Payouts "Would Depend On The Returns That Individuals Earn On Stocks And Corporate Bond Investments." According to the Congressional Budget Office's analysis of "Plan #2" proposed in a report from President Bush's Commission to Strengthen Social Security:

The uncertainty about Social Security that individuals and policymakers face is an important economic and policy consideration. [...] While the government would not face any direct investment risk under the proposal, the size of payouts from IAs [individual accounts] would depend on the returns that individuals earn on stocks and corporate bond investments. [, 7/21/04, emphasis added, internal citation removed]

Personal Retirement Account Balances Fell During The 2007 Recession — And Privatized Social Security Accounts Would Have As Well. According to an article in Fortune magazine, via CNNMoney: "Another problem is that the stock market has been stinko, the post-March rally notwithstanding. Stocks are below their level of April 2000, when the great bull market (August 1982 to March 2000) ended. It's hard to make money in stocks when they've been down for nine years. The Employee Benefit Research Institute estimates that the average retirement account balance of people 65 to 74 was about $266,000 in 2007 but had fallen to about $217,000 as of mid-June." [Fortune, 7/30/09, via CNNMoney]

Privatization Schemes Would Need Annual Rates Of Return That Are "Mathematically Impossible" To "Deliver On Their Promises." According to Noble Prize-winning economist Paul Krugman:

Schemes for Social Security privatization, like the one described in the 2004 Economic Report of the President, invariably assume that investing in stocks will yield a high annual rate of return, 6.5 or 7 percent after inflation, for at least the next 75 years. Without that assumption, these schemes can't deliver on their promises. Yet a rate of return that high is mathematically impossible unless the economy grows much faster than anyone is now expecting.

To explain why, I need to talk about stock returns. The yield on a stock comes from two components: cash that the company pays out in the form of dividends and stock buybacks, and capital gains. Right now, if dividends and buybacks were the whole story, the rate of return on stocks would be only 3 percent.

To get a 6.5 percent rate of return, you need capital gains: if dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn't sound too unreasonable if you're thinking only a few years ahead.

But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible.  [New York Times, 2/1/05]

2005 Ryan-Sununu Plan Would Have Increased Debts And Deficits And Threatened Other Budget Items

CBPP: Ryan-Sununu Plan Would  "Sharply Increase Federal Budget Deficits" And "Increase The National Debt...Every Year For At Least The Next 75 Years." According to the Center for Budget and Policy Priorities:

This analysis focuses on the large amount of general revenue transfers that the Ryan-Sununu plan would require. A related aspect of the plan is that it would sharply increase federal budget deficits, because very substantial amounts of federal revenue would be diverted from Social Security into private accounts, and that, in turn, would require the Treasury to borrow hefty sums in financial markets to finance the continued payment of Social Security benefits in the decades ahead.

The Social Security actuaries found that under the Ryan-Sununu plan, the Treasury would have to borrow an additional $2.4 trillion (in current dollars) over the first ten years alone. The plan would increase the national debt (i.e., the debt held by the public) every year for at least the next 75 years. Increased deficits and debt would be avoided only if Congress made very deep cuts in other programs and/or if corporate income tax receipts boomed in an unprecedented manner that is extremely unlikely to occur. [, 4/26/05]

CBPP: Ryan-Sununu Plan Would Have Posed "Large Additional Risks" For The Budget By Encouraging Private Investors To Risk Taxpayer Money. According to the Center for Budget and Policy Priorities:

Under the Ryan-Sununu plan, participants would receive a guarantee of benefits at least equal to those under the current Social Security benefit structure, regardless of the investment options they chose. The Social Security trust fund would act at [sic] a backstop to the private accounts: if an individual's investments turned out badly, the government - i.e., the taxpayers - would make up the difference between what the private account actually earned and the amount needed to provide the individual the full level of benefits promised under the current Social Security benefit structure.

This aspect of the Sununu-Ryan plan poses large additional risks for the rest of the budget. By insuring the holders of private accounts against bad investment results, the plan would encourage individuals to invest their private account balances in the riskiest allowable manner, hoping for the greatest returns. If the risky investments win big, the individual wins; if not, the rest of the budget (or the taxpayer) loses, not the individual investor. This would be a classic example of "moral hazard," in which the presence of a third-party guarantee promotes irresponsible behavior on the part of individuals, with others - in the case, the taxpayers - left to bear all the risk. [, 4/26/05]

Bush Plan And Ryan "Roadmap" Proposed To Use "Price Indexing," Which Would Severely Cut Social Security Benefits

President George W. Bush Advocated "Benefit Reduction Plan" That Would Change The Social Security Benefit Structure For High Earners To "Price Indexing." According to the Center for Budget and Policy Priorities:  "In his news conference on April 28, President Bush embraced a Social Security benefit reduction plan that is consistent with a proposal advanced by Robert Pozen, a former vice chairman of Fidelity Investments and a member of President Bush's Social Security Commission.  Pozen has developed a change in the Social Security benefit structure that he refers to as 'progressive price indexing.' [...] Under the proposal, low-earners would continue to receive the Social Security benefits promised under current law, which are based on a formula that uses "wage indexing," while high-earners would have their benefits calculated under a formula that uses "price indexing" instead, with the result that their benefits would be reduced.  (The benefit reductions would be phased in and would grow over time.)  For average workers, benefits would be calculated by using a mix of wage indexing and price indexing; their benefits would be reduced but by a smaller percentage than benefits for higher earners." [, 5/2/05]

In His "Roadmap," Rep. Ryan Claims "Progressive Price Indexing" Would Put Social Security "On A Sustainable Fiscal And Economic Course." From the "Roadmap for America's Future" plan on the House Budget Committee website:

This reform, starting in 2018, employs "progressive price indexing" - a mix of wage indexing and price indexing - for initial Social Security benefits. Individuals who make less than approximately $27,700 per year will continue to receive initial benefits based on wage indexing. Those who make between $27,700 and $149,900 (in 2018) will have their initial benefits adjusted upward by a combination of wage and price indexing that becomes more oriented toward price indexing as they move up the income scale. For example, an individual whose income is half way between roughly $27,700 and $149,900 will have his initial benefit adjusted upward approximately 50 percent by wage indexing and 50 percent by price indexing. Individuals making more than $149,900 will have their initial benefits adjusted upward by price indexing. These amounts will be indexed for inflation.

 As a result, all future Social Security beneficiaries will see their benefits grow by an amount at least equal to inflation over time. The reform will not affect the cost-of-living adjustment that Social Security beneficiaries receive each year once they have begun receiving benefits. The use of progressive price indexing will peg the growth of future Social Security outlays to a realistic index of the cost of living, while rescuing the program from the insolvency that will otherwise occur. It will place the program on a sustainable fiscal and economic course. [, accessed 8/11/11]

Progressive Price Indexing Would Substantially Cut Into Social Security Benefits For Many Non-Wealthy Retirees. From the Center on Budget and Policy Priorities:

  • Progressive price indexing represents a large benefit cut.  While the deepest benefit reductions would fall on those with earnings at or above the Social Security payroll tax cap (now $90,000 a year), workers who earn much less than that would face very substantial benefit reductions as well.

    o  A medium earner (one who earns $36,600today) retiring in 2055 would face a 21 percent reduction in his or her Social Security benefits (relative to the current benefit structure).

    o  A worker who earns 60 percent above the average wage - about $59,000 today - and retires in 2055 would face a 31 percent benefit cut.[2]  (These figures are based on the Social Security actuaries' analysis of the progressive price indexing proposal.)

    o  For those retiring in subsequent years, the benefit reductions would be significantly larger.

combined effect of progressive price indexing and president's private accounts on defined social security benefits

The benefit cuts would be this large because progressive price indexing is designed to reduce benefits enough to close 70 percent of Social Security's 75-year funding gap by itself.  Plans that include progressive price indexing thus rely heavily on benefit reductions to restore Social Security solvency, rather than on a balanced mix of benefit reductions and revenue increases as was done in 1983. [, 5/2/11, emphasis original, internal citation removed]

Rep. Ryan's "Roadmap" Would Raise Retirement Age, Cut Benefits To Seniors

Rep. Ryan's "Roadmap For America's Future" Calls For "Modernizing The Retirement Age," Citing Increased Life Expectancy. From the "Roadmap for America's Future" plan on the House Budget Committee website:

When Social Security was enacted, the average life expectancy for men in America was 60 years; for women it was 64. Today, average life expectancy has increased to 75 years for men and 80 years for women (2007 figures). Life expectancies are expected to continue lengthening throughout the century. Given these facts, and the choice among many Americans to work additional years, this proposal extends the gradual increase in the retirement age, from 65 to 67, occurring under existing policies, and speeds it up by 1 year. Once the current-law retirement age reaches 67 in 2026, this proposal continues its progression in line with expected increases in life expectancy. This will have the effect of increasing the retirement age by 1 month every 2 years. The retirement age will gradually increase until it reaches 70 in the next century.

The modernization of the retirement age will not affect the ability of an individual who chooses the personal account system to retire early, as long as his or her account has accumulated enough funds to provide an annuity equivalent to 150 percent of poverty. [, accessed 8/11/11]

CBPP: "Raising The Retirement Age Amounts To An Across-The-Board Cut in Benefits, Regardless Of Whether A Worker Files For Social Security Before, Upon, Or After Reaching The Full Retirement Age." According to the Center for Budget and Policy Priorities:

The full retirement age is 66 and will rise to 67 for people born in 1960 and later. Raising the retirement age amounts to an across-the-board cut in benefits, regardless of whether a worker files for Social Security before, upon, or after reaching the full retirement age.  A one-year increase in the full retirement age is equivalent to a roughly 7 percent cut in monthly benefits for all retirees who are affected.

The full retirement age really just means the age at which full benefits are paid.  Workers can file sooner and collect permanently reduced monthly benefits, or they can file later and get larger monthly benefits.  Shifting the retirement age means that the early retiree gets a deeper reduction and the delayed retiree gets a smaller bonus.

When the full retirement age was 65, a worker who filed at 62 - as do about half of claimants - could get 80 percent of a full benefit (or $800, if his or her full benefit were $1,000).  Now that the full retirement age is 66, a worker who files at 62 gets 75 percent of a full benefit ($750, in this example); when the full retirement age rises to 67, a worker who files at 62 will get just 70 percent (or $700, in our example).  That reduction in monthly benefits lasts for the rest of his or her life. 

And at the other extreme, someone who waits until 70 to file now gets nearly a one-third bonus - or $1,320, assuming that his or her full benefit is $1,000.  Eventually that will shrink to about one-quarter - or $1,240, in our example.  In short, an increase in the retirement age reduces benefits across the board.

Raising the Full Retirement Age Reduces Benefits for Everyone

[, 1/11/11, italics original]

CBO: Many Recipients Of Early Social Security Benefits Live In Poverty And Suffer From Physical Or Mental Health Conditions. According to a 1999 Congressional Budget Office study titled "Raising The Earliest Eligibility Age For Social Security":

As noted earlier, one-quarter of the men and nearly one-third of the women in the SIPP who were receiving benefits at age 62 or 63 had annual non-Social Security income below the poverty threshold. And those beneficiaries were much less likely than others to have any income from pensions or to have significant financial assets. If those beneficiaries had not been eligible for Social Security benefits, would many of them have had trouble working? Perhaps. One-third of the men said they had a physical, mental, or other health condition or disability that limited the kind or amount of work they could do (see Table 6). Nearly half reported not graduating from high school. And almost one-quarter said they had either lost their last job or left it because of a health problem. The percentage of women with non-Social Security income below the poverty threshold who said they had a work-limiting disability or had not graduated from high school was similar to that of men (see Table 7). A smaller fraction of those women, however, had lost their last job.

early social security benefits - men

early social security benefits - women

[, January 1999]

Galbraith: "Wealthier Elderly Are" Living Longer, But "The Non-Wealthy Not So Much." According to James K. Galbraith, an economist at the University of Texas at Austin:

The most dangerous conventional wisdom in the world today is the idea that with an older population, people must work longer and retire with less.

This idea is being used to rationalize cuts in old-age benefits in numerous advanced countries -- most recently in France, and soon in the United States. The cuts are disguised as increases in the minimum retirement age or as increases in the age at which full pensions will be paid.

Such cuts have a perversely powerful logic: "We" are living longer. There are fewer workers to support each elderly person. Therefore "we" should work longer.

But in the first place, "we" are not living longer. Wealthier elderly are; the non-wealthy not so much. Raising the retirement age cuts benefits for those who can't wait to retire and who often won't live long. Meanwhile, richer people with soft jobs work on: For them, it's an easy call.

Second, many workers retire because they can't find jobs. They're unemployed -- or expect to become so. Extending the retirement age for them just means a longer job search, a futile waste of time and effort.

Third, we don't need the workers. Productivity gains and cheap imports mean that we can and do enjoy far more farm and factory goods than our forebears, with much less effort. Only a small fraction of today's workers make things. Our problem is finding worthwhile work for people to do, not finding workers to produce the goods we consume. [, 1/2/11]