Policy Analysis of Paul Ryan's Social Security Personal Savings Guarantee and Prosperity Act

Policy Analysis of Paul Ryan’s Social Security Personal Savings Guarantee and Prosperity Act Robin West Collaborative MSW Program University of Wisconsin Oshkosh/University of Wisconsin Green Bay Author Note Assignment for Social Work 728: Advanced Social Welfare Policy Analysis Section I, Instructor Dr. Carol A. Hand Fall 2010

Social Security 2 Policy Overview For years now we have been hearing that the Social Security System is going broke and needs to be reformed before it does so. Republicans seem determined to privatize the system as a solution. U.S House of Representative Paul Ryan (WI), who is the ranking Republican on the House Budget Committee and a member of President Obama’s Deficit Commission, has outlined a plan for the reform of Social Security in his “Roadmap for America’s Future”.

The plan, which he calls the “Social Security Personal Savings Guarantee and Prosperity Act ” has been submitted to Congress in Title IV of H.R. 4529 which was introduced on January 27, 2010 (Goss, 2010, p. 1).

Ryan’s plan builds on the G.W. Bush Commission’s framework. In his plan, Paul Ryan pledges to preserve the current Social Security safety net and to ensure its continued solvency for future generations. This paper will take a look at Paul Ryan’s plan for privatization of Social Security and attempt to determine what affects it might have for people who choose to transition from the traditional system to Personal Savings Accounts. Social Security is a Federal social insurance program where workers and employers split a 12.4% tax that is taken from paychecks to fund the program. These payments are recorded by the government under each worker’s name and Social Security number.

When age, death, disability, or unemployment prevents workers from continuing on the job, they or their dependents are paid from the Social Security Trust fund (DiNitto, 2007). Social Security actually consists of many programs. Federal old-age and survivors insurance (OASI), Federal disability insurance (DI),Federal health insurance (HI) called Medicare, Unemployment insurance, Federal aid to people who are aged, blind, or disabled,(SSI)

Social Security 3 Federal –state aid to families with dependent children (TANF),Federal-state medical assistance for the poor such as Medicaid, Child welfare, Maternal and child health and additional social services to vulnerable groups (DiNitto, 2007, p. 127). For this paper, the focus will be on the Old Age and Survivors insurance (OASI) program. Social Security is a way to address poverty for our senior citizens and disabled poor by having people insure themselves against its occurrence. Social insurance programs compel people or their employers to purchase insurance against the possibility of their own indigency, which might result from forces over which they have no control, like the loss of a job, death of a family breadwinner, advanced age, or disability.

This problem of poverty in old age is worldwide and many countries struggle to do something about it.

Social Security pays benefits to about 53 million Americans and “More than 30 million Americans depend on Social Security to provide a significant share of their retirement income” (Ryan, 2010, p.41). Furthermore, Kelly Miller, who writes for AARP, claims that “Nearly 14 percent of people age 65 and older rely on Social Security for 100 percent of their family income” (Miller, 2010, p.1). Currently, the earliest a person can start collecting old age Social Security with a reduced benefit is at age 62. To get the maximum benefit amount, a person would need to be 66 this year. Social Security in the United States is a Pay-Go system.

A Pay-Go system, describes a System where funding for an existing program, must come from reallocating existing money. In the case of Social Security benefits, the money that is collected is immediately used to pay benefits. This system is an intergenerational wealth transfer plan based on demographic factors. Birthrate and longevity determine the solvency of Pay-Go retirement systems. (Karger & Stoesz, 2010, p. 266&498)

Social Security 4 Because Americans are living longer and the number of retirees per worker is increasing, Social Security is projecting a long-term shortfall. In 1900, U.S. Life expectancy averaged forty eight years, now it is seventy seven years. In just one century, we have added nearly thirty years to our life span. For Society, it means a huge, sustained increase in the elderly population. Only 4 percent of Americans in 1900 were over sixty-five, by 2030, one in every five Americans will be over sixty-five (Marshall, p. 51).

The crisis in Social Security was also fueled by demographic changes (a dropping birthrate plus an increase in life expectancy), more liberal benefits paid to retiring workers, high inflation, high unemployment, and the COLA’s passed by Congress in the mid-1970s (Karger & Stoesz, 2010, p.

267) . With the retirement of 77 million baby boomers on the horizon, the Social Security Administration began building a cushion in 1983 to help see this generation through its retirement years. Thanks to that planning, the Social Security Trust Funds hold more than 2.4 trillion in U.S. Treasury bonds, which earn interest every year. Without any changes, Social Security will be able to pay 100% of benefits until 2037 and more than 70 percent of promised benefits after that. Only paying 70 percent of promised benefits however, is not acceptable (AARP, 2010).

To avoid a shortfall, adjustments will have to be made, but there is disagreement about which adjustments are needed. Social Security first began to show signs of fiscal trouble in the mid- 1970’s. Between 1975 and 1981, the Old-Age and Survivors Insurance fund suffered a net decrease in funds and a deficit in the reserve of between 790 million and 4.9 billion a year. This imbalance threatened to

Social Security 5 deplete the reserve by 1983. (Karger & Stoesz, 2010, p. 267) Changes were made at that time to help keep it solvent. More recently, Social Security reform was proposed by G.W.

Bush during his second term. He proposed that private accounts be created with investment in the Stock Market, however, the idea of using payroll taxes for private accounts met huge opposition from Democrats, who argued that the plan would destroy Social Security’s Social insurance character without closing its long term deficit. “Even some Republicans have balked at the Bush plan, which would entail more government borrowing at a time when the United States is already running enormous budget deficits” (Marshall, 2005, p.49). The reason it would entail more government borrowing is because of the startup costs.

If workers payroll taxes were now going into their own private accounts instead of into the Social Security Trust fund, how would the government continue to pay for current retirees, or disabled person’s benefits? The government would have to find money from elsewhere to cover it.

At the time of President Bush’s proposal, the prediction was that baby boomers “will probably work longer as employers, facing a looming labor shortage and fearing a massive talent drain, try to hold on to older workers” (Marshall, p.50). That prediction proved to be false, as we now have a 9.6 percent unemployment rate and with older workers struggling to find work. In theory, Social Security is supposed to continue paying benefits after 2018 by drawing on the Social Security Trust Fund. The Trust fund is supposed to provide sufficient funds to continue paying full benefits until 2042, after which it will be exhausted.

At that point, by law, Social Security benefits will have to be cut by approximately 27 percent if nothing is done (Tanner, 2004).

Social Security 6 Michael Tanner, who is the director of health and welfare studies at the Cato Institute, goes on to say; “However, in reality, the Social Security Trust Fund is not an asset that can be used to pay benefits. Any Social Security surpluses accumulated to date have been spent, leaving a trust fund that consists only of government bonds, which are like IOU’s that will eventually have to be repaid by taxpayers”(Tanner, 2004, p. 2) These Trust fund balances are available to finance future benefit payments and other Trust Fund expenditures-but only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits.

Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. Even if Congress can find a way to redeem the bonds, the Trust fund surplus will be completely exhausted by 2042. At that point, Social Security will have to rely solely on revenue from the payroll tax-but that revenue will not be sufficient to pay all promised benefits. (Tanner, 2004, p. 3) Conservative values predominate in Ryan’s Social Security privatization plan. Their desire to promote economic freedom, to have smaller government, to direct money toward businesses, and to have lower taxes is imbedded in the agenda of the plan.

For President G.W. Bush, private accounts were integral to creating an “ownership society.” He wanted to “widen the ownership of homes and businesses, retirement savings and health insurance.” He said that, by making every citizen an agent of his or her own destiny, we will give our fellow Americans greater freedom from want and fear, and make our society more prosperous and just and equal” (Marshall, 2005 p. 56) “Conservatives believe the top-down distribution of public goods through universal entitlements like Medicare and Social Security

Social Security 7 deprives people of the freedom to make choices about their own lives and weakens individual responsibility by severing the link between effort and reward.” Republicans bemoan Social Security’s dwindling benefits and say that workers would get a much better deal from market investing” (Marshall, 2005 p.57). Social Security was originally designed in 1935 to replicate a private insurance fund. The program has undergone many changes over the past 75 years; In 1939, it was expanded to provide benefits to spouses, minor children and survivors of workers who die prematurely. In 1950 the first cost of living increase was added to the Policy.

In 1956 it provided benefits to disabled workers aged 5-64 and disabled adult children and women were permitted to retire early at age 62 with a reduced benefit. In 1961, men were allowed to retire early, starting at age 62 with a reduced benefit. In 1972 the annual cost of living adjustment became automatic and provided a 20 percent increase in benefits. It also added the Supplemental Security Income program which provided income security for elderly, blind or disabled persons and established wage indexing of the initial benefit amount upon retirement in order to ensure that benefits keep up with increases in the standard of living.

In 1977 the payroll tax was raised and benefits were reduced slightly to extend solvency. In 1983, Congress passed legislation that delayed the cost of living increase for six months, increased scheduled rates in payroll tax; added federal employers, including members of Congress; and started taxing a portion of Social Security benefits. It also gradually increased the maximum retirement age from 65 to 67 .In 1993 the government increased the portion of benefits subject to taxation. In 2000, the government eliminated the Retirement Earnings Test for seniors at or above the normal retirement age, allowing seniors who continue working to receive full benefits instead of having them reduced based on earnings (AARP, 2010a).

Social Security 8 The Problem According to Ryan In his Social Security Personal Savings Guarantee and Prosperity Act,” U.S. Rep. Paul Ryan says; That Social Security as currently structured, is going bankrupt and cannot fulfill its promises to future retirees. Without reform, future retirees face benefit cuts of up to 24 percent in 2037. Attempts to fix the problem without fundamental reform will excessively burden future workers and sacrifice U.S. prosperity. (Paul Ryan, 2010) Ryan says that even if the current system could be sustained, “It is no longer a good deal for American workers. The real rate of return for current workers is only about 1 percent to 2 percent, and the expected rate of return for today’s children is expected to fall below 1 percent.

Social Security’s shrinking value and fragile condition pose a serious problem that threatens to break the broader compact in which workers support the generation preceding them, and earn the support of those who follow” (Ryan, 2010 p. 42) Ryan claims that “ his 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.” In addition, 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” (Ryan, 2010 p.

42).

Ryan's plan proposes that the switch to private accounts be done incrementally. He claims that this will help to offset some of the costs of making the switch.

Social Security 9 Who Will Be Covered and How Will It Work? Individuals 55 and older in 2014, will remain in the current system. 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. As these personal accounts continue to accumulate wealth, they will eventually replace the funding that comes through the governments 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.

In addition, the creation of personal investment accounts for future retirees will provide additional capital stock for the U.S. Economy, increasing the potential for growth. This will be especially important in coming decades in helping compensate for the projected slow down in labor force growth, a key component to increases in GDP (Ryan, 2010 p. 42). Ryan claims that individuals who choose personal investment accounts will be ensured every dollar they place into an account will be guaranteed, even after inflation (Ryan, 2010 p. 43). An analysis of this guarantee was done and Gokhale found that: If participants PSA accumulations through their benefit collection years turn out to be insufficient to purchase annuities of like amounts, any shortfall in the PSA annuity compared to the guaranteed benefit level would be made up by the federal government each year.

And that”

Social Security 10 Ryan guaranteed benefits would be almost always less than benefits scheduled under current laws” (Gokhale, 2010, p. 287). This is interesting because Ryan claims that “All individuals in the traditional system who meet certain working requirements will be ensured that their minimum benefits are equal to at least 120 percent of the Federal poverty level, which is an improvement from current law”. So, what is the truth? Ryan also claims that “The use of progressive price indexing for lower-income workers will also allow the benefits for lower-income workers to grow faster than those who have greater means to provide for their retirement.

These changes will ensure the system favors those individuals who are most reliant on it for support” (Ryan, 2010 p. 44). How Does Progressive Price Indexing Work?

At present, an individual’s initial level of Social Security benefits is based on the individual’s average career earnings. To determine average career earnings, an individual’s income from previous years is adjusted upward by the rate that average American wages have increased over time. This approach, called wage indexing, exceeds the amount of initial benefit growth needed to keep pace with economic conditions, and contributes to the unsustainable projected burden on Social Security according to Paul Ryan.

An alternative approach is price indexing under which initial benefits are adjusted according to the consumer price index (Ryan, 2010 p.

44). Under full price-indexing, initial Social Security benefits for all beneficiaries would keep pace only with prices, rather than wages, from one generation to the next. Because prices increase more slowly than wages, this would result in successively larger benefit reductions over time, compared to the benefits that are scheduled to be paid under the

Social Security 11 current Social Security system. Sustained over many decades, it would cause beneficiaries to fall further and further behind the living standards of the rest of the population and to suffer a steeper decline in their own income and living standards when they retire (Ruffing & Van de Water, 2010). Ryan's reform proposal 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, a person whose income is half way between roughly $27,700 and $149,900, ($61,100) will have his/her initial benefit adjusted upward approximately 50% by wage indexing and 50% by price indexing. Persons making more than $149,900 will have their initial benefits adjusted upward by price indexing. These amounts will also be indexed for inflation. (Ryan, 2010 p. 44) Ryan claims that because of these changes; 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 (Ryan, 2010 p. 44).

Social Security 12 What Would Progressive Price Indexing Really Do to Social Security Benefits? According to Ruffing and Van de Water from the Center on Budget and Policy Priorities, The leading version of progressive price-indexing would cut benefits below currently scheduled levels for all but the lowest 30 percent of earners. Those cuts would grow for each future generation of retirees. The benefits reductions would reach nearly 30 percent for a medium earner by 2080. For higher earners, the reductions could equal as much as 50 percent. Proponents of progressive price-indexing imply that beneficiaries can readily afford such reductions.

In reality, Social Security benefits are modest. A lifelong medium earner at 65 in 2010 receives a benefit of $1,397 a month ($16,764 a year), only about 55 percent above the poverty line and barely more than what researchers reckon is a “nofrills, bare-bones” budget for retirees. (Ruffing & Van de Water 2010, p. 3) What Might the Unintended Consequences of That System Be?

The independent analysis done by Jagadeesh Gokhale, who is a senior fellow at the Cato Institute and a member of the Social Security Advisory Board, indicated that, “The Ryan reform proposal eventually equalizes the Social Security benefits of all workers. Under current laws, high lifetime earners receive larger benefits within a given birth cohort, although progressivity in the benefit formula implies that benefits are larger by less than in proportion to differences in lifetime earnings. So, if benefit growth of successive cohorts of high lifetime earners is reduced whereas benefit growth of low lifetime earners is preserved, the benefits of the former must eventually become equal to those of the latter for some future birth cohort, regardless of differences in their lifetime earnings (Gokhale, 2010, p.

272). I wonder how the conservatives would feel about everyone having the same level of benefits regardless of their wages.

Social Security 13 Ryan also claims that there will be no change for survivors and the disabled. Although his plan does not address how those programs will be funded. It is assumed that everyone would still contribute to those programs through the payroll tax system, as was done in Chile. Who Would Oversee the Program? Ryan’s plan involves governmental oversight of the possible choices of investment. “The government will select from a list of managed investment funds approved for soundness and safety” (Ryan, 2010 p. 43). This will take some of the guess work out of it for investors. There will also be a Personal Social Security Savings Board created to select additional nongovernment options for workers to choose from after they accumulate more than $25,000 in their account (Ryan, 2010).

How would the switch be made from the current pay-go system to personal savings accounts without creating a larger Budget deficit? First of all, Ryan's plan phases in the personal investment component “to allow a smooth transition” Initially, workers are allowed to invest 2 percent of their first $10,000 of annual payroll into personal accounts, and 1 % of annual payroll above that up to the Social Security earnings limit. The $10,000.00 level will be indexed for inflation. After 10 years, the amount that workers can invest will be increased to 4% up to the inflation – adjusted level, and 2% above that.

After 10 more years, these amounts will be increased to 6% and 3%. Eventually, by 2042, workers will be able to invest 8% up to the inflation adjustment level, and 4% of payroll above that, for an account averaging 5.1% (Ryan, 2010 p. 43).

Based on estimates by the Congressional Budget Office, the program will be solvent with permanent and growing surpluses by 2069 without requiring general fund transfers

Social Security 14 (Ryan, 2010 p. 42). However, the independent analysis done by Gokhale comes to a different conclusion on this. Gokhale says that the creation of Private Savings Accounts would involve large revenue shortfalls for the traditional Social Security program initially, and that the Ryan proposal makes up for this by including a benefit offset for PSA participants. The offset would be that their future benefits from the traditional system would be reduced, with the amount of reduction determined by applying a ratio to traditional benefits.

Basically, these retiree’s would wind up surrendering their entire traditional benefits when they participate in PSAs except when PSA accumulations turn out to be too small to provide even post reform scheduled Social Security benefits. In such cases, the Ryan proposal provides a Social Security benefit guarantee to top off any shortfalls from PSA annuities during retirement (Gokhale, 2010, p. 276). This guarantee was made to Chile’s retirees and it subsequently created a huge draw on their countries general fund. According to Ryan, the transition will also be paid for through a tax on employees health insurance benefits.

That’s right, the Ryan reform levies payroll taxes on currently payroll tax exempt employer provided group health insurance benefits. This reform element increases the payroll tax base for both the employer and employee shares of the payroll tax for each covered worker receiving employment based group health insurance benefits. Although conservatives generally reject tax increases for fixing Social Security’s finances, Ryan feels this particular tax increase on workers is justified as a restoration of the original intent of the payroll tax. This tax was first levied on total worker pay at a time when the distinction between wages and total compensation was negligibly small.

Non taxed benefits in employment contracts have since increased considerably as employers sought to minimize employment costs and employees to maximize total after tax compensation. As a result, the share

Social Security 15 of group health benefits in total compensation exceeds 10 percent today. The Ryan Social Security reform proposal reduces Social Security’s 75 year open group imbalance, much of it because of this tax increase. Estimates from the 2006 Current Population Survey of the Census Bureau suggest that between one quarter and one third of middle aged workers are covered under employer provided group health insurance. (Gokhale, 2010, p. 274) What Other Provisions Are Contained in the Ryan Proposal? The Ryan proposal also contains provisions to safeguard PSA accumulations from premature withdrawals; to allow access to a broader category of investment options once PSAs invested in relatively safe securities reach a minimum threshold value; to mandate annuitization of PSAs upon retirement to provide retirement income at least as large as post-reform scheduled Social Security benefits; to provide general revenue transfers to ensure the programs cash-flow solvency on a year to year basis; and to require that payroll taxes be reduced in future years when scheduled rates imply long-range program surpluses.

Finally, post-retirement withdrawals and annuities from PSAs would not be subject to income taxes under the Ryan reform proposal. (Gokhale, 2010, p. 276) Other benefits include that each personal account would be the property of the individual, which means that the resources accumulated can be passed on to the individual’s descendants. This contrasts with current government Social Security benefits, which are subject to reductions or other changes by Congress, and which cannot be passed on. Furthermore, Ryan says that the benefits of the personal accounts are tilted in favor of low income individuals who do not have disposable income to invest.

And, as Social Security benefits become an individual's property, the government no longer will be able to” raid” this money to pay for spending on other programs. (Ryan, 2010 p. 43)

Social Security 16 The current payroll tax and general fund would remain as the funding mechanisms for his plan until it becomes self sufficient in 2069 (Ryan, 2010). This plan purports to preserve the existing Social Security program for those who already are retired, persons now retired and receiving Social Security benefits, and those currently 55 and older. Their benefits will in fact be more secure according to Ryan, because the transformation of the program, along with other reforms in this proposal, ensures the Federal Government will be able to pay promised benefits (Ryan, 2010 p. 43).

Ryan’s plan to “Modernize” Social Security Ryan’s proposal also makes adjustments in the determination of future initial Social Security benefits that will “modernize” the program. (Ryan, 2010 p.44). What does Ryan mean by “Modernizing” the retirement age? In Ryan’s words, “When Social Security was enacted, the average life expectancy for men in America was 60 years, for women was 64. Today, average life expectancy has increased to 75 for men and 80 for women” (2007 figures). 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 which occurs under the existing policy and speeds it up by 1 year.

Once the current law age of 67 goes into effect in 2026, this proposal continues its progression in line with expected increases in life expectancy. The retirement age will gradually increase until it reaches 70 in the next century (Ryan, 2010 p. 45). He adds that the modernization of the retirement age will not affect the ability of

Social Security 17 an individual who chose 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% of the Federal poverty level (Ryan,2010). Ryan’s plan does not discuss how the policy’s effectiveness will be measured other than to make the program solvent .The policy is meant to ensure solvency for the next 75 years at least (Ryan, 2010) The underlying assumptions behind Ryan’s plan include; that the Stock Market will do well over the long term and that his plan will reduce Social Security’s reliance on the General Fund to cover shortfalls and that the system will become self sufficient and provide more money for retirement.

The social vision of having privatized accounts replace our current system is to "offer working Americans new opportunities to build personal wealth while asking them to take greater responsibility for financing their retirement. They would convert Social Security from an entitlement based on the promise that everyone can consume more than they produce, to a system that promotes savings, investment and greater economic self-reliance” (Marshall, 2005 p. 66). The central arguments for privatizing Social Security include:  This proposal gives control to people to plan and manage their own retirement funds rather than risk having the government mismanage the program and funds.

This proposal will help ensure that younger workers will not have paid thousands of dollars in taxes for benefits that simply will not be there when they retire.  . Younger and middle –aged workers will receive far more money when they retire if they are allowed to invest for their own Social Security payments. For younger and middle –

Social Security 18 aged workers, assuming even a modest 4 percent rate of return per year, they would receive almost three times more per month in Social Security benefits under this proposal.  There would be an explosion of money invested in personal retirement accounts. This money would be reinvested in emerging companies and would help stimulate and improve the nation’s economy.  This proposal has worked in countries like Chile, Argentina and Singapore. (Tanner,1996) Arguments against privatization include:  It would cost 57 trillion over the next 75 years to continue to pay for people currently receiving Social Security, and partial payments for all the people who paid into the old system.

This proposal would really only benefit wealthy people. They will have more money to invest; they will know more about where and how to invest the money.  Because the money will be invested in stocks and bonds, Wall Street firms will make billions of dollars as all the new money flows into retirement accounts (Tanner,1996). But Do We Really Need to Make Such Drastic Changes? Some people are saying that there really is not a crisis at all. Paul Krugman, in his article called “No Crisis in Social Security” claims that “that there isn’t a crisis in Social Security and that those who are claiming that there is are using bad faith accounting in which surplus Social Security money that has been accumulating for a quarter century doesn’t count, while future Social Security deficits are unacceptable because some feel the program has to stand on its own.

He feels ideological differences are behind this push to

Social Security 19 privatize the system. “Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution (Krugman, 2010, p. 2). Would Ryan’s Plan, as Described, Really Solve Social Security’s Solvency Issue? Stephen C. Goss, the Chief Actuary of the Social Security Administration, analyzed Paul Ryan’s plan and concluded that; Under these plan specifications, the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2009 through 2083.

The proposal meets the long-range criteria for sustainable solvency and would be expected to remain solvent for the foreseeable future. Special General Fund transfers are expected to be needed under the plan in years 2037 through 2056. However, the total amount of these General Fund transfers in present value dollars is expected to be offset by special transfers to the General Fund during the Trustees Report plus additional assumptions described below (Goss, 2010 p.2) To summarize, Goss states that if the Stock market performs well over the next 75 years, and if people are lucky in their investment decisions, if the new health insurance policy has little effect, and if persons don’t live any longer than they do now, Ryan’s plan could work to insure Social Security’s solvency (Goss, 2010 p.2,13,14,18).

That’s a lot of “ifs”. Ryan’s Policy Is Designed to Foster Change More specifically, the plan proposes to get people to take responsibility for their own retirement needs, and to send the Social Security dollars to the Corporate and Financial industries so they can make more money and stimulate the economy. It will also foster social change, but not in a desirable way, but by gradually increasing the maximum benefit retirement

Social Security 20 age to 70. His plan also proposes the continuing “modernization” of the earliest eligibility age from 62 to 65.Changing the eligibility age will force people to work longer whether they are able to or not. “Advocates of delayed retirement claim that they are merely trying to provide incentives for people to choose continued employment over Social Security” (Carson,2010,p.2) But forcing people in that age group to work is cruel at worst and mean at best because, realistically, many cannot choose to work. Many work blue collar jobs, their bodies are failing them and they don’t have the energy levels anymore.” Forty-five percent of workers over age 58 work at jobs that are physically demanding or have difficult work conditions” (NCPSSM, 2010, p.

23). And, Social Security is already full of incentives for those who can choose. Continued work produces higher benefits by virtue of a deferred retirement credit for each year of delay. In the real world, technological change, surging imports or other competition, plant, office or store shutdowns, layoffs, an individual’s health, the health of one’s partner or parent, or the absence of local or regional job prospects often force that determination (Carson, 2010, p. 2). This proposal offers no amelioration of these dire circumstances. Rather, as President Obama noted, the “ownership society” really means “you’re on your own” (Carson, 2010 p.2).

Who Is Likely to Support this Policy?

According to Michael Tanner who is the Director of health and welfare studies at the Cato Institute, Republicans, young people and some minorities may support the policy (Tanner, 1996). However, the House Republican leadership has been reluctant to formally embrace, Rep. Paul Ryan’s “Roadmap for America’s Future,” because some feel it’s too radical and ridiculous

Social Security 21 (NCPSSM, 2010, p. 18). Now that they control the house, and Paul Ryan may become the Chair of the Budget committee, it will be interesting to see if they will try to push it through Congress.

In 1996 approximately two-thirds of voters said they would support privatization of Social Security and more than three-quarters of younger voters supported privatization (Tanner, 1996 ). It is unknown how many would support it now, mainly because of the potential start up costs. According to the AARP, many young people want something done to insure that the program will be there for them when they retire. A survey, which polled 1,206 people by telephone between Sept. 24 and Oct. 10, 2010, found that only job creation trumps protecting Social Security on a list of issues important to voters age 40 and over.

This group views the future viability of Social Security as more critical than cutting the federal budget, reducing health care costs or lowering taxes for the middle class. Almost half said they would be willing to pay more in Social Security taxes to ensure that they got all their benefits. 39 percent mentioned protecting Social Security as their first or second issue of personal concern. 54 percent think the average Social Security check, at $1,168 per month is too low. The poll showed that Social Security benefits represent an important component of economic security for many older Americans, not just for low-income citizens.

(Zielenziger, 2010) How Would We Fund This Plan for Reform?

The likelihood of funding for this plan to reform Social Security at this point in time is low. We already have a budget deficit in the trillions of dollars. The Republicans know this so are trying to package it to appeal to younger voters. ”Obviously, convincing Americans they don’t need Medicare and Social Security will be an especially tough sell these days, as Americans continue to suffer in this recession, so this time GOP leaders are wrapping their

Social Security 22 proposals in the best marketing PAC money can buy. They claim privatization and ending Medicare are “innovative” and energetic” proposals offered by a “new generation” of leaders.” Paul Ryan is one of the new generation of leaders they are referring to.

Is the Switch to Privatized Social Security Accounts Feasible Right Now? While the Social Security Administration has reviewed Ryan’s policy and said it was feasible to insure solvency given several assumptions prove true (Goss,2010), The budget deficit at this time is too huge to make the switch without drawing from the general fund and making the deficit much larger. Since spending was the main complaint of the Republican party in this last election, they would be hard pressed to suddenly advocate for spending to start this program.

Furthermore, while the policy sounds good on its face, the relatively fresh memory of the 2008 Stock Market crash may make it difficult to sell to most of the American people. The financial meltdown of 2008 dented many people’s stock portfolios and 401k retirement plans. And in fact, other countries have tried privatization with disastrous results. For unintended consequences, I thought it made sense to take a look at a country that has already made the switch to private accounts. I chose the country of Chile because they transitioned 29 years ago, which means they should be paying benefits to those who made the switch about now.

Chile’s Privatized Pension System Chile adopted a private pension system that began covering new workers in 1981. (C.B.O. 1999) Many of the same promises Ryan is making to Americans, were made to workers in Chile before they switched to privatization of their retirement program. The biggest selling

Social Security 23 point being that they will have more money for their retirement if they invested in the Stock market. Chile’s private savings program is very similar to what Paul Ryan proposes, but in addition to diverting money to private savings accounts, workers had to continue to contribute to disability and survivor insurance.

Like Ryan’s proposal, Chile also has a minimum Pension guarantee. This means that they would receive a transfer from the government that raised their pension to that minimum if the worker did not set aside enough. General fund revenues would be used to meet that guarantee. (C.B.O., 1999) Workers who decided to switch to the new system received “recognition bonds” from the government to compensate them for contributions they had made under the old system. The bonds are credited to workers personal accounts when they retire. Ryan’s plan also includes a similar system for giving credit for what has already been paid into the system for those who want to switch (C.B.O., 1999) Chile paid for the transition costs in three ways: raising tax revenues, reducing spending, and selling government assets.

Shortly after the reform the governments’ budget showed a deficit. The fiscal costs of the transition peaked at 4.8 % in the early years of the transition, and started to fall in 1988. The costs of paying the benefits to those who stayed in the system are significantly larger than the cost of recognition bonds. The U.S. could also experience these fiscal costs in the early years of the transition (C.B.O. 1999).

Private investment companies manage the individual retirement accounts. Fees and commissions include the cost of administration, marketing, sales, and the company’s profit. Because of the company’s commissions and fees, the very high rates of return of Chilean pension funds-averaged 12.7 percent in real terms between 1981 and 1995-have not yielded equally high

Social Security 24 rates of return for account holders.” Chilean workers who invested their money in an AFP in 1981 have received an internal rate of return of 7.4 percent on that investment through 1995.” “Additional costs arise if retirees decide to annuitize their retirement savings.”(C.B.O.1999 p.23) Retirees pay additional commissions when they choose to purchase an annuity.

Commissions for annuity brokers were between 2% and 3.5% of premiums in the later 1980s and early 1990s. (Rohter, 2005) Private investment companies benefited from the switch in Chile, I imagine this will be the case in the U.S. as well.

How Has It Worked Out for the Chilean Workers Who Switched to the Privatized System? A follow up article about Chile’s privatization written in 2005 indicates that the system is not working out very well for them. Nearly 25 years ago, Chile embarked on a sweeping experiment that has since been emulated, in one way or another, in a score of other countries. Rather than finance pensions through a system to which workers, employers and the government all contributed, millions of people began to pay 10 percent of their salaries to private investment accounts that they controlled. The promise was that such investments, by helping to spur economic growth and generating higher returns, would deliver monthly pension benefits larger than what the traditional system could offer.

But now that the first generation of workers to depend on the new system is beginning to retire, Chileans are finding that it is falling far short of what was originally promised. For all the programs success in economic terms, the government continues to direct billions of dollars to a safety net for those whose contributions were not large enough to ensure even a minimum pension approaching $140 a month. Many middle class workers who contributed

Social Security 25 regularly are finding that their private accounts-burdened with hidden fees that may have soaked up as much as a third of their original investment, are failing to deliver as much in benefits as they would have received if they had stayed in the old system. (Rohter, 2005) They give the example of a man who is a 66 year old laboratory technician who plans to retire in March because of a recent heart attack. He earns just under $950 a month. His pension fund has told him that his nearly 24 years of contributions will finance a 20 year annuity paying only $315 a month. His colleagues and friends with the same pay grade who stayed in the old system are retiring with pensions of almost $700 a month-good until they die (Rohter, 2005).

Has Chile’s Privatization Become Self Sustaining?

Larry Rohter says that “Overall, Chile has spent more than 66 billion on benefits since privatization was introduced. Despite initial projections that the system would be self sustaining by now, spending on pensions makes up more than a quarter of the national budget, nearly as much as the spending on education and health combined” (Rohter, 2005, p. 3). The problems have emerged despite an average 10 percent annual return on investments. “Those results have been achieved by the pension funds largely through the purchase of stocks and corporate and government bonds-investments that helped fuel an economic expansion giving Chile the highest growth rate in Latin America over the last 20 years” (Rohter, 2005, p.

3) Rohter goes on to say that: What we have is a system that was good for Chile but bad for most Chileans. If people really had freedom of choice, 90 percent of them would opt to go back to the old system. Contributors are forced to pay exorbitant commissions to the pension funds. Estimates are that a quarter to a third of all contributions paid by a person retiring in 2000 would have gone to pay such charges. Another problem is that the lengthy quarterly financial

Social Security 26 balance sheet they receive is not comprehensible. It needs to be replaced by a simple and transparent financial statement so workers can determine with fund charges the lowest fees. Because many of the claims initially made on behalf of the privatized system proved exaggerated or inaccurate, the transition period has turned out to be longer and more expensive than anticipated (Rohter, 2005, p. 5) For those remaining in the government’s original system, the maximum retirement benefit is now about $1250 a month. It was calculated that to get that same amount from a private pension fund, workers would have to contribute more than $250,000 over their careers, so far fewer than 500 of the private system’s 7 million past and present contributors have been able to reach that amount of savings.

There is now an Association of People with Pension Damage in Chile that has 157,000 members. (Rohter, 2005) Are There Safer Options We Can Take to Assure Social Security’s Solvency? A new Report by the U.S. Senate Special Committee on Aging offered some other options that could close the projected long term gap without cutting benefits (Bethell, 2010). For example:  Lift the cap. Earnings above $106,800 aren’t currently taxed to support Social Security. The cap inches up year to year based on increases in average wages, but raising it more would have minimal impact on high earners while closing much of the projected gap.

This is the proposal “Candidate Obama” made.  Raise the payroll tax rate, but very gradually, such as by 1/20th of a percent each year for workers and employers over the course of 20 years.

Social Security 27  Extend Social Security coverage to more workers, including newly hired state and local government employees. This would bring more tax revenue through the door.  Earmark revenue from the estate tax for Social Security.  Bolster Social Security’s reserves by diversifying its trust fund beyond government bonds to include higher yielding commercial investments. Contrary to popular belief, the sky is absolutely not falling for Social Security says Sen. Herb Kohl, D-Wis., who chairs the Special Committee on Aging. With modest changes, we can ensure solvency and even strengthen benefits for those who count on their monthly check the most (Bethell, 2010 p.4) For another alternative, I looked to the AARP.

The AARP believes that any changes to our present Social Security system must ensure that:  You will receive the benefits you’ve earned over a lifetime of hard work if you pay into Social Security.

Your Social Security benefit will keep up with inflation for as long as you live.  You will receive a benefit if you become disabled and can no longer work.  Your family will be protected if you die. They believe that taking some of the money people pay into the system and diverting it into private accounts is a bad idea because; Less money would then be flowing into Social Security, so the guaranteed and inflationadjusted lifetime benefits would be put at great risk for cuts. And any new private account would be subject to the risks of the market. The risks have been significant over the past few years.

Private accounts can lose money just as fast as they make it. And, unlike the current program, with money invested in the markets, you run the risk of

Social Security 28 outliving your savings and lose the protection against inflation. Further, private accounts are expensive. Most of us would have to pay twice to create this new system, first to keep our commitments to current retirees and again to pay into the private accounts. (AARP, 2010b p. 3) The AARP only opposes private accounts that are financed out of the Social Security payroll contribution. They support people having additional retirement savings. They claim that on average, an individual would have to save $225,000 while working to replace the benefits Social security provides in retirement (AARP, 2010b).

The Social Security trustees-the official body charged with evaluating the programs longterm finances-project that Social Security can pay 100 percent of promised benefits through 2037 and about three-quarters of scheduled benefits after that, even if Congress makes no changes in the program. They claim that relatively modest changes would put the program on a sound financial footing for 75 years and beyond (NCPSSM, 2010, p.7). Why Not Just Compromise and Have the Government Invest the Social Security Funds?

The people proposing privatization, the conservatives, do not want the Federal government to invest the money because “Government investment would allow the Federal government to become the largest shareholder in every American company, posing a potential threat to corporate governance and raising the possibility of social investing.

And government, not workers, would still own and control retirement benefits” (Tanner, 2004, p. 6). And conservatives are against government control of anything that stands in the way of them making a profit.

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