News > March 10, 2005

Who Benefits?

The big winners of Private Investment Accounts

By Jack Rasmus

Treasury Secretary John Snow.

George W. Bush’s plan to privatize Social Security has nothing to do with enhancing workers’ retirement income. Rather, it is a scheme to redistribute money from the majority of people who work to the minority of people who own the banks and brokerage firms.

The vehicle for enabling the fundamental transformation of Social Security—and transfer of wealth—is the Private Investment Account (PIA). PIAs will allow current participants in the Social Security program to divert up to 4 percent of their present 12.4 percent payroll tax deduction going to the Social Security Trust Fund and invest it in individualized 401(k)-type accounts managed by private financial institutions.

Diverting that percentage of payroll taxes to PIAs will generate what are called “transition costs” of around $2 trillion over the coming decade. Social Security is a “pay as you go” system, with those working contributing via payroll taxes to provide benefits for those currently retired or disabled. Since Bush has already stated that “the one thing I’m not open-minded about is raising the payroll tax rate” (which would cover the projected shortfall), the only alternatives are either to cut Social Security benefits for future and/or current retirees, or to borrow money in public markets by selling Treasury bonds.

The Bush administration is using the concept of PIAs to sell the whole idea of privatization to the public. They claim that the accounts will result in greater net income at retirement. But will the public really benefit from diverting their Social Security money into PIAs? As they say in financial circles, “let’s do the numbers.”

To begin with, the historic long run net return on T-Bonds in the Social Security Trust Fund, adjusted for inflation, is around 3 percent. In order for participants to do better by diverting their payroll taxes, they would have to earn more than 3 percent after inflation by investing in stocks in their PIAs. But the rate of return on stock investments may average zero percent or less for years or even decades, as it did between 1901-1921, 1928-1948, or 1962-1982. In normal periods, stocks average 3.7 percent annual returns over the long run, only 0.7 percent more on average than returns in the current system.

A February 4 study by the Center on Budget and Policy Priorities paints an even darker picture. A worker retiring in 2042 after having earned average compensation would ordinarily receive about $20,000 a year in Social Security benefits. If nothing at all were done to offset a Social Security Fund shortfall due in 2042, and all future benefits were paid to that worker out of payroll taxes at the time, that worker would still receive approximately $18,000 in benefits. With the Bush plan, that same worker would have his benefits reduced to less than $15,000 a year, according to the center’s analyses.

So who are the real winners here? The answer is clear: Big Finance.

Congress has already used $1.6 trillion of the Social Security surplus over the last 20 years to cover the general U.S. budget deficit. The diversion of payroll taxes to PIAs means that, at minimum, another $2 trillion would be diverted from the Social Security Trust Fund. The banks, Wall Street brokers, insurance companies, mutual funds and other financial institutions that will manage and manipulate the PIAs will directly benefit. Those financial institutions will charge administrative fees of typically around 2 percent, not to mention a variety of other related charges, such as when a participant switches from one PIA fund to another, leaves or re-enters the workforce or arranges for annuities at retirement.

But the biggest gains to financial institutions will come not from fees but from the interest they’ll charge for financing the federal government’s borrowing of $2 trillion transition costs. Treasury Secretary John Snow has already indicated that the Bush administration will offer Treasury Bonds to the big financial institutions at above normal rates of interest. Even more potentially lucrative are the revenue and profit streams from reinvesting the several trillion dollars worth of PIA funds they will manage.

Bush and his advisers know they could correct the alleged $3.7 trillion shortfall by 2042 (or 2052) without introducing PIAs, through modest increases in the payroll tax for wealthier taxpayers; an extension of the estate tax, currently scheduled to expire after 2009; or simply reversing Bush’s projected $11 trillion tax cuts for millionaires through 2042. But the administration’s objective is just the opposite—to dismantle Social Security as we know it and replace it with a totally privatized retirement system that benefits corporate interests.

A longer version of this article can be found in his book The War at Home: The Corporate Offensive from Reagan to Bush.

• subscribe to print magazine

  First Name Last Name Home Address City State Zip Code Email

  2-year, 24-issues, $44.95 1-year, 12-issue, $24.95

• stay in touch with our email newsletter

  Subscribe to our regular weekly e-mail newsletter. It's packed with updates on recent and upcoming stories, events, campaigns and things every progressive should be informed about.

   

• email this article to a friend

  Your Name Your Email Recipient Email

  Personal message Thought you might be interested in this article from In These Times.

   

  Please help us prevent spam by verifying the word you see in the image above

  Send to multiple recipients. Just separate each email address with a comma.

• Reader Comments

  Credit card companies opened the 30 percent interest casino – inviting high risk debtors – in the mathematical expectation that they would make more money on 30 percenters than they ever will on “straight” credit card holders – and they found out they were right.

  The author of “The Two Income Trap spent all day giving a seminar to Citibank on how to cut its mortgage default rate in half – only to be told after all: “We have no intention of not making loans to those people; we make money on those people.”

  If American finance wants to leave behind the old world of conservative loan practices to cash in on the higher risk arena – bless their sophisticated foresight – but the law of the land need not be pressed into service to reel in even more loans that went bad in the
  lenders’ chosen high-fast game.

  Posted by Denis Drew on Mar 10, 2005 at 11:01 AM

  If this were an American phenomenon, then I’d understand the belief that the attack on social security can be stopped.  However, the equivalent of Social security is under attack in dozens of countries all over the world, by governments of the right and the left.  The welfare state is being systematically dismantled globally. 

  Since the beginning of the year, several hundred thousand people have demonstrated in Russia against government measures aimed at dismantling the existing benefits available to retired people, the sick, or certain state employees. The state will no longer provide free basic medicine and medical treatment, public transport or reductions in the price of phone calls or rents. In Germany, the period in which you can get unemployment pay has been cut from 36 months to 18 for the over 55s and to 12 for the rest; this at a time when unemployment has risen above 5 million (13%).

  In Holland and Poland the governments are taking similar measures, following in the wake of the French and Austrian governments who, in 2003, ‘reformed’ the system of pension payments, adding several years to people’s working lives. The French government continues with its attacks on social protection, while the British government also intends to force more and more categories of workers to carry on toiling until they are 65 or even 70.  In all the industrialised countries the welfare state is on the verge of collapse.

  These governments have NO CHOICE, because it is CAPITALISM that is bankrupt.  The economic crisis is laying bare all the contradictions of capitalism, and revealing the impossibility of finding a solution to them. Too many commodities are being produced; the world market is glutted. The bourgeoisie’s need to make profits in order to avoid bankruptcy is increasing rivalries between the main industrial countries. The result is an open economic war where the prize is to grab the markets from your rivals. This in turn leads to the desperate search to lower production costs. The only way to do this is to attack the working class. On the one hand the bourgeoisie is trying to raise productivity through speed-ups and increasing the flexibility of the labour force, so that it can get away with employing as few workers as possible. On the other hand it is carrying out a vast programme of ‘reforms’ – i.e. attacks on the social wage: pensions, unemployment benefits, medical benefits, sick pay, and so on. NO section of the working class is being spared – older or younger generation, at work or on the dole, public sector or private sector. The consequence of these attacks is a general degradation of living and working conditions for the whole international working class. The ferocious exploitation imposed on the workers leads to a general decline in health at the very time it becomes more difficult to get medical assistance; workers who have looked forward to a period of rest after years of wage slavery see these hopes threatened by the retirement age being raised and pension payments being lowered; younger workers face the problem of precarious employment, going from one job to the next with wage levels always being pulled downwards, all this interspersed by periods of unemployment on reduced benefits. Finding accommodation and putting something away for retirement becomes increasingly difficult.

  The attacks are not going to stop there - they are going to get worse. It is a GLOBAL phenomenon. This is why the working class has to become aware that the system is indeed bankrupt and that the solution lies not in reforms, or a change of government, but in a change in the very basis of society.

  Posted by Maximillian Al Dakari on Mar 10, 2005 at 1:37 PM

  “In normal periods, stocks average 3.7 percent annual returns over the long run, only 0.7 percent more on average than returns in the current system.”

  I don’t know where this “data” came from, but it is wrong. Stocks average about 11% growth per year and have for over a century (see Stocks for the Long Run or any economic text). This amounts to about 7-8% after inflation,

  Allowing people to handle THEIR OWN MONEY makes about as much sense as allowing them to OWN THEIR OWN HOUSES - and we all know what a failure that was! :)

  Posted by facts on Mar 10, 2005 at 2:23 PM

  That is a very dire outlook, probably true.  I also see that this is becoming a global situation.
  I have posted numerous times on the Social Security issue and I have expressed concern with my state senators and district congressman.  I don’t think the will of the people is being considered.  The Bush agenda is being steamrolled, and I hope Congress won’t roll over and die on this.  What is with this bottomless well of greed? Political propaganda is beating on Social Security mercilessly with lies, lies, and more lies. 
  Perhaps economies need to change before a collapse, but right now we are being driven into debt by the most fiscally irresponsible U.S. administration ever.  It’s not too late to take a nose dive over the cliff if Congress would develop a backbone and serve the people instead of the fattest wallets.

  Posted by pick of the litter on Mar 10, 2005 at 2:38 PM

  Apologies folks; I seem to have patched in the wrong response with my credit card bit reply to the S.S. privatization story.

  :-] <sheepish grin

  I MEANT TO SAY that privatization requires the gov to overextend by borrowing (even more?) trillions, thereby taking a chance we CANNOT afford on causing the entire economy to melt down—all for the sake of lending money to buy stocks to folks who CAN afford to take the chance on their retirement precisely because they are otherwise so securely situated finacially.

  Denis Drew

  Posted by Denis Drew on Mar 10, 2005 at 2:50 PM

• extended discussion >>>Continued...

  Discussions with more than 5 comments are continued on our special discussion page to encourage continuity and ease of use. There are currently 57 posts.

Member Login

Also by Jack Rasmus

• Crash Landing
  United Airlines' ditching of this pensions may well precipitate a national crisis
• Who Benefits?
  The big winners of Private Investment Accounts