Retirement Pensions and its Reforms in the U.S.
by Johannes Widmann
1. Why Mr. Scully doesn´t want any reforms
Detroit will cut employee wages and health services, stop updating equipment like police cruisers and reduce health benefits, if the federal government‘s proposals for Social Security reform take place, Mr. Scully, a retired police officer in Detroit, fears (see: Anderson). Why would the city be forced to take such dramatic measures? Because one proposal to save the U.S. retirement system wants to include those who are exempt under the present system. Those are an estimated 5 million public employees --also exempted are older federal workers, ministers and some college students-- with their own retirement plans. They were originally kept out of Social Security in its inception during the Depression in 1935 out of concerns about the constitutionality of forcing state and local governments to spend payroll tax. Since state and local governments were first permitted to join in 1950, about three quarters of public employees are now covered by Social Security instead of their own retirement plans, which offer much better benefits than does Social Security. Mr. Scully, for example, who belongs to the still exempted quarter, gets benefits equal to half of his final annual police salary plus health coverage, and he paid in less while working. That´s why he and many of his colleagues prefer their programs to Social Security.
2. Why even reform the retirement pensions in the first place
The inclusion of the public employees in Social Security would mean that they and their employers would each pay the 6.2 percent payroll tax --just like 148 million other workers and their bosses in the U.S.-- to the Social Security Trust Fund. In 1999 this federal Fund pays an average of $1,310 a month to each eligible retired worker over 65 and his or her spouse (source: Anderson). A married low wage earner whose spouse did not work gets about 85% of his or her former wages, a married high wage earner about 38% (source: Holtfrerich, 115). The inclusion of the public employees would raise about $11.3 billions over five years. The Social Security Fund always had and still has a strong surplus, which even serves to balance the federal budget (see the paper by Simon Gajer on "The balanced budget and Social Security"). But the U.S. society is getting older. The retirement of the baby-boomer generation and the overall increasing life expectancy will increase costs for retirement pensions. More retirees will demand increasing cash flow in the future. The ratio of workers per beneficiary, today 3.4, is expected to be 1.8 in the year 2075 (see chart). Social Security’s returns are nearing zero for new retirees and, starting in 2013, taxes won’t cover benefits. The program is expected to become insolvent by about 2032 (source: The Economist, 57). The $11.3 billion which would be earned by inclusion of the state and local public employees would be enough to buy roughly two years of solvency for Social Security. Because this inclusion doesn‘t seem to provide a long-term method for saving the biggest government benefit program from bankruptcy, the debate focuses on other proposals.
3. What are the main proposals?
In 1983 there already was a debate over Social Security,
mainly about cutting benefits or raising the eligibility age. In
today´s debate, politicians are searching primarily for ways to
generate more benefits. The core of the debate addresses the
question of whether or not to use lucrative stock markets in
order to produce higher revenues. Should Wall Street be used to
save Social Security? The average annual return on stocks over
the past century has been about 7% after inflation (source:
Glassman, see chart). The proponents of privatisation of
retirement pensions (mainly Republicans, conservative policy
groups, the American Bankers and the Securities Industry group)
argue that while short term stock market investments can be
risky, long term investments, such as retirement investments, are
not. The Clinton administration as well is considering saving
Social Security with stocks. Due to the fact that this reform
poposal consists of ideas, traditionally in the hand of
conservatives and anxiety at the Democratic party over giving up
old principles, the Clinton administration does not get tired in
emphasizing, that they will work out a solution that will
"lean on Wall Street without sacrificing the program’s
guiding principles" (Goldstein/Hager).
Until now a team of economic advisers in the White House has been
concentrating on five potential reform plans, all of which rely
on the stock market. The greatest variation among the plans
concerns how much they rely on Wall Street and who takes the
responsibility for investing, the government or individuals.
Three plans propose shifting some of the Social Security taxes
into individual retirement accounts (IRAs) and either requiring
or allowing people to invest the money personally on the Stock
market. For example the Feldstein plan, supposedly a Clintons
favorite, would use the budget surplus to let the people invest
an additional 2% of their income (Goldstein/Hager show a list of
all the five plans in detail). The remaining two proposals allow
the Trust Fund to place a portion of its reserves on Wall Street.
In other words: Uncle Sam buys stocks.
4. Voices against privatization
Labour, civil rights and liberal groups which strongly oppose the plans of IRAs argue firstly that private ownership would completely alter the relationship between government and the individual. Secondly they say that as affluent people discover that they can make more money on their own, they could create pressure to break up a unified system of redistribution between wealthier and poorer people. Another argument is that with fewer dollars to invest, minorities are generally more dependent on Social Security when they retire. Besides the "unfairness" of the risk involved would be too big. Aside from the fact that more than 50% of Americans do not know the difference between an equity and a bond (The Economist, 58), the program will depend on the ups and downs of the market, which means that people who invest during a boom time will be better off than those who invest during a slump. Jesse Jackson put all the arguments together in the sentence: "Privatization is pro-market, but anti-security, anti-worker and anti-family" (see: Gordon). The opponents of the privatisation also receive their arguments from comparisons with other countries. In Britain, which allowed its citizens private investment accounts in 1988, people lost billions from unsuitable investment pushed by high pressure sales people (see: Gordon). Furthermore, brokerage and administrative fees and charges for converting the savings into annuity accounts would eat up a good deal of the projected high returns, as was the case in Chile during its transition to a privatised pension system (see: die tageszeitung). Most of these voices which oppose a privatized retrirement system in the U.S. would not oppose allow the government to invest on Wall Street. However, this proposal is strongly refused by conservative and business groups.
5. Uncle Sam on Wall Street?
The opponents of this proposal have several arguments. First of all, to allow Uncle Sam to buy stocks and to allow Washington to become a major shareholder in U.S. corporations could undermine the system of free enterprises and could lead to political manipulation. Some of the proposed plans prohibit investment in firms that fail to meet foreign policy or that sell cigarettes or alcohol (see: Glasman). Secondly one proposal would allow the goverment to invest 40% of the Social Security Fund (according to Gordon about $3 trillion) on the Stock market, which would represent roughly half of the total value of stocks traded on the New York Stock Exchange. They also argue that politicians would be unable to resist interfering. A study of smaller state-employee plans done at Yale University showed that money is often directed to "social investments" or local companies with lobbying clout. Another study showed that between 1968 and 1986, public pension plans earned less than leading market indexes (source: Glassman). Last but not least a survey of the Democratic Leadership Council magazine shows that 67% of the Americans favor personal accounts while only 21% favor government investments (see: Glassman).
6. "Hope I die, before I get old " (The Who)?
The failed attempt, concerning the 1983 reform, showed that "the sacred cow" (Holtfrerich, 116) of retirement pensions can only be touched if there is a broad consensus among the acting parties. The ongoing impeachment trial of president Clinton and the fact that there is no immediate crisis in the program increases the likelihood of conflict and inaction in the U.S. legislature (see: Rich 1998b). As shown above, many Republicans would not accept a Social Security reform bill that excludes private accounts. But Democrats and labour groups say the market is too risky and workers could be left high and dry if they made bad investments, or happened to retire during a downturn period. Given these fundamental conflicts, a very high degree of trust between Democrats and Republicans will be needed to reach an agreement. Democrats, the creators of Social Security during the "New Deal" have succesfully beaten Republicans down for years with charges that they wanted to cut back Social Security. Gun-shy Republicans want a political guarantee that any proposal they suggest as part of an effort to save the program will not be held against them in future election years. In his impeachment trial, Clinton will have to rely on liberal Democrats in Congress, the very people who strongly dislike Social Security privatization proposals to support his case, which doesn´t leave the president with much room to maneuver. The American people seemed to know all of this long beforehand: "According to a 1994 poll, Americans under thirty-five are much more likely to believe in UFOs than to believe that they'll ever receive Social Security benefits" (Peterson).
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