February 2005 Home   Newsletters

March 2005

May 2005

President's Message (Jackie Parnell)
Member Speaks on Social Security (Hal Loomis)
Transit Funding Mess (Charles Carole)
Nurse Vote Count on March 26 (Arlene Ellis)

A Member Speaks on Social Security

It is clear now that the Social Security fight is ideological. If SS is seen as group insurance, which guarantees at least a minimum level of income for retirees, then all that is needed is adjustments in taxes and benefits to sustain it. If, on the other hand, you think that individuals should take full responsibility for their family's welfare, then privatization would be your choice. Partial privatization is a step in that direction.

The first privatization step does nothing to improve the economics of SS. In fact it worsens them. The SS surplus each year (around $165 billion this year) is loaned to the operating branch of the government. Without it, other taxes would have to be raised. This being the case, why does Pres. Bush want to launch a partial privatization of SS? Apparently the ideology of privatization is more important than the tax offset.

The Social Security Trust Fund

Surplus SS funds at present add up to around $3.5 trillion and are in the form of government bonds. As a practical matter, there is only an imaginary fund, which consists of a pile of IOUs that the government has written to itself. These are worthless unless at some future time the government is willing to raise general taxes beyond current operating needs to start repaying the IOUs.

Various economists, some administration officials, and especially Paul O'Neill, then Secretary of the Treasury, were saying, "There is no trust fund," anticipating a future reluctance to tax sufficiently to redeem these IOUs. Also they like to say that SS is a "pay as you go" scheme and that the SS tax is just one more tax which, combined with other revenue sources, is used to run the government.

Are Government Bonds worth anything?

The payers of the SS tax think that they are contributing to their retirement fund. Government bonds are backed by the "full faith and credit" of the US government. They have to be repaid to the SS Administration and to every other holder of these bonds such as central banks of foreign governments, mutual funds and individuals. Drawing on the Trust Fund will push the SS crisis out decades into the future.

The establishment of private accounts out of some portion of the SS contributions does nothing to solve the SS problem. In fact, it makes the economics of the SS program somewhat worse in several ways. Interest on the privatized portion of SS would be lost and interest will have to be paid on the borrowed funds to make up for the funds privatized. This makes the economics of the US government a lot worse in that a considerable government debt will be incurred in borrowing monies to replace those assigned to the private accounts. Vice President Cheney said that Reagan proved that debt doesn't matter. However, it is beginning to appear that continuing and cumulating debt does matter.

Aside from the ideology, is there anything to be said for permitting a portion of the payroll tax to be diverted into a private account? For one thing, regardless of the time of death, the privatized portion of SS still remains with the estate of the holder of such an account. Furthermore, if he/she has been lucky in his investments, he/she would have more money in the end. Furthermore, this money will be his/hers and is an increment in that family's wealth. This is a practical benefit and might even have psychological effects in that the family might start thinking of themselves as being part of the ownership class. This effect might not be widespread, but any increment in that direction is a plus. Aside from the direct effect on a few successful families, the idea that ownership is possible and beneficial could spread even further which would be good.

Hal Loomis
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