International Socialist Review Issue 42, July–August 2005

The attack on Social-Security and pensions

by BILL ROBERTS

Bill Roberts is on the editorial board of the ISR.

ANOTHER MAJOR assault on American workers’ living standards is underway in what has been a relentless thirty-year one-sided class war. This time, retirement benefits are at risk—both Social Security and corporate pension plans. As President Bush made clear in his State of the Union address, and more recently in well-orchestrated and highly vetted rallies, Social Security is on his hit list.
Under the guise of promoting reforms to “strengthen” Social Security, similar to President Clinton’s safety-net shredding “reform” of welfare in the 1990s, President Bush has spent the last six months stumping hard in twenty-seven states to sell what he describes as a plan to make Social Security “viable.” Bush has attempted to create a hothouse atmosphere around the issues of Social Security by claiming that the system is in serious crisis. “The crisis is now,” warns Bush, conjuring up images of imminent collapse if something isn’t done immediately to solve it.1
The White House is proposing that the Social Security crisis be “solved” by reducing benefits and partially replacing them with privatized individual retirement accounts. Behind the recommendations of the president and his supporters is a long-held desire to undo the Social Security system as a repository for workers to keep some of the wealth they have created over time. And, as Paul Krugman has put it, the “crisis” of Social Security “is about ideology: Mr. Bush comes to bury Social Security, not to save it.”2
Bush seeks to finish what Ronald Reagan was unable to do in 1981—gut the most successful social program in American history. Opponents of Social Security are hoping to create the perception of a crisis in order to introduce schemes that will eventually overturn the Social Security system that has provided some minimal safety net for workers over the last seventy years. If successful, Medicare won’t be far behind.
If Bush thought that on the heels of his 2004 reelection he was going to have a mandate for his plans, he was wrong. To date, a significant majority is not buying his sales job. A CBS News Poll (May 20–24) shows only 26 percent of respondents “approve of the way...Bush is handling Social Security,” while 62 percent “disapprove.”3 This indicates that there is a reservoir of sentiment that could be drawn upon to organize resistance to Bush’s attack. But the Democratic Party, though critical of Bush’s plans, accept the terms of the debate, that is that the system is in crisis and needs “fixing.” As Robert Kuttner notes, “Democrats, as well as Republicans, talk of [Social Security’s] shortfall and offer different ways to make up the gap. Unfortunately, that tends to play into Republican hands.”4 The lack of any effort by organized labor’s leaders to mobilize this mass sentiment means that, in spite of Bush’s inability to sell his plans, he may still get away with, at the very least, introducing drastic cuts to the system.
Crisis? What crisis?
But is there really a Social Security crisis? Not by any reasonable standard.
Dean Baker and Mark Weisbrot in their book Social Security: The Phony Crisis start with an analogy often used by President Clinton when he addressed projected Social Security shortfalls. Speaking in the era of budget surpluses, Clinton saw the opportunity to “fix the roof while the sun is still shining.” Expanding the analogy, Baker and Weisbrot write: “Imagine that it’s not going to rain for more than 30 years. And the rain, when it does arrive (and it might not) will be pretty light. And imagine that the average household will have a lot more income for roof repair by the time the rain approaches.”5
To get a better idea of what kind of holes the Social Security roof will have as baby boomers reach retirement age, the Social Security trustees have projected thirty years into the future based on the worst-case scenario. Currently, Social Security is running a surplus of roughly $124 billion. By the time the first baby boomers begin retiring in 2008, the surplus will be at $150 billion. It won’t be until 2034, after the last boomers retire, that a shortfall will begin to appear, based on the trustees’ projections.6
The Social Security trustees (four of six of whom are Bush appointees) have projected that the fund has enough money to pay out full benefits until 2042 (revised upwards from their 1997 calculation that funds would run out in 2029), after which it would pay out 73 percent—an amount that in real inflation-adjusted terms would still be higher than what current retirees receive. These figures are based on an extremely pessimistic assessment of projections for average labor force, economic, and productivity growth rates—about 1.7 percent.7
According to the more bipartisan Congressional Budget Office (CBO), the Social Security trust fund will be able to pay full benefits until at least 2052. Even with no funding increase, Social Security revenues would still cover 81 percent of benefits after this point. As Paul Krugman notes, the expense of maintaining the trust fund is “modest.” If the CBO assessment is accurate, it means that the system is the healthiest it has been in decades, requiring one-quarter of the funds to make up the projected shortfall than the one the system faced in the early 1980s.8 Citing the CBO report, Krugman calculates
that extending the life of the trust fund into the 22nd century...would require additional revenues equal to only 0.54 percent of G.D.P. That’s less than 3 percent of federal spending—less than we’re currently spending in Iraq. And it’s only about one-quarter of the revenue lost each year because of President Bush’s tax cuts—roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.9
In short, “rolling back Bush’s tax cuts on the very wealthiest would raise sufficient revenue to cover the shortfall for 75 years.”10 Compared to the nation’s ballooning government debt and trade deficit, Social Security looks like an unmitigated success. Of course, Wall Street bankers salivating over the profits to be made on private accounts don’t see it that way. Indeed, if the purpose is to dismantle Social Security, a social program once considered untouchable, the last thing that its critics want is for it to be a success story. As Baker and Weisbrot point out, “most of the people who say they want to fix the roof actually want to knock holes in it.”11
Bush’s privatization plan
Bush’s proposed “solution” to this non-crisis will, in reality, make it worse. The plan calls for voluntary personal accounts for younger workers that would insure a better retirement than Social Security alone. This plan, it should be understood, involves drastic cuts in Social Security payments. According to a study by Baker and David Rosnick,
The proposal that President Bush is using as the basis for his plan phases in cuts over time. A worker who is 45 today can expect to see a cut in guaranteed benefits of around 15 percent. A worker who is age 35 can expect to see a cut in the guaranteed benefit of approximately 25 percent. A 15-year-old who is just entering the work force can expect a benefit cut of close to 40 percent. For a 15-year-old, this cut would mean a loss of close to $200,000 in Social Security benefits over the course of their retirement.12
These reduced benefits will, it is argued, be more than offset by the new private retirement accounts. Indeed, those who favor the private road to “retirement riches” insist that if a young worker would invest just 5 percent of his Social Security payments in stocks he could retire a millionaire.
This crapshoot logic is based on using the last seventy-five years of stock market returns and projecting them forward into the next seventy-five years. But when these same would-be reformers apply this method to the Social Security fund, the rate of growth is cut in half.13 What about a recession and financial market losses instead of gains? As every mutual fund is careful to note in its prospectus, “Past performance is no guarantee of future returns.” What if the market collapses, as it did in 2001? Will there be a cushion for those subjected to bad markets? Or will they be out of luck because their life span didn’t fall within the fat years?
Privatizing Social Security might produce less retirement money for individuals, not more. A Wall Street Journal study noted that company managed pension plans have done better than 401(k) (individually managed) pension accounts by 0.46 percent annually. “Over 30 years, a $100,000 investment would generate $88,000 more in a pension plan than in a 401(k) account.”14 And according to Baker and Rosnick’s calculations,
A 15-year-old can expect to make back approximately $9,000 from the $200,000 cut with the earnings on a private account. If this worker retires when the market is in a slump, then it could make their loss even bigger.15
Moreover, what happens to the current retirement generation? If younger workers are taking funds out of the system (in the form of private accounts) that would have gone to pay the benefits of the current retirees, where will those benefits come from? Bush has promised to continue to pay current benefits (some of his advisers have hinted cuts will be necessary), which means the government would have to make up the difference estimated at $1–$5 trillion. This estimate has caused some in Congress to urge caution.
Never mind, privatization advocates are already busy establishing their bait-and-switch schemes to allay these fears. Their argument goes like this: borrow $1 or $2 trillion today to set up private accounts which will be so successful they will erase the debt forty years later. If you dream of money in the future it is not a debt today—and voila, no budget deficit. As any Enron worker will attest, this off-the-books accounting is just what cost them their retirement.
We don’t have to wait twenty-five years to see if Bush’s plan is sound. Several countries have already gone down the privatization road and the results are worrying. Chile, for example, a country Bush has lauded as “a great example,” introduced privatized accounts twenty-five years ago. A recent New York Times article points out “now that the first generation of workers to depend on the new system is beginning to retire, Chileans are finding that it is falling short of what was originally advertised under the authoritarian government of Gen. Augusto Pinochet.”16 The Chilean model was part of a package of market and monetary reforms recommended by the Chicago School of free-market economists headed by Milton Friedman, whose disciples now advise the Bush team. The system has been profitable, generating 10 percent profit rates, but not for retirees. The article continues:
Even many middle-class workers who contributed 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.17
Bush’s plan to privatize a portion of Social Security for younger workers will exacerbate the problem of the fund’s long-term solvency. As Paul Krugman points out, the Bush plan to fix Social Security is part of a larger plan proposed by conservative politicians “to starve-the-beast” and make social spending less possible. Krugman describes this “bait-and-switch strategy: First, advocate tax cuts using whatever rationale you think might work—supply-side economics, inflated budget projections, whatever. Then use the resulting deficits to argue for slashing government spending.”18
So who benefits? This huge transition expense will in essence be a subsidy for the investment industry eager to get its hands on workers’ retirement money where it can collect fees for managing the individual accounts. One estimate puts the windfall to the financial industry at $80 billion in the initial phase of setting up private accounts.
Background to the attack
The Bush initiative to “reform” Social Security “as we know it” has its roots in three decades of attacks on wages, benefits, and social spending. Social Security is the last major entitlement that millions of workers fought to win in the 1930s. It was a major part of the price that capital and its representatives in government, from President Roosevelt on down, determined they would have to pay to achieve labor peace and put capitalism back on track.
Social Security has been an entitlement target of the right wing ever since. President Reagan introduced privatization and benefit cuts in his first administration, but Congress, afraid to touch the “third rail of American politics,” modified his efforts. The Senate passed a resolution—96–0—to reject any attempt to cut benefits and “to preserve the integrity of the system.”19 Using the cover of this resolution, Congress went on to raise workers’ taxes (employers pay an equal percentage, which is treated as a business expense) as well as extend the age of retirement to sixty-seven years—in effect a benefit cut. Wealthy wage earners were exempted from any taxes above the current $90,000 cut off.
In 1981, politicians of both parties paid lip service to maintaining Social Security without major changes. To protect elected officials, a special commission was established to make recommendations. Still, touching this “third rail” remained politically risky.
What happened over the last twenty-five years to remove the voltage from the third rail? Three things stand out. First, the political leadership—largely from the Democratic Party—that traditionally defended New Deal programs like Social Security has shifted significantly to the right in the wake of the decline of the social movements and the rise of the Right starting in the late 1970s.
In tandem with this shift, the labor movement, which led the militant fights in the 1930s to establish Social Security and then defended it from right-wing attacks, has been in retreat throughout this period. Third, there has been a consistent and successful ideological undermining, along with corresponding funding cuts of, working-class entitlements including welfare, Medicaid, and food stamps. Now thirty-five years on, the right wing has the confidence to recommend wrecking ball solutions for a system that only needs a relatively small share of the nation’s vast wealth to fulfill its promise.
Of course, Social Security has never been locked away safely. It has always been a chest for Congress and the president to plunder in order to reach their budget targets. That’s what Al Gore’s “lock box” debate in 2000 was about—locking away the credits so that they could accumulate rather than be “loaned” to balance or reduce the federal debt. In fact, as some economists have noted, if this surplus were invested there would be no shortfall to project.
Why isn’t the Social Security trust fund invested like a private or institutional pension fund? President Roosevelt ran into objections when he proposed that the trust fund should be invested in government bonds. Conservative opponents feared that any excess funds would be used for social projects, like housing, schools, or hospitals. As Arthur Altmeyer, the first Social Security administrator recalled, in a discussion with Senator Vandenburg leading up to the Social Security Act, “[I] suggested that a provision could be put in the Social Security Act that would require the Treasury to invest the excess in private securities. He said no...‘That would be socialism.’”20
Until the 1970s, Social Security was sacrosanct for both Republicans and Democrats. But behind the scenes, right-wing think tanks like the Cato Institute, the American Enterprise Institute, and the Heritage Foundation were busy developing arguments to undermine public works and income assistance programs like welfare and Social Security. Ensconced in these think tanks were the disciples of free-market gurus Friedrich von Hayek and Milton Friedman who never saw government programs—outside of the Defense Department—they liked.
Funded by free-market millionaires, these institutions began a steady ideological attack against the postwar welfare state consensus—a product of economic depression and war. This consensus gave the state a large role in directing the overall economy and led to funding everything from guns to butter (not by any stretch in equal measure). The consensus was known as Keynesianism after the British economist, John Maynard Keynes, who first proposed that the state should play the key role in rescuing capitalism from depression. Deficits didn’t matter as long as the wheels of commerce were greased through this state-sponsored cash flow system.
Social Security was only a small part of the rescue plan in 1935, but its popularity and strong connection to working-class struggle and the rise of industrial unions in the 1930s ensured its survival. Again in the 1950s and 1960s, the civil rights movement joined with the labor movement to help extend the gains with Medicare, Medicaid, and food stamps.
As unions grew weaker, politicians on both sides of the aisle began to chip away at the hard won gains of workers. The first entitlement to be cut from the Social Security Act was Aid to Families with Dependent Children under President Clinton’s watch in 1996. This, the culmination of Clinton’s promise to “end welfare as we know it,” eliminated federal standards for welfare benefits, imposed a five-year lifetime limit and a two-year continuous limit on benefits, barred immigrants from receiving welfare, and cut $24 billion from the federal food stamp program. Various estimates projected that it would throw at least 1.1 million more children into poverty. Yet it provoked very little resistance. This prompted Peter Edelman, a Health and Human Services official and husband of Marian Wright-Edelman, head of the Children’s Defense Fund, to write (after quitting his post in disgust):
So many of those who would have shouted their opposition from the rooftops if a Republican president had done this were boxed in by their desire to see the president re-elected and in some cases by their own votes for the bill.21
There was virtually no opposition from unions or civil rights groups to this gutting of welfare because these organizations were tied to the Democratic Party. This historic defeat has helped open the way to attack Social Security and Medicare under even less favorable conditions today.
The pension industry
Social Security is not the only retirement benefit under threat. The growing drumbeat signaling a growing insolvency in private pension funds is hard to miss. Airline workers at United, U.S. Airways, and Delta are only the latest group to see their retirement years threatened. In 2002, steelworkers’ retirement benefits were cut in half after the $3.9 billion collapse of Bethlehem Steel’s pension fund. And who can forget the Enron workers whose pension plan was built on a fraud perpetrated by leading executives of that company?
Whether private or public, American workers’ pensions are threatened by a capitalist class whose insatiable hunger for wealth knows no limits. The battle over pension control is another aspect of the unending scramble for profits. After decades of attacking workers’ wages and health care benefits, a new front has opened aimed at retirement benefits.
With world pension funds at $13 trillion in 1999, or nearly half of global GDP, their place in the economy cannot be overlooked. Three-fifths of world pension assets are held by U.S. pension funds.22 Together with Social Security—still running a bookkeeping surplus of $124 billion a year—the pool of pension assets is wide and deep.
Because pension funds are immersed in elaborate accounting procedures, there is little transparency. Robin Blackburn, in his excellent history of pensions, calls this area of the economy “gray capital.”23 Ever since pension laws first appeared near the end of the sixteenth century they have been structured with employers’ needs coming first. Workers have always had to struggle to shape them in their interests. Today, pension funds that do not serve bottom lines are targets for “reform,” or in the case of airline workers, outright abolition. This is facilitated up front in current pension law with a simple sixty-day notice to terminate or reconfigure the type of pension plan to better serve the interest of the employer.
Defining pension problems and their solutions is a growth industry. A quick check on any Web search engine will produce thousands of articles, studies, and solutions to the “pension crisis.” What is clear from this vast volume of literature is that pensions and pension control is another class battleground in which the employers’ are pushing through a major transfer of wealth from the working class to the employing class.
Private pension plans are on the chopping block. Here the aim is to improve corporate bottom line figures by restructuring plans that require a proscribed level of funding under the Employee Retirement Income Security Act (ERISA). When the stock market boomed in the 1990s it was not a problem for corporations to meet the funding requirements. Without adding new money, corporate pension portfolios grew and added to corporate bottom lines.
After the stock market bubble burst in 2001, corporations had to find “new money” to fund their plans or use credits (pre-payments) accrued in flush times. This often meant dipping into profits. Instead, many companies began to run from their obligations. Some switched from a defined benefit plan to a defined contribution plan (usually a fraction of previous contributions). Employees who once received yearly projections of solid retirement expectations now find themselves at the mercy of volatile financial markets, not knowing what will be there at the end of their working lives.
For corporations like United Airlines, the collapse of the bull market offered a way out of obligations and a competitive advantage. Already in bankruptcy, United recently forced its unions, under threat of a court-ordered contract termination, to take another hit (workers had already given back $2.5 billion in pay and benefit cuts) by dumping its $8.3 billion defined benefit plan into the already over-extended federal Pension Benefit Guaranty Corporation. Now that United has dumped its current pension obligations, its competitors will be forced to follow suit.
Congress has provided corporations enormous leeway in using pension plans to shore up their bottom lines. For example, under ERISA companies can use paper gains in the stock market as credits toward their pension funding obligations. This allows companies to put real money into their profit lines instead of funding pension plans—which would otherwise be an expense.
In some cases, companies are attacking healthy, solvent pension funds in order to shore up their profit margin. Take the case of Lucent, the huge provider of telecom equipment, which because of massive overproduction in this area of the economy, has struggled to survive since 2001. It has only recently returned to profitability after cutting its workforce by two-thirds. Part of its restructuring involved cutting workers’ benefits, including those of retirees, of which it had a large number that were largely inherited when it was spun off from AT&T eight years ago.
But as a Wall Street Journal investigative report noted,
an examination of Lucent’s government filings shows that having a disproportionately high number of retirees hasn’t been a problem.... [Lucent] never had to dig into its own pocket to pay benefits for U.S. retirees. The funds paid every cent, both of pensions and of retiree’s health care.24
The report goes on to show that
Lucent has been able to use assets in these funds to help it pay for repeated rounds of downsizing. Moreover, the benefit plans—thanks to accounting rules—have fed Lucent hundreds of millions of dollars of income.
This amounts to a legal thievery of workers pensions.
Many of the accounting rules established to implement the federal laws allow companies to calculate pension values that are far from solid. In effect, companies can steal money from pension funds through a myriad of accounting rules that can make a fund look stronger or obligations smaller, even when the fund is about to go under.
For example, United Airlines “over-contributed” (mostly from increases in stock holdings) to its pension fund in the 1990s by $1.3 billion, thus building credits. These credits didn’t disappear as the fund’s assets shrank after 2001, making the fund look stronger than it was. When it came time to add funds (a percentage requirement of the pension law), United used its credit balance. The New York Times described the accounting maneuver this way:
When...contributions came due, United did not have to part with any cash, it had only to reach for the funding credits. Thus, in 2001, when the flight attendants’ pension fund slid to 88 percent funding for the second time in three years, United was required to make emergency contributions. So it took $68 million out of its credit balance and, using those book entries, fulfilled its legal requirement to revive the pension fund. In actual dollars, United did not contribute a penny that year.25
Corporations are rewarded for using this legal, but virtual, bookkeeping method, while workers pay the actual price in reduced benefits. According to a new Government Accounting Office report, United’s creative bookkeeping isn’t an isolated case. The study finds that 39 percent of pension funds in the U.S. were underfunded between 1995 and 2002.26
Conclusion
President Bush, hoping to capitalize on his electoral victory last November, has introduced a phony crisis in order to attack Social Security and once again cut workers’ living standards. Following the logic of “starving the beast,” the Bush administration has cut taxes for the wealthy, poured billions into an imperial war, and slashed social spending at every turn. Now Bush wants to project this strategy into the future by undercutting the Social Security trust fund.
After six months of trying to sell this plan, polls show Bush’s idea has actually lost ground. When first introduced, a small majority favored some form of private savings as a component of Social Security for workers under thirty. A recent poll shows 47 percent “favoring” the idea and 47 percent finding it “a bad idea.”27 The polls show that a majority of Americans believe that any attempt to make up any Social Security shortfall should come from increasing taxes on the rich. In addition, 62 percent versus 31 percent believe taxes should be paid on income above $90,000—the current exemption level. Currently, salaries above $90,000 are not taxed for Social Security. Furthermore, 50 percent of poll respondents favor limiting the growth rate of benefits for people with incomes over $100,000, especially if this will help lower-income workers.28
The polls show that Bush can be resisted. But polls aren’t enough. A movement spearheaded by the working class could defend Social Security. Unfortunately, the unions today seem incapable of leading this fight. The unions in the airline and automobile industries, two industries facing battles over pensions and health benefits, have failed to put up a fight against billions in concessions that the employers have forced their workers to give up. There has yet to be a strike or a mass protest to challenge the legally sanctioned gutting of private pensions. As Alan Maass and Lee Sustar write,
The response from union leaders is that it’s “unrealistic” to take job actions, for example, in the airlines. But the choice is between a coordinated resistance that has the potential to shut down the airlines and demand a real government bailout—or continued acceptance of the logic of labor-management “partnership” in which union leaders help executives restore profits at workers’ expense.29
The labor movement has so long been hamstrung economically by the outworn view that it can continue acting as though it is in partnership with employers that are seeking to destroy the union gains of previous decades. And it is hamstrung politically by its allegiance to a party that has been an only slightly less enthusiastic supporter of the employers’ offensive of the last three decades as the Republicans.
The AFL-CIO has strongly condemned Bush’s plans to privatize Social Security, and they called dozens of small, local protests last March. This is of course a welcome development. But can we expect the union leaders to mount an effective challenge to the attacks on public pensions when they have failed to mount one against the attacks on private pensions?
The perceived political defender of Social Security, the Democratic Party, has a wait-and-watch strategy; hoping Bush’s plan will collapse of its own bad poll numbers. This does not inspire confidence that Social Security will survive in its present form. As Peter Camejo, independent vice-presidential candidate on Ralph Nader’s ticket last fall, often says, the Democrats grease the path for attacks on the working class. They’ll say no to a Republican-sponsored 30 percent cut, denouncing it as an outrageous attack on workers—and then come back with an offer to accept 10 percent. If we depend on “allies” like these, Social Security will not be around to serve the next generation of workers.
Workers today should take a lesson from their grandparents’ generation that built unions from the ground up in the 1930s, and in the process launched a movement that forced the bosses and their politicians to provide Social Security for all workers—action speaks louder than words.
Peter Drucker, an MIT management guru, writing in the 1970s, looked forward to the possibility of “pension fund socialism,” believing that through pension funds workers could control the means of production through their investment choices. He wrote, “They offer one example of the efficacy of using private non-governmental institutions of our ‘society of organizations’ for the formulation and achievement of social goals and the satisfaction of human needs.”30
Drucker’s gross underestimation of capital’s needs and overestimation of who really controls pensions, including Social Security, nevertheless identified a potential that should be made a part of the fight for old-age security. Only when the working-class majority gains full control of their productive efforts will these reservoirs of wealth serve the needs of those who produced it. That future is worth fighting for today.