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Protecting America: Social Security Better Than Republican Options [1]
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Date: 2025-04-06
Social Security is better than any option proposed by Republicans. I know they talk a good game about how you can have more to retire on with a private plan. But as with any scam there’s a flaw in the ointment.
The purpose of retirement funds is not to make you rich. The purpose of retirement funds is to make sure you survive retirement.
You can’t take any unnecessary risk. If you get to 70 you need your check (or direct deposit). You can’t have some asset manager call you up and say, “Sorry, we’re out of money.” Because when you’re 70, you can’t go back to, say, 35, and invest more wisely. (I can tell you as someone who is 70.)
If you were to invest in your retirement you would have to invest in the safest possible instrument you could. You’d want a Treasury. You’d want a bond from the U.S. government. Because we all know that the U.S. Treasury is good for it. They are never going to go bankrupt.
Ah, ah, ah! Don’t talk to me about politics. Don’t talk to me about how the Republicans can bankrupt the government. Stupid and vile as they are, the U.S. government isn’t going out of business. They may all take a bunch of gold on their yachts and sail off for the Cayman Islands or someplace else, but the U.S. is going to be here and someone is going to pick up the pieces.
There will be a U.S.
And if there isn’t, there will be vastly more difficult problems to overcome than the death of Social Security.
Of course, Treasuries don’t pay as much as the market over a sufficiently long time. But if you invest in the market, you don’t have the security of a U.S. bond. The market goes up and the market goes down. You don’t need me to tell you. All you have to do is look at some recent market returns.
What Republicans Propose
So, what do Republicans suggest we do to privatize Social Security? Going back to the 2012 Republican presidential debates:
Rick Santelli: Speaker Gingrich, for the first time in its 75-year history, Social Security is going to be in the red. According to The Washington Post, on October 29th, $105 billion this year. The reason, political parties, both sides, the end of last year agreed that they wanted a tax cut. And the area they cut were payroll taxes, the main funding for Social Security. If we continue that, and there seems to be some agreement on both sides of the aisle, to extend that tax cut, for 2011 and 2012, the cumulative amount would be closer to $260 billion. Are all tax cuts created equal? Is this a tax cut that you would back? Newt Gingrich: Well, I’m not prepared to raise taxes on working Americans in the middle of a recession that’s [just] bad. But let me put Social Security in context. In 1968, in order to fake a balanced budget, Lyndon Johnson brought Social Security into the general budget. And ever since politicians have hid behind Social Security. Now it is going to become a disadvantage to do so. I think the first step is you take Social Security off the federal budget and you don’t try to solve the budget deficit problem on the back of working Americans and retirees. You deal with Social Security as a free-standing issue. And the fact is, if you allow younger Americans to have the choice to go to a Galveston or Chilean-style personal Social Security savings account, the long-term effect on Social Security [as] scored by the Social Security actuary as absolutely stabilizing the system and taking care of it. The key is there is $2.4 trillion in Social Security which should be off budget, and no President of the United States should ever again say because of some political fight in Washington, I may not be able to send you your check. That money is sitting there. That money is available. And the country ought to pay the debt it owes the people who put the money in there.
From presidential debate 10 for the 2012 election
Date: 9 November 2011
Place: Oakland University in Rochester, MI
Participants: Michele Bachmann, Newt Gingrich, Mitt Romney, Herman Cain, Rick Perry, Ron Paul, and Jon Huntsman
Host: CNBC
Alex Brill: Even if the super committee hadn’t failed, the savings that they would have proposed would have been a drop in the bucket relative to the $11 trillion deficit our country may face in the subsequent decade. What entitlement reform proposals would you make to address our long-term structural deficit? Newt Gingrich: It’s a great question and it raises the core issue of really large scale change. Yesterday in Manchester, I outlined a Social Security reform plan based on Chile and based on Galveston, Texas. In Chile, people who have now have the right to a personal Social Security savings account, for 30 years, the government of Chile has promised that if you don’t have as much savings as you would get from Social Security, the government would make up the difference. In 30 years time, they’ve paid zero dollars, even after ‘07 and ‘08 and ‘09, people slid from three times as much to one-and-a-half times as much, but they didn’t go below the Social Security amount. The result is in Chile, for example, they have 72% of the GDP in savings. It has increased the economy, increased the growth of jobs, increased the amount of wealth and it dramatically solves Social Security without a payment cut and without having to hurt anybody.
From presidential debate 12 for the 2012 election
Date: 22 November 2011
Place: Constitution Hall in Washington, DC
Participants: Jon Huntsman, Michele Bachmann, Newt Gingrich, Herman Cain, Mitt Romney, Rick Perry, Ron Paul, and Rick Santorum
Hosts: CNN, the Heritage Foundation, and the American Enterprise Institute
What is Gingrich talking about? He proposed a plan based on Chile and Galveston, TX. So, what was the actual experience in these places?
Privatization Experience
Chile
Let’s take a closer look at social security in Chile. In 1980, during the Augusto Pinochet government, this system was changed from a pay-as-you-go system to a system of private accounts managed by financial services companies. Companies were required to pay a percentage of their workers’ earnings to these funds. The workers could continue contributing to the old system, or switch to the new. Since the required payments into the new system were lower, most chose to do so. The military dictatorship ordered employers to pay an additional 17% to workers so that they could afford to buy into the plan.
(Imagine, if you can, Donald Trump sending our military to private industry and forcing employers to fork out an additional 17% to workers so they could buy into private retirement funds.)
Details
The private funds have requirements for minimum reserves, can only put money into approved investments, and are supervised by the government. The government guarantees a pension equal to the state-run pension system if the worker’s fund falls short. Funds that do not meet minimum profit margins are dissolved and combined into other funds. If a fund goes bankrupt the government steps in and pays the worker in retirement.
Workers can change funds at will and their contributions (mandatory on the first 10% of income) are income-tax deductible. When the worker retires, they convert the fund to an annuity or take it with periodic payments over a period of time. How much you get is determined by how much you contributed and the performance of your fund(s) over time, and you can run out of payments if you live too long. The risk is entirely yours, although the government was forced to provide supplementation, because by 2006 only half of retirees were covered by a pension, and for 40% of those it was inadequate.
The administrative costs of the funds are not regulated by law. In any alternative to Social Security, administrative costs should be limited to 0.75%—a typical value for administrative costs by the Social Security Administration for retirement savings—and they should be no-load funds (that is, there should be no sales commission). Otherwise, workers are paying more to have their money managed than they currently do. But in Chile, the administrative costs average almost 3%. This is, in part, because participants can switch at will between funds.
The Social Security Administration costs about 0.9% each year, and a part of that is not for retirement funding, but for Disability Insurance. For example, in 2011, the percentage was 0.9% overall, but some of that was for DI, leaving the cost of paying retirement benefits around 0.6% for that year. So, if the Republicans suggest private funds, then we should demand they cost us no more than Social Security administration does on average for retirement funds.
At the same time, the Chilean government is not off the hook for retirement. If the funds fell short, it would need to make up the difference.
Conversion Costs
Meanwhile, it is paying the conversion costs of moving to the new system, which have historically been over 4% of GDP. (In the U.S., GDP is projected to be around $30.337 trillion in 2025, so 4% represents about $1.2 trillion a year.) The conversion costs in Chile were projected to be about 4.3% through the late 2030s, so it could be more than $1.2 trillion in the U.S.
(Imagine, if you can, Republicans passing a tax hike of over a trillion dollars to fund conversion from our transfer payment system to a private retirement system. The alternative is to put current Social Security recipients out on the streets to fend for themselves.)
The Failure
Because a large part of the population couldn’t qualify for the minimum of 20 years of contributions and because capital accumulation for poorer workers is difficult (due to the high administrative costs), the Chilean government revised the system in 2008. People who didn’t qualify, but have lived in Chile for 20 years or more, were given a minimum pension paid by tax revenues. It does not appear that administrative costs have been addressed. Financial institutions can still scrape their enormous fees off the money flowing through the system.
Meanwhile, Back in The States
What would this mean for the U.S.? If financial institutions here charged 3% fees on the $1.16 trillion flowing through the system every year, they would rake in over $34 billion. This is the real target. This is why we keep seeing privatization pop up in every election. Privatization is a way for Wall Street to earn billions of dollars off our money. It is a proposed gift to financial services companies and their richest owners and employees.
What are the real lessons here? Chile tried to privatize their system and failed. They couldn’t make it work for most workers, and they had to pull back for the poorest. It works best for the well-off and those with good financial understanding. They still have tax-based, pay-as-you-go benefits for situations where privatization doesn’t work, just with an additional (expensive) system that allows wealthier workers to put aside more for retirement.
Argentina tried a similar plan, but it worked so poorly that in 2008, they replaced it with a public system. In both Chile and Argentina, the governments were forced to scale back from privatization, primarily because it doesn’t work for the poor. But, what about the Galveston plan? Perhaps it’s better.
Galveston
In this plan (for county workers) retirement benefits were directly tied to contributions (6.1% from the employee and 7.8% from the county). An investment firm guarantees a rate of return between 3.75 and 4% to hedge against inflation. Employees can opt to put more of their money into riskier investments.
However, the basic investments are invested by a financial-services company chosen by the county in a bidding process. Benefits are not indexed for inflation. The plan is really intended to supplement a state defined-benefit program. (This plan may have changed since 2012, but the point is that this is the kind of plan Newt Gingrich held up as a goal for our retirement system.)
When the employee retires, they can take a lump-sum payment, monthly benefits for a period of time, or an annuity at a reduced rate. They are not guaranteed benefits for life if they don’t take the annuity option.
Social Security provides a payout that’s weighted toward lower-income workers. The Galveston plan is not, and your benefits are generally based on how much you are earning while you work. That means that if you are poor you tend to stay poor in retirement, much more so than you would on Social Security. Remember: Social Security is designed to keep the elderly out of poverty. It isn’t intended as a full retirement plan. If you never earn all that much, you will still be protected by Social Security in retirement. But if you earn more, you can put away additional money and live much better after you retire.
In the Galveston plan, each employee takes their own risk. If they invest wisely, they could very well beat what they’d get from Social Security, especially if they have a higher salary and few dependents. However, if they make a hash of it, they could end up with nothing, which defeats the purpose of retirement savings: you need a specific amount each month to stay alive and out of poverty. If your investments go bust, so do you. That’s why all the good retirement plans are “defined benefit” plans, not “defined contribution” plans.
Risk
Private retirement accounts have a serious flaw: You take your own risk. That means you have to put more aside, whereas a public system can spread the risk over everyone in the country. When the risk is spread over 70 million retirees, one may live for 1 year after retirement while another lives 35 years. As an individual, you would not plan to live to be 103. And so, your money might run out at 100. But if you’re one of 70 million that makes it to that astounding age, Social Security can cover you. No sweat.
So, privatization is inefficient in economic terms, and it also doesn’t solve the problem Social Security solves. Social Security keeps the poorest workers out of poverty. For richer workers, it’s great for them to have opportunities to save for retirement, and private funds like 401(k) accounts and IRAs can allow workers to retire more comfortably, while encouraging savings and investment. We already have that.
Are You Feeling Lucky?
The reason privatization has such appeal is that the vast majority of people think they are smarter than average. But the sad truth is that their intelligence isn’t any better than anyone else’s. Half of all people are not as smart as average.
And half of all people are less lucky than the other half.
This system is particularly bad for people that aren’t above average intelligence and aren’t especially lucky. They fall into the bottom quadrant.
Sucks, but that’s a statistical truth.
The Purpose of Social Security
The purpose of Social Security is to make sure people who retire stay out of poverty. That’s its sole legitimate purpose, and to do that it needs to collect enough to keep seniors out of poverty, then turn that over to them. And it needs to do that at the cheapest reasonable cost. That is, for all intents and purposes, what the Social Security system already does. Tampering with it is a way to waste money and to put seniors into poverty.
I should mention that Social Security also provides very basic disability insurance. The fundamental concept of Social Security and Medicare is to make sure workers have income even when they can’t work. These programs are transfer payments and part of the private economy, not part of the federal budget. They are a kind of minimum wage. Even replacing Social Security with a voucher system leaves the question of what happens to the disabled.
Beyond the basics of keeping seniors out of poverty, of course there’s good reason to invest wisely and try to pad your retirement. We have 401(k) plans and Individual Retirement Accounts already that serve the affluent for this. People with disposable income should be encouraged to put aside money for retirement. But then privatizing the Social Security on top of that is not fiscally responsible.
What if you wanted to actually strengthen retirement? What if you wanted to make the Social Security system stronger?
I want to come back to that in my next installment.
Series
The start of this series is:
[END]
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