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Wednesday, January 05, 2005

So you think you'll do better under private accounts?
Posted by Jill | 7:07 AM

Guess again, if you think that Bush's plan to put a measly $1000 annually into private accounts will bring you a more secure retirement.

The cuts Bush is proposing are going to hurt...and hurt badly:

The Bush administration has signaled that it will propose changing the formula that sets initial Social Security benefit levels, cutting promised benefits by nearly a third in the coming decades, according to several Republicans close to the White House.

Under the proposal, the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker's lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century. The White House hopes that some, if not all, of those benefit cuts would be made up by gains in newly created personal investment accounts that would harness returns on stocks and bonds.


"The White House hopes..." Well, I hope that I wake up tomorrow and I'm 29 years old again, tall, slim, and blonde. Ain't gonna happen. Hope is nothing to build a policy on.

Oh, people MY age won't do too badly. You know, those baby boomers who are like an elephant going through a snake. Under the Bush formula, we'll only take a 9.9% hit. But those of you who are younger are going to be clobbered by the guy you think is going to save your benefits. If you're planning to retire in 2042 (which means you're about 30 years old right now), you'll take a 25.7% cut EACH YEAR over what you'd receive if Social Security remains as it is now. Are YOU confident that the markets will give you a 25.7% return each year? If so, you're living in a dream world.

A former senior administration official who recently discussed Social Security strategy with Bush aides said the change in the indexing formula "is assumed to be a part of any final solution."

"You've got the bitter medicine of changing the indexing, but to go along with that you've got the sweetener of the accounts," the former official said.


Yikes. Isn't it interesting how this former official used the expression the Nazis used for their extermination of Jews to describe what Bush is going to do to Social Security? I'm not sure that's accidental.

Now, what this official is saying is that you're supposed to be lulled into a false sense of security because MAYBE the private accounts will offset ENOUGH of the hit you're going to take that you won't squawk too much.

But as the Center for American Progress notes, "If this system had been in place since Social Security's inception, people today would be retiring with a benefit tied to the living standard of the 1930s, when 40 percent of households lacked indoor plumbing."

I know that most of you who are younger resent that baby boomers are going to "steal" the entire Social Security trust fund, leaving nothing for you. But most baby boomers are under no illusions about Social Security. Most of us have always assumed that it was not going to be there by the time we retire anyway. But more importantly, WE ARE NOT THE PROBLEM. When the Social Security (FICA) tax was raised to provide a "trust fund" for the purpose of handling this elephant going through a snake, the plan was for that money to be there when the baby boomers retired. But because Republican presidents have replaced the trust fund with IOUs in order to fund tax cuts and huge military expenditures (you could call this "investing the trust fund" -- loaning the money to the government at interest), these IOUs need to be paid. Essentially, the government has borrowed this money and will have to pay it back, just the way a bank loans you money to buy a house, and then they expect you to pay it back.

But George W. Bush doesn't want to pay it back, because that might require sacrifice in the form of rescinding the tax cuts he's granted to his wealthy cronies and campaign contributors. But because he's in the unusual position of being a borrower who also runs the bank, he gets to set the rules, and according to his rule, he doesn't have to pay the bank back, so the bank has to cut what it pays to other depositors. Essentially, he's defaulting on a mortgage but has no fear of foreclosure.

All Bush has to do is live up to his obligations, and the system will push this elephant through, and after the baby boomers die off by 2040 at the latest, the system will be just fine WITHOUT CHANGES. Even if he won't live up to his obligations, the system can be secured simply by lifting the cap on earnings subject to Social Security.

The Bush Plan is NOT about "saving Social Security." It's about destroying one of the few government programs that actually works. Republicans have been wanting to get rid of Social Security since the 1930's, and now they have succeeded in using generational warfare and outright lies to gain approval for dismantling the program brick by brick. They're telling you that you can do better in the stock market, but the numbers tell otherwise. The only people who benefit from the Bush plan are the investment companies, who charge account maintenance fees that will cut into the returns you MAY get on your "investments", and people who earn most of their money through investments. Do you think they give you the same information they give their large investors or institutional investors? If you do, guess again. Many investment companies were touting Enron and Worldcom and Global Crossing, even as those companies were imploding from within. Have you forgotten? Are you willing to rely on the kindness of corporate executives and investment managers?

So what's driving this push to divert money into the markets? Here's what:

You see, many baby boomers have invested a ton of money into the markets through our 401(k) plans and IRAs. And when we start tapping those funds, that's going to be a ton of money being pulled out of the markets all at once. And what happens when people start selling stocks? The price goes down. A good chunk of the markets' performance over the last 15 years has been baby boomers making up for lost time by socking away as much as we can afford into retirement accounts. What do you think is going to happen when we start taking that money out?

But if Bush can redirect Social Security funds into the markets, it might help ameliorate the hit that HIS friends will take when stock prices plummet as all that money is taken out of the markets.

Think about it.

UPDATE: Josh Marshall says pretty much the same thing:

After 1980 we started borrowing money big-time to finance our deficits -- in large part because of tax cuts on high-income earners. However you want to slice it, we started spending substantially more than we were taking in in tax revenue.

So where'd we borrow the money?

This is from memory, so I may have the numbers a bit off. But I believe about $4 trillion of that debt was borrowed on the open market -- individual Americans have them in their investment portfolios, or pension funds hold them, or the Chinese, Japanese and the Saudis and others have them in bonds.

But about $3 trillion of those dollars we needed to fund the 1980s and 1990s deficits we managed to borrow closer to home. We borrowed it from the Social Security (and a few other government) trust fund(s).

Almost the entirety of President Bush's Social Security phase-out plan comes down to a simple proposition: finding out how not to pay it back.

Now, admittedly, this is an approach that the president is rather familiar with from his own business career at various failed energy companies. But it is, in so many words, a straight up con -- one of vast scale, and one which virtually no one in the media ever frames in just these terms.


ANOTHER UPDATE: And Lambert at Corrente points out that if the stock market is so great, how come U.S. executives are bailing out of their stock IN THEIR OWN COMPANIES?

The rats with the most to lose leave the ship first, I guess:

U.S. executives sold $41 billion worth of their own companies' stocks in 2004, the second-highest level since 1990, according to Thomson Financial.

Insider sales in 2004 jumped 40 percent over 2003, with the first and fourth quarters seeing the highest three-month sell volumes. Large insider stock sales often precede a drop in stock prices, analysts said.
(via Reuters)


More from the same article:

Insider purchases, too, rose 27 percent to $1.45 billion, Thomson said late Monday. Still, the amount of stocks bought by corporate executives was at its second lowest annual level since 1996.

As a result, the annual sell-buy indicator of insider sentiment -- the ratio of insider sales to purchases -- hit its most bearish reading at 28 in 2004.


Don't you think perhaps those guys know something you don't?
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