Social Security A Success Story: Can It Withstand Republican Privatization Attacks?
Republicans continue to launch efforts to privatize and dismantle the very efficient Social Security program says economist Dean Baker
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore.
Last week, the U.S. Social Security system celebrated its 82nd birthday. Republicans have long warned us that this system is about to go bankrupt. They often use this argument to push for privatization of Social Security. However, during his presidential campaign, Donald Trump promised that he would not touch Social Security, part of the reason that senior citizens showed up in large numbers to vote for him. Despite this promise, Republicans remain interested in making changes to Social Security. A few months ago, Treasury Secretary Steven Mnuchin suggested that if Republicans come up with a coherent reform plan, Trump might have no choice but to support it. Also, the Republican budget resolution for 2018 contains a provision for triggering Social Security reform.
So joining us now to take a closer look at Social Security is Dean Baker. Dean is co-director of the Center for Economic and Policy Research and is the author of Rigged: How Globalization and the Rules of Modern Economy Were Structured to Make the Rich Richer. Welcome, Dean.
DEAN BAKER: Thanks for having me on.
SHARMINI PERIES: So Dean, you recently published a blog post analyzing how successful Social Security system has been for Americans. Give us a sense of what you attribute this success to.
DEAN BAKER: Couple points. First of all, most seniors of course have very little income other than Social Security. Pretty much by definition they’re not working. Obviously some people do work later years in their lives, but most people don’t. They’re not able to or don’t want to. So their income is pretty much Social Security and whatever savings they’ve managed to accumulate, and most people, that’s very little. So roughly for two-thirds of the people, Social Security income is more than half of their total income, and for about a third, it’s over 90%. So it’s hugely important for retirees.
It’s also important to understand that it’s a very well-run program. Republicans, a lot of people like to beat up on it and say it’s old fashioned, it’s one size fits all. My comment is, yeah, it is old fashioned, it is simple, but so is the wheel. It works. It’s a very good innovation. And one of the great things about Social Security is its simplicity, which means it costs very little.
So if you look at the cost of operating the program, what we pay in administrative fees is about 0.004% of what we pay out in benefits every year. I like to make the comparison to the privatized systems that at least many would like us to emulate. If you look at the best of them, systems like those in Chile and the United Kingdom, they pay out 10 to 15% of their benefits in administrative fees to the financial industry every year. If you plug that into the U.S. numbers, you’d be talking about 800 billion to 1.2 trillion a year going to the … I’m sorry, 80 billion to 120 billion a year, it’s not quite as bad as I just said, going to the financial industry rather than into the pockets of seniors. And that’s a huge deal.
SHARMINI PERIES: I know there’s some countries that had privatized and they reversed it, like Argentina. Do you think that countries like UK should consider that?
DEAN BAKER: Absolutely. Another country that’s going that route, I don’t know how far along it is in that path, but Chile, which was one of the first privatizers if not the first under Pinochet back in the early ’80s. Their last election all the candidates, both the candidates said they would reverse it and have a larger defined benefit, sort of the core public program, something similar to what we have here because of course, again, we have the public plan, but people, certainly middle-class people have something on top of that, which I think is fine. That’s what you want. You want to have a core program that ensures people peace in retirement. For people of a little more income, if they want to put aside savings, that’s a good thing. So Chile is moving in that direction. I should be honest, I don’t know how far along they are, but there seems to be a political consensus there. UK, it is entirely up in the air. They’ve had kind of chaotic experiences with their plans really ever since they went the route of privatization in the early ’90s.
SHARMINI PERIES: Dean, is what the current system in the U.S., what it is generating and what senior citizens are getting, is it sufficient for their livelihood?
DEAN BAKER: No, it’s not. The basic story is it’s done a huge amount in lifting senior population out of poverty. So if you look at poverty rates among people over 65, it’s pretty much the same as the adult population, which is a huge accomplishment because if you go back to the ’30s before we had Social Security, poverty rates would’ve been 40 to 50% among seniors. Basically, they were dependent on their kids or whatever they could’ve gotten in the way of charity. They were doing very, very poorly. So that’s a huge deal, but still you have a lot of seniors that are living on 10, 12,000 a year. Above the poverty level but often not by much.
So I think two things that would make sense here, one, there’s been a growing movement in recent years primarily among the Democrats but I think it’s not impossible to get some Republican support to raise the benefits, particularly for those at the lower end. But then on top of that, we have to improve private sector savings. So we used to have defined benefit pensions. We can idealize them and say they were great. Many people did have good pensions, many people did not, most people did not. But those are largely disappeared. So where you see traditional defined benefit pensions that give you 20, 30, 40% of your wages, that’s almost exclusively in the government sector now. You don’t find that very often in private sector. Some unions still have it, but other than that it’s been pretty much eliminated.
The 401(k) system that’s replaced it has generally led to very small accumulations in large part because, one, people often don’t have even the option; two, when they switch jobs, they often lose it; but three, and this is the biggest one, they pay a lot of money in administrative fees. It’s not uncommon for people to pay 1, 1.5, even 2% of what they have in their savings in administrative fees, and that adds up to an enormous amount of money over, say, a 30-year working career. You could easily spend, and this is just a middle-income person, could easily spend 40, 50, 60,000 on administrative fees, and that’s money directly out of their retirement accounts.
So to my view, the key issue here is make it simple, make it cheap. And the model is what’s happened in California and Illinois and Oregon now where they’re allowing private workers to pay into a retirement system managed by their state retirement system. So they have retirement systems for their public employees already, they’re taking advantage of that infrastructure, and they’re allowing people in the private sector of pay into that so they could have a low-cost, portable system that will go with them job to job, and that way they’ll be able to accumulate much more for whatever they put in so that they have larger savings at retirement.
SHARMINI PERIES: Right. A great solution. Dean, as I mentioned in the introduction, Republicans continue to show an interest in privatizing Social Security. Their 2018 budget resolution includes a reform trigger. According to the budget resolution, reforms will be made if annual Social Security Trustees Report indicates that the fund will run into deficit in 75 years. This could mean the reform provision could be triggered sooner than we might expect. What is your response to that?
DEAN BAKER: They’ve been screaming crisis, crisis, crisis for a long time. I’ve been in this debate over two decades, and they’ve been saying crisis this whole time. Sure, the program does, it’s projected … And I’m saying “projected” because none of us know the future. I’m not saying they’re making up numbers, but things often turn out differently than we expect. In any case, they’re projecting we’ll first see a shortfall in 2034. Even if those numbers prove exactly right, the program could still pay 80% of scheduled benefits. Most of us consider that unacceptable, but the idea that it’s going to run out of money and we’re going to have people getting nothing, that literally doesn’t make any sense. So it does face a shortfall. It could still pay most benefits.
The question is how do you deal with that? The Republicans are saying we have to deal with that now, and obviously being in control in both houses of Congress and having a Republican in the White House, their dream is that they would be able to take advantage of that situation to cut benefits and privatize at least a portion of the program. My guess is that they may write something like that into the budget resolution, but nothing will happen for the simple reason that that’s enormously unpopular even among Republican voters.
There have been any number of polls. When you ask Republicans, they like Social Security pretty much as much as Democrats. Eighty percent of them feel strongly that the system’s good, should be maintained, maybe even increase the benefit. So I would be very surprised, not to say I’m not worried, we should be worried, but I would be very surprised if they actually go through with some plan any time in the next year or two years to cut benefits and privatize the program.
SHARMINI PERIES: Because it has such political consequences. And if Mnuchin is correct and that he’s willing to consider this, this might really cost Trump in the next election.
DEAN BAKER: Exactly. I’ll give Donald Trump some credit for being a clever politician. He understood when he was going around during the Republican primaries, he quite explicitly said, “I’m going to protect your Social Security. Those guys,” and he’s pointing to Jeb Bush, he’s pointing to Marco Rubio, “They say they want to cut benefits. They want to raise the retirement age.” That was true. They did say that. So he made a big point of telling people, “Vote for me. No reason to cut your benefits.” So now he’s in office a year or two years and goes, “Oh, I changed my mind.” Those people are going to remember that, and they won’t be very happy if they see that. So again, these people, I will give them credit, they’re politicians, they do know what’s politically popular, and cutting Social Security is not.
SHARMINI PERIES: All right, Dean, I thank you so much for joining us today.
DEAN BAKER: Thanks for having me on.
SHARMINI PERIES: Thank you for joining us here on The Real News Network.