Privatizing Social Security was a bad idea in 2005 when it was proposed by President Bush and rejected by the American people. It's still a bad idea, despite recent Republican attempts to revive it.
Three new analyses out this week make clear that GOP proposals would cut benefits for middle-income Americans, jeopardize the solvency of the Social Security Trust Fund and weaken the program's ability to keep millions of Americans out of poverty.
The Center on Budget and Policy Priorities (CBPP), the Chief Actuary of Social Security, and the U.S. Congress Joint Economic Committee (JEC), which I chair, have each weighed in on the Social Security proposal introduced by Republican Congressman Paul Ryan. While Republicans have sought to recast their proposals as modest changes to the current system, they are anything but that.
The new CBPP report finds that Rep. Ryan's proposal would reduce benefits for the top 70 percent of earners by linking Social Security benefits to change in prices, rather than changes in wages, as is now the case. Additionally, increasing Social Security's full retirement age, as called for in Ryan's plan, would reduce benefits for everyone regardless of when they retire.
According to the Chief Actuary of Social Security, the "progressive price indexing" proposal would reduce benefits by 17 percent compared to current law for a new retiree in 2050 with medium earnings ($43,000 today). The cuts get deeper over time and are steeper for higher income workers. By 2080, benefits converge at a much lower level, with little difference in benefits for high earners and medium earners. At that point, Social Security would bear little resemblance to today's program, where benefits are based on a worker's lifetime earnings.
The JEC report, prepared by the committee's Majority Staff, looks at privatization, where future retirees are able to divert a portion of their payroll taxes to private investment accounts. Privatization would allow all retirement savings accumulated by retirees to be subject to fluctuations in the performance of asset markets, including the stock market, where significant swings in returns and account accumulations are possible from year to year and even month to month.
A worker with a private account could purchase an annuity with a fixed monthly payment at the end of his or her working life. However, the size of that monthly payment depends on the timing of retirement relative to the performance of the different asset markets that the retiree had invested in. For example, a retiree who invested solely in the stock market over a 40-year work history and was expecting an annuity of $867 per month in 2006 would have received only $399 per month if he had retired in 2008.
Republicans claim that the Social Security Trust Fund would ensure that individuals who invest in private accounts will get back as much as they put in, plus indexing for inflation, even if the stock market craters. But such a guarantee - where private account holders win when the stock market is up, and don't lose when the stock market falls - must have another source of funds during bear markets. Without additional funds to pay for this one-sided bet, the solvency of the General Fund will be at risk.
While Social Security benefits are modest, they have a major impact. Without Social Security, nearly half (46 percent) of senior citizens would live in poverty, but with Social Security the poverty rate for elderly Americans falls to 10 percent. Indeed, Social Security accounts for more than 76 percent of income for middle-class seniors.
The Republicans ignore these facts and plan to radically change a program that provides economic security and peace of mind to millions of Americans. Their proposals are either a misguided belief in the stock market's ability to miraculously "save" Social Security or a cynical attempt to gut a successful program that has kept generations of Americans economically secure.
The more we learn about privatization and progressive price indexing, the worse -- and riskier -- the ideas look.
Congresswoman Carolyn Maloney represents parts of Queens and Manhattan in the House of Representatives, where she chairs the U.S. Congress Joint Economic Committee.