*Private accounts, public disaster* - Sen. Jon Corzine

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New Jersey's senior senator, Jon Corzine, knows a thing ot two about

investments; he formerly was chairman and CEO of the investment firm

Goldman Sachs.

 

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*Private accounts, public disaster*

 

by JON S. CORZINE

The Star-Ledger

January 09, 2005

 

<< President Bush has yet to provide specific details about his plan

for changing Social Security, but he has said often enough that he is

likely to use a blueprint developed about three years ago by his hand-

picked Social Security Commission. That blueprint must be rejected. It's

a blueprint that calls for deep cuts in guaranteed benefits and would

lead to a massive and irresponsible increase in debt. It takes the

security out of Social Security.

 

Social Security is based on the best of American values. It promises all

Americans that if they work hard, pay taxes and play by the rules, they

will be able to retire and live in dignity. Social Security is not a

handout. It's an earned benefit that promotes and rewards work. Social

Security guarantees that regardless of the state of the economy or the

stock market, every contributing American will have a basic level of

financial security. The Bush privatization plan undermines that

guarantee.

 

By changing the formula for calculating benefits, the Bush commission's

plan would impose steep cuts. According to the Congressional Budget

Office, which is a nonpartisan official scorekeeper, the Bush plan's

cuts would be about 25 percent for many current workers. In the future,

cuts could exceed 45 percent. These figures include the projected

proceeds from privatized accounts.

 

The Bush cuts would apply to all retirees, even those who choose not to

invest in privatized accounts. Those who do invest in these accounts

would be hit twice -- first with a cut in their basic guaranteed

benefit, and second with a new, added tax on their account when they

retire. That tax could wipe out most, or even all, of their account,

depending on actual returns. In any case, although the plan does not

explicitly raise the retirement age, its cuts almost certainly would

force many Americans to delay their retirement, in order to build up

more assets.

 

Even without these cuts, Social Security's guarantee ensures only a

basic existence. Today, the average Social Security benefit is about

$950 per month, or $11,500 a year. For women, the average benefit is

about $825 per month, or less than $10,000 annually. For most seniors,

especially those living in high-cost areas like New Jersey, that's

hardly enough to maintain even a basic standard of living.

 

Some argue that we need deep cuts in Social Security benefits to save

the program. But the numbers prove that's wrong. Over the next 75 years,

the entire Social Security shortfall represents about 0.4 percent of our

gross domestic product. By contrast, the cost of President Bush's tax

cuts, if made permanent, would be 2 percent of GDP. In other words, the

tax cuts will cost about five times the entire Social Security

shortfall. The truth is, we have the resources to meet our obligations

and honor our promises. It's simply a matter of setting priorities and

maintaining fiscal discipline.

 

To be clear, I am not opposed to the use of private accounts to save for

retirement. To the contrary, it is essential that Americans save

privately for their retirement, and that is why I strongly support

providing tax subsidies for 401(k)s and IRAs. But private accounts, by

their nature, cannot provide the same level of security as Social

Security. When investments tumble, health declines and all else fails,

Social Security benefits are there -- guaranteed -- as a final lifeline

for seniors.

 

I am especially concerned that President Bush apparently plans to

finance privatized accounts by incurring massive amounts of debt. In the

first 10 years, that debt is likely to exceed $2 trillion. But that's

just the beginning. In the second 10 years, for example, debt could

increase by more than $4 trillion. To provide some perspective, that's

almost as much as our entire publicly held debt today, which totals

about $4.4 trillion.

 

Such massive increases in debt would impose a huge burden on young

Americans and our nation's future. They also would threaten to raise

interest rates and undermine economic growth in the short-term. As a

former bond trader, I find it almost incomprehensible that the president

would want to increase debt so dramatically when we already are

suffering from the largest deficit in our nation's history. This kind of

fiscal recklessness is simply not sustainable.

 

Many privatization advocates rest their case on claims that seniors will

enjoy better returns. However, such claims are misleading. First, they

generally overlook the costs of financing the accounts -- the higher

interest costs that future taxpayers will be forced to bear. Also,

privatizers typically ignore the fact that Social Security, in addition

to its role in protecting retirement security, also includes insurance

for workers who become disabled and for survivors of workers who die

prematurely.

 

Perhaps more fundamentally, privatization proponents generally fail to

adjust projected returns for the added risk of investing in equities, as

virtually all economists agree is necessary for a fair comparison.

 

Having earned my living as a trader and investment banker for 30 years,

and having run one of America's largest financial companies, I

understand something about markets. I can assure you it is pure folly to

assume that privatized accounts will always increase in value and will

be at a high-water mark at the moment when an individual retires. The

truth is, markets go up, down and sideways -- sometimes for many years.

One thing they never do is provide guaranteed returns or protection

against both inflation and the risk of outliving your savings -- only

Social Security does that.

 

There is another problem with privatized accounts: They are very costly

to administer. One reason is that many accounts are quite small, so a

significant share of any gains is eaten up by management fees. A

University of Chicago study found that fees would reduce benefits by 20

percent. By contrast, Social Security's administrative costs are

minimal, about one-half of one percent.

 

Social Security at its most basic level provides a simple guarantee:

Work hard and contribute now, and your financial future will be secure.

Proposals to cut guaranteed benefits in favor of individual bets on the

market strike at the very core of Social Security's promise. Those who

disagree with that promise have a right to call for the program's

repeal. But they shouldn't pretend that privatization promises security

for America's seniors. It doesn't. >>

 

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Jon S. Corzine, former chairman and CEO of the investment firm Goldman

Sachs, is a Democratic U.S. senator from New Jersey and a member of the

Senate banking committee. He is running for governor this year.

 

 

 

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