THE PRIVATEERS GIRD THEIR LOINS FOR THE COMING CAMPAIGN

[Guest guest]

1/18/04

 

The Privateers Gird Their Loins for the Coming Campaign

 

Fanatical ideologues are drooling over what they see as a final

assault

in the battle to privatize Social Security. Of course, that's only

one

target, but it's the government agency they see as the most blatantly

and immorally socialistic. As we all know, once something becomes

socialist, it is but one step away from the horrors of Godless

Stalinistic Communism. Of course, the main reason the privateers want

to socialize everything in sight is that every agency and project run

by the government takes away one more field of service that offers

vast

monopolistic enrichment to endless greed of corporate America.

 

This is especially true in the case of so-called 'natural monopolies'

such as education, public health, postal service, water, sewage, and

so

forth. That fact that these areas cry for public ownership matters

little to the privateers.

 

These folks endlessly intone anti-government mantras. The Invisible

Hand, as we are ex cathedra told, is the best possible overseer of

utilities, medical care, postal service, and so forth. Some of the

privateers even want to privatize the police, the courts, and the

prisons. Public libraries are also lusted after. Good God, they have

books by anarchists, socialists, communists, and atheists sitting on

their shelves. They even have John Stewart's naked Supreme Court on

their shelves. Privatize the libraries, and we can rid ourselves of

all

that intellectual poison. We know through our faith in the existence

of

a metaphysical force that optimal results are always achieved when

free

markets rule over any given project of free enterprise.

 

The current cabal of neocons are drooling down their tailored suits

over the prospects for the next four years. Apparently, Social

Security

is to be the number one target. The possible profits that could

accrue

for the corporateers are vast. Imagine being able to deduct payments

from every worker in America for 55 years before having to dish out a

cent. Even then, the pensions to retirees can be arranged to last no

more than five or ten years at most, thusly guaranteeing vast profits

while life expectancy extends into the late 80s and mid-90s. (As you

will see below, this indeed seems to be the secret plan.)

 

Never mind the staggering social costs of a huge population of

penniless people in their 70's, 80's, and 90's. Bear in mind that a

nation of Charles Dickens-style nursing homes will all be privatized

by

that time. How will millions of destitute seniors survive? Our

medical

care system already is shot to hell through an irrational subjugation

to insurance corporations and managed care greedsters. Alas, such an

enormous social disaster does not figure into the equations of the

neocons or of the Clintonesque neoliberals.

 

Of course, the SS funds have already been looted to the tune of

billions by warmongering necons and neoliberals to pay for their

campaigns to control most of the world's vital resources (oil,

drinking

water, food, etc.). The privateers want to make the boodle even more

easily plundered by simply privatizing SS. I guess they want to make

honest men of themselves.

 

Today's selection is a refreshingly clear refutation of the cabal's

sophistic attacks on Social Security. I realize these types of

analyses

are exceptionally boring for most folks, but it behooves us to

occasionally buckle down and wade through such analyses in order to

write intelligent letters to local newspapers, national magazines,

websites, and so forth. Those are the current battle lines, and it

would be well to enter the fray well armed.

 

The de facto private ownership of the public airwaves is instructive.

One of the most highly praised TV shows on cable today is 24. It is

exciting, suspenseful, full of stunning surprises, and so forth. It's

an old fashioned serial not unlike the ones we saw at neighborhood

theaters way, way, way back when I was a kid and movie tickets cost a

dime and triple decker ice cream cones cost a nickel.

 

This lauded TV series is owned by Fox's Rupert Murdoch, one of the

most

powerful right-wingers in the world. He uses this show to over and

over

again justify the use of torture in the endless war against 'terror'.

He's so bold in his propaganda, he even attacks the messages and

mental

health of liberals such as Michael Moore.

 

Our children are still being taught that it's cool to smoke through

TV

movies and dramatic series. A much greater number of folks on TV

series

and films smoke than smoke in the general population. Of course,

corporations pay for this ongoing lethal propaganda. I call it

placement propaganda because that's what it is. The privateers have

no

social conscience whatsoever regarding the social costs. This and

other

tragedies are unfolding in America today via the fanatical drive to

privatize everything that can be milked for huge profit, especially

by

virtue of possessing a monopoly status.

 

Once anything that was formerly publicly owned is taken over by the

privateers, they will use it for any number of antisocial ends. We

need

only observe what they have done in the past with those once publicly

owned services they have taken over.

 

They piss and moan endlessly over the fact the postal service loses

money, and nobody on the Hill has the guts to say this is an

absurdity.

Why the hell should it earn anything? Libraries, police forces, and

public schools also lose money. What an imbecilic argument. The USPS

was founded as a free service for private citizens. Consider that I

hail from Minnesota where the legislature chartered the University of

Minnesota to be forever a free institution for all Minnesotans. That

was the thinking back then. The U of M no longer is for everybody.

Somebody in Congress should be standing up and delivering impassioned

orations for a return to those halcyon days.

 

As a final note, Ma Bell should never have been dismembered. It

should

have been socialized. It is a true natural monopoly. The current

system

is a god-awful mess. The greedsters who own the phone service where I

live render service that is inferior to the that of some third-world

countries.

 

Humbug.

 

Today's Quote

 

The public be damned!

 

W.H. Vanderbilt, American industrialist and holy icon of the

greedsters

 

==============================================================

 

30th Edition 2004 dollarsandsense.com

 

Social Security Isn't Broken

 

So Why Does Greenspan Want to Fix It?

 

By Doug Orr

 

Federal Reserve Chairman Alan Greenspan told Congress earlier this

year that everyone knows there's a Social Security crisis. That's

like

saying " everyone knows the earth is flat. "

 

Starting with a faulty premise guarantees reaching the wrong

conclusion. The truth is there is no Social Security crisis, but

there

is a potential crisis in retirement income security and there may be

a

crisis in the future in U.S. financial markets. It's this latter

crisis that Greenspan actually is worried about.

 

Social Security is the most successful insurance program ever

created.

It insures millions of workers against what economists

call " longevity

risk, " the possibility they will live " too long " and not be able to

work long enough, or save enough, to provide their own income.

Today,

about 10% of those over age 65 live in poverty. Without Social

Security, that rate would be almost 50%.

 

Social Security was originally designed to supplement, and was

structured to resemble, private-sector pensions. In the 1930s, all

private pensions were defined-benefit plans. The retirement benefit

was based on a worker's former wage and years of service. In most

plans, after 35 years of service the monthly benefit, received for

life, would be at least half of the income received in the final

working year.

 

Congress expected that private-sector pensions eventually would

cover

most workers. But pension coverage peaked at 40% in the 1960s. Since

then, corporations have systematically dismantled pension systems.

Today, only 16% of private-sector workers are covered by

defined-benefit pensions. Rather than supplementing private

pensions,

Social Security has become the primary source of retirement income

for

almost two-thirds of retirees. Thus, Congress was forced to raise

benefit levels in 1972.

 

What has happened to private-sector defined benefit pensions?

They've

been replaced with defined-contribution (DC) savings plans such as

401(k)s and 403(b)s. These plans provide some retirement income but

offer no real protection from longevity risk. Once a retiree

depletes

the amount saved in the plan, that pension is gone.

 

In a generous DC plan, a firm might match the worker's contribution

up

to 3% of his or her pay. With total contributions of 6%, average

wage

growth of 2% a year, and an average return on the investment

portfolio

of 5%, after 35 years of work, a retiree would exhaust the plan's

savings in just 8.5 years even if her annual spending is only half

of

her final salary. If she restricts spending to just one-third of the

final salary, the savings can stretch to 14 years.

 

At age 65, life expectancy for women today is about 20 years, and

for

men about 15 years, so DC savings plans will not protect the elderly

from longevity risk. The conversion of defined-benefit pensions to

defined-contribution plans is the source of the real potential

crisis

in retirement income. Yet Greenspan did not mention this in his

testimony to Congress.

 

No Crisis

 

Opponents of Social Security have hated it since its creation in

1935.

The first prediction of a Social Security crisis was published in

1936! The Heritage Foundation and Cato Institute are home to many of

the program's opponents today, and they fixate on the concept of a

" demographic imperative. " In 1960, the United States had 5.1 workers

per retiree, in 1998 we had 3.4, and by 2030 we will have only 2.1.

Opponents claim that with these demographic changes, revenues will

eventually be insufficient to pay Social Security retirement

benefits.

 

The logic is appealingly simple, but wrong for two reasons. First,

this " old-age dependency " ratio in itself is irrelevant. No amount

of

financial manipulation can change this fact: all current consumption

must come from current physical output. The consumption of all

dependents (non-workers) must come from the output produced by

current

workers. It's the overall dependency ratio—–the number of workers

relative to all non-workers, including the aged, the young, the

disabled, and those choosing not to work—that determines whether

society can " afford " the baby boomers' retirement years. In the

1960s

we had 1.05 workers for each dependent, and we were building new

schools and the interstate highway system and getting ready to put a

man on the moon. No one bemoaned a demographic crisis or looked for

ways to cut the resources allocated to children; in fact, the living

standards of most families rose rapidly. In 2030, we will have 1.27

workers per dependent. We'll have more workers per dependent in the

future than we did in the past. While it is true a larger share of

total output will be allocated to the aged, just as a larger share

was

allocated to children in the 1960s, society will easily produce

adequate output to support all workers and dependents, and at a

higher

standard of living.

 

Second, the " demographic imperative " ignores productivity growth.

Average worker productivity has grown by about 2% per year, adjusted

for inflation, for the past half-century. That means real output per

worker doubles every 36 years. This productivity growth is projected

to continue, so by 2040, each worker will produce twice as much as

today. Suppose each of three workers today produces $1,000 per week

and

one retiree is allocated $500 (half of his final salary)—then each

worker gets $833. In 2040, two such workers will produce $2,000 per

week each (after adjusting for inflation). If each retiree gets

$1,000, each worker still gets $1,500. The incomes of both workers

and

retirees go up. Thus, paying for the baby boomers' retirement need

not

decrease their children's standard of living.

 

So why the talk of a Social Security crisis? Social Security always

has been a pay-as-you-go system. Current benefits are paid out of

current tax revenues. But in the 1980s, a commission headed by

Greenspan recommended raising payroll taxes to expand the trust fund

in order to supplement tax revenues when the baby boom generation

retires. Congress responded in 1984 by raising payroll taxes

significantly. As a result, the Social Security trust fund, which

holds government bonds as assets, has grown every year since. As the

baby boom moves into retirement, these assets will be sold to help

pay

their retirement benefits.

 

Each year, Social Security's trustees must make projections of the

system's status for the next 75 years. In 1996, they projected the

trust fund balance would go to zero in 2030. In 2000, they projected

a

zero balance in 2036 and today they project a zero balance in 2042.

The projection keeps changing because the trustees continue to make

unrealistic assumptions about future economic conditions. The

current

projections are based on the assumption that annual GDP growth will

average 1.8 % for the next 75 years. In no 20-year period, even

including the Great Depression, has the U.S. economy grown that

slowly.

Each year the economy grows faster than 1.8%, the zero balance date

moves further into the future. But the trustees continue to suggest

that if we return to something like the Great Depression, the trust

fund will go to zero.

 

Opponents of Social Security claim the system will then

be " bankrupt. "

Bankruptcy implies ceasing to exist. But if the trust fund goes to

zero, Social Security will not shut down and stop paying benefits.

It

will simply revert to the pure pay-as-you-go system that it was

before

1984 and continue to pay current benefits using current tax

revenues.

Even if the trustees' worst-case assumptions come true, the payroll

tax paid by workers would need to increase by only about 2%, and

only

in 2030, not today.

 

If the economy grows at 2.4%—which is still slower than the stagnant

growth of the 1980s—the trust fund never goes to zero. The increase

in

real output and real incomes will generate sufficient revenues to

pay

promised benefits. By 2042, we will need to lower payroll taxes or

raise benefits to reduce the surplus.

 

The Real Fear: An Oversupply of Bonds

 

So why did Greenspan claim cutting benefits would become necessary?

To

understand the answer, we need to take a side trip to look at how

bonds and the financial markets affect each other. It turns out that

rising interest rates reduce the selling price of existing financial

assets, and falling asset prices push up interest rates (see " How

Does

the Bond Market Work? " p. 15).

 

For example, in the 1980s, President Reagan cut taxes and created

the

largest government deficits in history up to that point. This meant

the federal government had to sell lots of bonds to finance the

soaring

government debt; to attract enough buyers, the Treasury had to offer

very high interest rates. During the 1980s, real interest rates

(rates

adjusted for inflation) were almost four times higher than the

historic average. High interest rates slow economic growth by making

it

more expensive for consumers to buy homes or for businesses to

invest

in new infrastructure. The GDP growth rate in the 1980s was the

slowest in U.S. history apart from the Great Depression.

 

But high interest rates also depress financial asset prices. A five

percentage point rise in interest rates reduces the selling price of

a

bond (loan) that matures in 10 years by 50%. It was the impact of

the

record-high interest rates of the 1980s on the value of the loan

portfolios of the savings and loan industry that caused the S & L

crisis

and the industry's collapse.

 

Greenspan is worried because he sees history repeating itself in the

form of President Bush's tax cuts. In his testimony, Greenspan

expressed concern over a potentially large rise in interest rates.

This is his way of warning about an excess supply of bonds. Starting

in 2020, Social Security will have to sell about $150 billion (in

2002

dollars) in trust fund bonds each year for 22 years. At the same

time,

private-sector pension funds will be selling $100 billion per year

of

financial assets to make their pension payments. State and local

governments will be selling $75 billion per year to cover their

former

employees' pension expenses, and holdings in private mutual funds

will

fall by about $50 billion per year as individual retirees cash in

their

401(k) assets. Private firms will still need to issue about $100

billion of new bonds a year to finance business expansion. Combined,

these asset sales could total $475 billion per year.

 

This level of bond sales is more than double the record that was set

in the 1980s following the Reagan tax cuts. But back then, the newly

issued bonds were being purchased by " institutional investors " such

as

private-sector pension funds and insurance companies. After 2020,

these groups will be net sellers of bonds. The financial markets

will

strain to absorb this level of asset sales. It's unlikely they will

be

able to also absorb the extra $400 billion per year of bond sales

needed to cover the deficit spending that will occur if the new Bush

tax cuts are made permanent. This oversupply of bonds will drive

down

the value of all financial assets.

 

In a 1994 paper, Sylvester Schieber, a current advisor to President

Bush on pension and Social Security reform, predicted this potential

drop in asset prices. After 2020, the value of assets held in 401(k)

plans, already inadequate, will be reduced even more. More

importantly, at least to Greenspan, the prices of assets held by

corporations to fund their defined benefit pension promises will

fall.

Thus, pension payments will need to come out of current revenues,

reducing corporate profits and, in turn, driving down stock prices.

 

It's this potential collapse in the prices of financial assets that

worries Greenspan most. In order to reduce the run-up of long-term

interest rates, some asset sales must be eliminated. Greenspan said,

" You don't have the resources to do it all. " But rather than

rescinding Bush's tax cuts, Greenspan favors reducing bond sales by

the Social Security trust fund. Doing that requires a reduction in

benefits and raising payroll taxes even more.

 

Framing a question incorrectly makes it impossible to find a

solution.

The problem is not with Social Security, but rather with blind

reliance on financial markets to solve all economic problems. If the

financial markets are likely to fail us, what is the solution? The

solution is simple once the question is framed correctly: where will

the real output that baby boomers are going to consume in retirement

come from?

 

The federal budget surplus President Bush inherited came entirely

from

Social Security surpluses resulting from the 1984 payroll tax

increase. Bush gave away revenues meant to provide for workers'

retirement as tax cuts for the wealthiest 10% of the population.

 

We should rescind Bush's tax cuts and use the Social Security

surpluses to really prepare for the baby boom retirement. Public

investment or targeted tax breaks could be used to encourage the

building of the hospitals, nursing homes, and hospices that aging

baby

boomers will need. Such investment in public and private

infrastructure would also stimulate the real economy and increase GDP

growth. Surpluses could be used to fund the training of doctors,

nurses and others to staff these facilities, and of other high

skilled

workers more generally. The higher wages of skilled labor will help

generate the payroll tax revenues needed to fund future benefits. If

baby boomers help to fund this infrastructure expansion through

their

payroll taxes while they are still working, less output will need to

be allocated when they retire. These expenditures will increase the

productivity of the real economy, which will help keep the financial

sector solvent to provide for retirees.

 

Destroying Social Security in order to " save " it is not a solution.

 

Doug Orr is a professor of economics at Eastern Washington

University.

He is a regular speaker on the issues of private sector pensions and

Social Security and has published articles on these issues in

national

and international journals. His e-mail is dorr.