Social Security

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Social Security

Social Security’s Political Crisis

Why investing Social Security in the Stock Market is a bad deal

Alternatives to the Stock Market "Solution"

Final Thoughts

Use the Social Security Calculator to see what privatization would do to your benefit

View press releases and related documents on social security


Social Security

Congressman Kucinich has been one of the sobering voices on the Social Security "crisis." Contrary to what some are saying, Social Security is in fact secure. But there are political forces that are trying to dismantle Social Security. Wall Street is seeking the privatization of Social Security because of the billions of dollars of fees they will be able to charge on retirement investment accounts, and these private interests seek the dismantling of Social Security because they oppose successful government programs.

Congressman Kucinich has been at the head of efforts in Congress to protect and preserve Social Security. For instance, back in 1999 Congressman Kucinich brought experts together on Capitol Hill to examine and refute claims that Social Security is facing a crisis. At a conference he held in Washington in February 1999, members of Congress, staff and the public heard from Ralph Nader, economists and senior citizen advocates dispelling the myth that Social Security faces a crisis.

In 2001, the Progressive Caucus, which Congressman Kucinich chaired, offered an amendment to prohibit the implementation of the Presidential commission’s privatization plan. Nearly every Democrat voted in favor of our amendment. Indeed, this vote revealed that we need only 30 more votes to stop privatization. Congressman Kucinich believes that in the event a real privatization plan should come before Congress, we will succeed in finding those 30 votes.

Congressman Kucinich has also circulated letters among other members of Congress against privatization of Social Security.


Social Security’s Political Crisis

Social Security is essentially sound. Social Security is projected to pay all promised benefits for the next three and one-half decades without any changes whatsoever. A projected shortfall occurring 37 years in the future is not a crisis. No other organization, public or private, has a plan for operation 37 years into the future. Social Security is secure.

Indeed, Social Security's financial solidity is improving, even as Congress does nothing. The Trustees released an analysis recently that asserted that the Social Security Trust Fund is now projected to be solvent through the year 2041, without any congressional action. Only a few years ago, a previous Trustees' report set the date of projected insolvency to 2030.

The Social Security Trust Fund has gained seven complete years of solvency without privatizing Social Security or investing it in the stock market! Social Security got stronger without any Congressional action because the economy grew stronger and wages rose. This should be a lesson for everyone claiming a desire to save Social Security. We don't need the stock market to solve Social Security's projected financial shortfalls. We only need to strengthen the economy and raise wages, and Social Security will strengthen itself.

Nevertheless, Social Security does face a political crisis. It is a political crisis that there are members of Congress who want to radically dismantle Social Security and replace the Social Security guarantee with a stock market gamble. The President is guilty of stoking anxiety about Social Security for political advantage. He recently claimed that "there is no Social Security trust fund." That is totally false and misleading. It is unprecedented that a President would refer to government-issued bonds -- the assets in the trust fund -- as anything but backed by the full faith and credit of the United States. It is also cynical, because the U.S. redeems all bonds in full and on time. Investors the world over know that, which is why a U.S. treasury bond is considered the safest investment in the world. The Social Security trust fund contains equivalent bonds which are, therefore, the safest investment in the world. The President also created a “Commission to Strengthen Social Security," which was stacked to privatize Social Security. Every member of the Commission had declared a preference for diverting Social Security resources to the stock market. Indeed, they were chosen by the President because they support privatization. Even the Wall Street Journal (May 10, 2001) wrote, "It's no secret that President Bush stacked his bipartisan commission with members who agree with his goal of creating private accounts."

Fortunately, the President will face opposition to his plan to privatize Social Security. In 2001, the Progressive Caucus, which Congressman Kucinich chaired, offered an amendment to prohibit the implementation of the Presidential commission’s privatization plan. Nearly every Democrat voted in favor of our amendment. Indeed, this vote revealed that we need only 30 more votes to stop privatization. Congressman Kucinich believes that in the event a real privatization plan should come before Congress, we will succeed in finding those 30 votes.


Why investing Social Security in the Stock Market is a bad deal

There are many opinion leaders sporting plans to save Social Security, and they all have one thing in common: they all divert Social Security tax revenue to the stock market. There are differences among the stock market plans. Some call for complete privatization and the establishment of individual accounts. Others call for government investment in the stock market. And still others are a kind of hybrid. While the differences are important, the similarities are even more important and subject to the same weaknesses.

Proponents of investing some or all of Social Security in the stock market say that doing so will make a lot of money for Social Security. This argument does not make sense. Why?

The stock market cannot earn the rates of return that it has in the past if we accept the Social Security trustees' assumptions about economic growth. Proponents of investing Social Security in the stock market assume that the stocks will earn a 7% annual real rate of return over the next 75 years. Although these returns have occurred over the last 75 years, the Trustees are predicting that the economy will grow half as fast as it used to: 1.45% per year. It is impossible to get the same rate of return on stocks in such a slow growth economy.

To be consistent with the Trustees' slow growth projections, we would have to assume a 3.5% return on stocks. This is not very different from the projected return on government bonds (2.9%), which the Trust Fund currently invests in. The stock market will not be a source of additional funds if the assumptions the Social Security actuaries use are applied equally to stock market performance.

Here's how the math works: stock prices are already at a record level relative to their earnings (33 to 1, compared to an historic average of 14 to 1). If we assume that this ratio is not going to go higher, then stock prices have to grow at the same rate as earnings, or net profits. How fast can profits grow? The Trustees assume that profits grow at the same rate as the economy. That's 1.45%, according to the Trustees. So, that would allow for a 1.45% increase in the value of stocks. Of course, shareholders also receive dividends. the average dividend payout is currently about 2%. If we add this to the increased price of the stock, we get a total return of 3.45%.

If you think that the stock market is going to make high returns over the next 75 years, then you are rejecting the pessimistic assumptions of the Trustees AND you don't have reason to believe that Social Security faces serious financial trouble. The question to ask anyone proposing a stock market fix to Social Security is: what are your assumptions for economic growth, and what do you assume will happen to the price-to-earnings ratio of the stock market? If the response is: we're assuming the same economic assumptions as the Trustees, then they are also assuming a gigantic increase in the price-to-earnings ratio. And you know what that means -- an extremely risky and historically abnormal stock market.

Stock market investment is inherently risky. Stocks go up, and they go down. For every winner there must be a loser. Since Social Security is the only guaranteed income in case of old age or disability, putting Social Security into the stock market would be like betting the rent money. Not only would individuals have to pick the winning stock from the losing ones (and face the consequences if they bet wrong), but all people would have to confront the variations in stock market returns that come from the timing with which they invest. Market analyst John Mueller has shown that there is a lot of variation in the lifetime stock market total return based simply on timing. He found that someone investing during his working life (age 25 to 65) would have drastically different average returns if that person started working in 1940 and retired in 1980 (rate of return would be about zero) or started working in 1950 and retired in 1990 (rate of return would be about 4.5 percent). Mueller found that in several instances, the rate of return was below zero. Since people cannot control when they age, this variation will mean that some people would go without retirement income while others would have income. That disparity is what the original Social Security system was designed to prevent. Therefore, investing Social Security in the stock market would be a step backwards for society.

There are also serious political costs to linking the subsistence retirement benefit Americans cannot do without to the stock market. First, government investment of Social Security in the stock market will precipitate renewed attacks on existing consumer protections and a powerful argument against passage of new consumer protections. The future is even more bleak when one considers how a stock market-dependent Social Security system would add new and harmful pressures to consumer, environmental and workplace safety protections. Picture a "Social Security Protection Act of 2010." This would be the bill that the business lobby would advance to strip consumer, environmental and workplace safety regulations on the plausible argument that those regulations diminish the price of stocks held by Social Security. It has a certain cynical logic -- eliminate the regulations, and the stock prices rise, and so does Social Security's "ability" to pay promised benefits. If you think that deregulation disguised as "paperwork reduction" is bad, you do not have to imagine very creatively to see that deregulation disguised as Social Security protection is the political Trojan horse of all time. Second, government investment of Social Security in the stock market will introduce conflicts of interest within the government, impairing enforcement of consumer protections and obstructing the improvement of those protections. Some may wonder how the Federal Trade Commission, Federal Energy Regulatory Commission and Federal Communications Commission would respond to the increased pressure to approve mergers caused by the effect on Social Security of higher stock prices in sectors of the economy where merger activity was rumored. Couldn't Congressional appropriations for those investigations be imperiled if protecting Social Security's stock holdings were the reason? Wouldn't fear of causing a drop in the stock market, or even in a sector of the market place a chilling effect on future lawmaking? Those laws or institutions that cut across industries and affect the shape of the economy such as antitrust or product liability would be put under the greatest pressure.


Alternatives to the Stock Market "Solution"

You might say, if the stock market is not an adequate solution to long term funding problems, the Social Security actuaries' assumptions still forecast problems. If the actuaries' projections become reality, there are many steps Congress can take. First, Congress can back Social Security with a guarantee that any shortfall will be made up through general revenue. Claims of impending insolvency are indeed concerning, but underneath the rhetoric is really a mundane, non-emergency fact - that the income from the payroll tax is projected to no longer meet expected benefit costs. That does not mean that the costs are too great in any absolute sense, just that more money is needed than the dedicated tax is projected to raise. Compare that to the thousands of other government projects that are funded out of general revenue, rather than a dedicated payroll tax. The same claim of “crisis” cannot be made because Congress meets the cost every year automatically by law. That point is worth remembering, because it reveals that the mere form of funding, not the absolute ability to find funding, is the real source of the problem. In Congress, finding more money is a normal operation of Congress. If Social Security were supplemented by general revenues, as most government programs are, it would be more difficult for privatizers to argue that bankruptcy is the inevitable result of forces beyond congressional control. Can you imagine anyone arguing that the Pentagon is going bankrupt? Of course not. The Pentagon will go bankrupt only if Congress wants it to. The same is true of Social Security. Social Security will become insolvent only if Congress says it should. Second, Congress can correct a persistent problem --Congress has been shortchanging the interest rate on the Social Security trust fund. The interest rate was arbitrarily set to the intermediate term bond rate. But that is a lot less than the average interest rate of US Treasury-backed securities. If Congress changed the law to credit the Social Security trust fund with the average interest rate of all Treasury-backed securities, we can reduce any long term financing problems by about 30 percent. Third, Raising the average wage in America will make the most important contribution to Social Security's long-term projected financial balance, since Social Security derives almost all of its revenue from a wage-based tax. Congress should work to ensure that Americans receive a real raise of $7,000 above any increase in the cost of living over the next 10 years, raising the average real wage to $36,000 from about $29,000 today. If Congress only does this, maintaining such an average increase over the long term (a real wage growth rate of 2 percent), Social Security's projections will remain in balance through 2049. A number of steps can be taken to set the economy in that direction, including reducing the legal barriers to unionization through instituting the "card-check" requirement for unionization; raising the minimum wage to $7.50, restoring purchasing levels of 1970, and maintaining a low unemployment rate and low real interest rates on borrowing.


Final Thoughts