May
01
1999

The Derailing of Social Security

How Cato and Heritage paved the way for privatization

For many years, Social Security was supposed to be the third rail of American politics--not to be touched by officials who valued their political lives. This unique power resulted from an irresistible combination of affection and clout: Social Security was appreciated as the most successful anti-poverty program in America, and its clout came from the millions of voters from all walks of life who received checks every month, without fail.

But by late 1998 it was beginning to look like the 63-year-old program was facing forced retirement, and would be rejected for a younger, sexier model. Two conservative think tanks, with funding from investment firms with plenty to gain from a privatized system, have worked hard, and effectively, to undermine the loyalty of the U.S. public, and politicians.

If Social Security as we know it is cast off like a rejected first wife by this Congress, it will be because of the slow but steady deterioration of public support over more than a decade. Dorcas Hardy, Reagan's Social Security commissioner, wanted to privatize Social Security, but the idea seemed so weird that it received little serious attention--especially from the public.

It became obvious that privatization would not receive substantial public support until the public's faith in the Social Security system had dramatically eroded--but to do that the public needed to be convinced that there was a crisis, not in some far future time, but now. And so, the "fact" that Social Security was going broke, or was already bankrupt, became a recurring theme trumpeted by the pro-privatization pundits of the Heritage Foundation and the Cato Institute.

The bankruptcy myth

Over the years, the statement has been made so many times and repeated by so many people that many Americans now believe that Social Security is bankrupt, or will be any day now. My personal experience is that most reporters assume that it is so. And yet nothing is further from the truth.

Last year, Social Security paid out $383 billion in checks, and received $436 billion in taxes and an additional $49 billion in interest. Instead of red ink, Social Security made almost $102 billion in profit, to add to the more than $652 billion it had in profits from previous years.

I suppose there are some folks who aren't impressed by a program with an annual surplus of more than $100 billion and "end of the year assets" of more than $756 billion, but even they can't call it bankrupt, a term that means "lacking funds" or "unable to pay one's debts." A more accurate description of the Social Security program is to say that it is rolling in money, that it has an enormous surplus that is growing every year, and will be for years to come.

The Trustees of the Social Security System use very conservative (that is to say, pessimistic) assumptions in forecasting their program’s financial future. (See "TV on Social Security: It's Broke, Fix It") But even using their figures, it is not until sometime after 2020 that the program will collect less in taxes and interest than it pays in benefit checks, and even then, it will have more than $1 trillion in the Social Security Trust Fund, left from previous years. Their most recent estimate is that, for the next 34 years, the taxes that are collected, when added to interest and money from the Trust Fund, will be sufficient to pay all the benefits currently planned.

It is not until 2034 that the Trustees project that there will be no money left in the Trust Fund, and not enough taxes to pay all the benefits that are expected. But even when the Trust Fund is empty, and for the foreseeable decades thereafter, the Trustees expect there will be enough taxes to pay 75 percent of the planned benefits.

And yet experts from the Heritage Foundation and Cato Institute have repeatedly and falsely claimed that Social Security is bankrupt--and the media have let them get away with it. For example, in an executive summary of a June 1998 report entitled "Social Security's $20 Trillion Shortfall," the Heritage Foundation author, Daniel J. Mitchell, flatly claimed "the Social Security system is bankrupt." When Mitchell repeated that lie on Good Morning America the following month (7/26/98), the ABC reporter interrupted him--not to correct him, but to indirectly support his views by pointing out that 84 percent of participants in a survey on ABC's website favored some sort of privatization.

Of course, ABC is not the only network that fails to challenge the misinformation of these think tanks. In January 1998 on CNN's Newsday and again in December 1998 on CNN's Your Money, the anchors claimed that "Social Security starts having cash-flow problems just 14 years from now." According to actuaries at Social Security, at the end of 2015, which is 17 years after that broadcast, Social Security will have assets of almost $2 trillion. I'd like to have cash flow problems like that!

Are these pro-privatization pundits unable to read those tiny numbers on the charts that Social Security makes public every year, or is there something else going on? The statements about bankruptcy are clearly just wrong, but the claims of cash flow problems seem to reflect their view that since the Trust Fund is filled with government bonds instead of stacks of paper money, these assets are not real.

These funds were borrowed from the trust fund by the U.S. Treasury, under the condition that they would be paid back with interest. But Cato, Heritage and others apparently view these funds as gone forever. For example, in a column in the L.A. Times (12/7/98), Cato’s Michael Tanner refers to the Trust Fund as "little more than an accounting fiction." Washington Post columnist James Glassman, who is also an American Enterprise Institute fellow, refers to these hundreds of billions of dollars as if they were irrelevant (11/24/98). Glassman tells us that the Trust Fund consists of what little was "left over--and there hasn't been much" after the checks are sent to beneficiaries. In fact, these "left-overs" currently amount to $730 billion.

Privatization, not preservation

Now that half of America is persuaded that Social Security is a riskier bet than a Superbowl game (Oppenheimer Funds Newswire, 1/21/99), the next step is to try to convince everyone that privatization, rather than preservation, is the answer. Since the goal is to bring wavering Democrats on board, the next strategy was to issue reports claiming that minorities and women would particularly benefit from Social Security privatization. Once again, facts did not get in the way of ideology.

As a dramatic first step, last year the Heritage Foundation published a report claiming that Social Security is a bad deal for African-Americans and Latinos. The report received considerable coverage and was widely quoted by major media--for example, Rep. Mark Sanford (R.=N.C.) claimed in a Washington Post op-ed (6/7/98) that "a single male born in 1975 and living in Charlie Rangel's [mostly minority] New York district is guaranteed a negative 6.4 percent rate of return."

CNN (1/13/98) reported that "an African-American male born in 1970, single with a high income, would see a nearly 4 percent negative rate of return because of shorter life expectancy." This example should have raised immediate skepticism, since men with high income, regardless of race, tend to live longer lives, not shorter.

In fact, the Heritage Foundation's estimates were fatally flawed and totally inaccurate, based on "a glaring error," according to a former chief actuary of the Social Security Administration (The Actuary, 9/98). Current Social Security Administration officials have also corrected the Heritage report, and concluded that non-whites actually do at least as well if not better than whites. Many of the TV networks and news magazines were strangely silent, but Business Week (12/14/98) ran a outspoken critique entitled "Red-Faced Over Social Security: A Conservative Think Tank's Boo-Boo." In contrast, CNN repeated the exact same example of a short-changed African-American that they had used in January 1998 for a story that they used one year later (Your Money, 1/18/99).

Cato took the lead on the women's issue, writing a well-publicized report (CNN, 7/20/98) claiming that women would greatly benefit from privatization. The claim was immediately questioned by women's advocates--if women earn less than men, and are the main beneficiaries of Social Security's benefits for widows and non-working spouses, how could they benefit from a program where benefits are more closely tied to earnings?

In this case, Cato's claim was possible because they conveniently ignored the enormous transition costs of privatization. By pretending that all the money that is now paid as Social Security taxes could instead be invested in stocks and bonds for each individual's private account, Cato researchers were able to conclude that women would benefit. In order to make their point, Cato researchers ignored the cuts in benefits that had been included in every serious privatization plan, all of which disproportionately harmed women (Congressional Quarterly, 4/28/98).

The Heritage and Cato estimates also ignore another major factor: Social Security taxes don't only pay for our retirement, they also help to support children whose working parents have died, as well as widows and severely disabled individuals who are unable to work to support themselves. These are the people who most desperately need Social Security, but the pro-privatizers hope that nobody will notice that their economic security isn't even mentioned in the reform plans--and on this point, the privatizers have usually been right.