Tom Latham Endorsed Mandatory Private Investment of Social Security
Read Between the Lies: Report #11
By Hans Riemer, Senior Policy Analyst
10/23/02 | PDF
TOM LATHAM ENDORSED MANDATORY PRIVATE INVESTMENT OF SOCIAL SECURITY
Latham privatization plan would require everyone to lose Social Security benefits while taking more risk.
Congressman Tom Latham, candidate for Iowa's Fifth Congressional District, is hiding his real views about Social Security. He doesn't want voters to know that the idea he supports - requiring workers to invest their own Social Security money in stocks and bonds - would cause people to lose a lot of what they are owed from Social Security.
It is just simple math: if some workers take their money out of Social Security in order to invest it in stocks and bonds, then there is less money in the fund to pay benefits for everyone else. Guaranteed Social Security benefits have to be reduced dramatically.
Yet Tom Latham would take this bad idea one step further. He supports requiring workers to invest their own Social Security money, even if they don't want to take the risk.
Congressman Latham does not want to admit that his plan would cause benefit cuts. In fact, he now claims that he opposes privatization, even though for years both Republicans and Democrats have used the word to describe private account schemes such as the one proposed by Latham.
The truth is that Tom Latham doesn't want the voters to know about the consequences of his ideas before Election Day.
Latham told corporate group he would vote for mandatory privatization.
Tom Latham told the National Taxpayer's Union (NTU), a right-wing pro-corporate organization that advocates privatizing Social Security, that he supports mandatory private account schemes for Social Security.
In the NTU's 2002 candidate questionnaire, Latham took the following position:
"I recognize that Social Security will default on its obligations to future retirees unless fundamental reforms are made. Therefore, I will work and vote for a gradual transition to a system that creates obligatory personally-controlled retirement accounts…" [NTU, 2002 Survey, Question #5 http://www.ntu.org/candidate_survey/]
The National Taxpayers Union is a long-standing advocate of privatizing Social Security.
According to the NTU website, "America needn't rely on hypothetical situations or comparisons to similar plans to prove the worth of privatizing Social Security. In fact, countries throughout the world are in the process of privatizing their social security plans. Those that have completed the transition are currently reaping the benefits of privatization." [NTU Policy Paper # 110, 04/07/99]
Private accounts would cut Social Security benefits...
By supporting mandatory private accounts, Latham takes the idea of privatization to its very extreme. He believes that all workers should be forced to take risk with their Social Security money, even if they do not know how to invest or if they think that they are already taking too much risk in their retirement plans.
By the same token, these workers would also be forced to go along with the cuts in guaranteed Social Security benefits that the investment accounts would require.
It is important to understand why private accounts would take money out of Social Security, and why that would force a cut in benefits. For the purposes of illustration, imagine if every worker paid $1000 into the Social Security system every year. Under a private accounts system, that worker would divert an amount, say one-sixth or $160, into a private account. Social Security, in turn, would have only $840 to pay benefits, where before it had $1000. So promised benefits would have to be reduced to the level that could be paid from $840.
This new gap in funding would of course compound the currently projected gap in funding. To continue the illustrative example, if Social Security in the future would actually need $1200 to pay full benefits - but would have only $840 because of privatization, benefits would have to be reduced even further, from $1200 as promised to $840 as could be funded.
That is why private accounts don't help secure Social Security's finances at all, but rather cause deep benefit cuts.
Consider the most widely discussed approach to partial-privatization, which is to divert two percentage points of Social Security taxes into private accounts. [1] A "2% plan" would reduce Social Security contributions from 12.4% to 10.4%, and direct that money to private accounts. Two percentage points of FICA is about one-sixth of total Social Security revenues (2/12.4).
According to the intermediate projections of the 2002 Social Security Trustees report, Social Security benefits are fully funded (meaning that 100% of benefits can be paid) until the year 2041. After 2041, when the Trust Fund has been entirely redeemed, Social Security will be able to fund about 73% of benefits throughout the remainder of the century. Social Security is facing a real - but manageable - financial shortfall.
In contrast, if the "2% plan" were put into effect today, nearly $1 trillion would be diverted away from Social Security over the first ten years of implementation. Social Security would first become insolvent in 2026 - fully 15 years earlier than current law. Similarly, the date at which the Social Security Trust Fund would first need to be repaid would move up to 2009, from the current projection of 2017. [1]
The amount of benefits that could be funded after the date of initial insolvency would be reduced substantially. According to projections from the most recent Social Security Trustees report, [3] the benefit cuts under the bill would be as follows:
- In the year 2030, the bill would leave Social Security with only 65 percent of the money it needs to pay full benefits. Social Security benefits, including survivors and disability benefits, would have to be cut by 35 percent.
- In the year 2045, the bill would leave Social Security with only 63 percent of the money it needs to pay full benefits. Social Security benefits, including survivors and disability benefits, would have to be cut by 37 percent.
- In the year 2065, the bill would leave Social Security with only 59 percent of the money it needs to pay full benefits. Social Security benefits, including survivors and disability benefits, would have to be cut by 41 percent.
As a result, the "2% plan" would substantially reduce the amount of money available to pay Social Security benefits in the future, causing Social Security benefits to fall and retirement income risk to increase.
… and turn Social Security's guarantee into a gamble.
Advocates of partial-privatization argue that, on average, workers would be better off under a private account scheme than under Social Security.
Perhaps some people would have enough success with their investment accounts that they could offset some of what they lose from Social Security. But it is a mathematical certainty that millions of workers would not be able to; some would have bad luck, some would make bad decisions, some would get ripped off.
After all, even under an "average" stock market return scenario, nearly half of the workers do not do as well as the average.
Academic studies prove, moreover, that average investors do significantly worse than the stock market average. According to research by finance professor Terrance Odean of the Haas School of Business at UC Berkeley, average American households as well as investment clubs have portfolios that "underperform the stock market by about 4 percent annually." [4]
There is no such thing, of course, as a 401(k) plan that can also provide disability insurance for an entire family, life insurance for an entire family, an inflation-protected benefit that protects a standard of living, and a reduction of poverty for low-income retirees, all from the same contribution.
The purpose of Social Security is to provide a guaranteed benefit in the event of retirement, disability and survivorship that is adequate to protect a family's standard of living. That benefit should be immune to stock market swings and it should be guaranteed by the full faith and credit of the U.S. government. That is what Social Security provides today.
A partial-privatization plan cannot meet these important objectives.
Latham tries to hide his agenda by playing word games about privatization.
According to the Ames Tribune, "Latham has said it's a 'scare tactic' to say his proposal for the creation of individualized accounts is tantamount to privatization of Social Security - something he said he said he never will support." [Ames Tribune, 10/03/02]
According to Latham's own campaign website, "Congressman Latham is opposed to privatizing Social Security." Latham writes:
One prominent false claim centers around the privatization of Social Security. This claim is absolutely untrue. Those attempting to misinform and scare seniors are mischaracterizing a proposal for the introduction of personal accounts as "privatization of Social Security". 'Personal accounts' is not synonymous with 'privatization.' The term 'personal accounts' does not imply that Social Security would no longer remain a publicly administered system. Neither does it imply that individuals who do not opt for the accounts would experience any change in how benefits are provided.
Unfortunately, Latham is just trying to trick the voters by denying that private accounts are the same thing as privatization. His promise that individuals can "opt" for accounts is directly contradicted by his statement to the National Taxpayers Union that he would "vote for a gradual transition to a system that creates obligatory personally-controlled retirement accounts."
Considering that the Latham agenda for Social Security means benefit cuts and stock market risk, it's not a bit surprising that he would rather focus on what to call it rather than what it does.
The fact is, for years, both Republicans, Democrats, independent experts and advocates have used the term "privatization" or "partial privatization" to describe any proposal that would use Social Security money for private investments:
- Karl Rove, top advisor to the Bush administration, has used privatization to describe private accounts. Discussing VP nominee Dick Cheney's qualifications in a CNN interview during the 2000 campaign, Rove said, "On Social Security privatization, encouraging private personal retirement accounts, Cheney was for them." [CNN, 8/13/00]
- John McCain, captain of the StraightTalkExpress, said, "I'm for school vouchers and privatization of Social Security. If the Democratic Party wants me with those conditions, I'd be surprised." [Washington Post 5/13/2002]
- The Congressional Research Service, the legislative analysis unit for Congress, says, "One approach has been to switch greater responsibility for providing retirement income from state sponsored systems to workers' own savings, a process commonly referred to as 'privatization.'" [Congressional Research Service, 01/01]
- According to the AARP, "Some would "privatize" Social Security by moving it away from a social insurance program to one composed of individually controlled investment accounts that replace part or all of Social Security. This approach is sometimes called a carve out. Social Security should not be jeopardized by individual accounts that would replace all or a portion of Social Security's guaranteed benefit." ["The Policy Book: AARP Public Policies 2001," Page 3-7]
When Tom Latham says that private accounts are not the same thing as privatization, he is blatantly trying to mislead the voters.
Tom Latham should come clean on Social Security.
In 2002, every candidate for U.S. Congress has been asked to sign the Campaign for America's Future "Pledge to Protect Social Security and Medicare" (www.signthepledge.org ). The Pledge commits those who sign it to oppose plans for complete or partial-privatization of Social Security.
If candidates refuse to sign the Pledge, they refuse to promise to "oppose diverting any Social Security revenues to fund private investment accounts," the common definition of partial-privatization. They also refuse to "oppose any plan that includes any of these benefit cuts to finance private investment accounts," including the "White House Commission" plans.
Latham has refused to sign the Pledge.
Instead, he has tried to confuse the voters with semantic games. He says that he opposes privatization - even though independent experts, advocates, Republicans, and Democrats have called the approach he supports just that for years. He tells Iowa voters that he opposes mandatory privatization - even though he tells a DC business group that he will vote for it.
Voters deserve straight answers about the future of Social Security. Tom Latham should come clean with the voters before - not after - Election Day.
[1] This model was proposed as H.R. 306 in the 103rd Congress, written by Representative John Porter (R-IL) and co-sponsored by twenty members of the House of Representatives. The proposal called for reducing the Social Security contribution by two percentage points, from 12.4 percent to 10.4 percent. The two percentage points of contributions would be diverted into private investment accounts, similar to 401(k)’s, which businesses were required to establish and workers were required to invest. See http://thomas.loc.gov for further information.
In testimony opposed to this plan, the AARP said, “If one percent of the worker’s and the employer’s share of the payroll tax contributions are rebated, the Social Security trust funds will collect insufficient income to guarantee its current benefit promises…The trust fund shortfall could lead to unanticipated tax increases or future efforts to cut benefits.” [AARP: House Ways & Means Committee testimony, 10/4/94]
[2] Calculations by Dr. Peter R. Orszag, Brookings Institution. For more information (with slightly older numbers) see Peter Orszag, “The Impact of 2 Percent Individual Accounts on Social Security Solvency.” Center on Budget and Policy Priorities, May 15, 2000. http://www.cbpp.org/5-12-00socsec.htm
[3] Table IV.B1 of the 2002 Social Security Trustees Report provides estimates for future income and outgo of the Social Security system. Determining the benefit cuts under the H.R. 306 requires subtracting two percentage points from the income rate specified in that table, divided by the outgo, for a given year. This calculation applies for any year after 2026, after which the Trust Fund is no longer available to supplement the payroll tax income specified in that table. [http://www.ssa.gov/OACT/TR/TR02/IV_LRest.html#186623]
[4] “Investors Beware: Can Small Investors Survive Social Security Privatization?,” by Brooke Harrington. The American Prospect. Vol. 12 Issue 16, 09/10/01. http://www.prospect.org/print/V12/16/harrington-b.html
