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April 06, 2005

The Commander Is on Deck

Gene Sperling issues marching orders on Social Security reform:

On Clear Lines on Progressive Savings Accounts

by Gene Sperling, Senior Fellow, Center for American Progress
April 4, 2005

With the public overwhelmingly rejecting the White House's efforts to partially privatize Social Security through the diversion of payroll taxes into private accounts, there is already a growing conservative effort to use new rhetoric and designs to blur the distinctions between harmful privatization options and the types of progressive savings options outside of Social Security that are deserving of progressive support.

One way the lines are blurred is by the emphasis on partial privatization proposals that, while sharing virtually all of the same flaws as "carve-out" privatization proposals in terms of injecting unnecessary risk and undermining Social Security's progressive guaranteed benefit, are nonetheless defined as "add-on" accounts. Indeed, even President Bush on at least one occasion has sought to describe partial privatization accounts as an "add-on." Since the phrase add-on has also been used to describe proposals like President Clinton's USA Account and the Universal 401K,* which are completely outside of Social Security and targeted to middle-income and moderate-income families, it is clear that simply using this term does little to define the nature or acceptability of such a proposal.

Another likely avenue for such line-blurring is for conservatives fleeing partial privatization plans to call for "add-ons" that rely on borrowing and running up the national debt to fund regressive savings accounts – such as President Bush's Retirement Savings Accounts and Lifetime Savings Accounts – that would further skew our upside-down savings system even more toward the most well-off. While some new proposals attached to conservative Social Security reform plans include a small incentive targeted toward low-income savers, every such plan that has been floated so far has been regressive, with the largest costs directed at the most well-off.

As one who believes progressives must support responsible and fair efforts to enhance Social Security's solvency and as a strong supporter of progressive savings options outside of Social Security such as a Universal 401K, I believe it is crucial that progressives be crystal clear about what would constitute an acceptable effort to increase pension and personal savings outside of Social Security, and what constitutes harmful regressive or partial privatization proposals.

While the language and design of varying Social Security and savings account options can be complex and murky, the principles that define what progressives should stand for and what they should reject are straightforward. When it comes to new individual accounts or savings options, they should meet three clear principles:

  • No Integration with Privatization: They should be completely separate and have no integration with the financing and benefits of Social Security;
  • Progressivity: They should be progressive – at a bare minimum 80 percent of the benefits should go to the bottom 80 percent of all taxpayers, with special refundable incentives for low- and moderate-income earners.
  • No Increase in National Debt: They should be financed without increasing our already escalating national debt.

1. No Integration with Privatization: A critical issue in distinguishing between acceptable progressive savings accounts and private accounts that seek to undermine the risk-free, guaranteed benefit structure of Social Security is whether or not the new savings options are wholly separate from the financing and benefits of Social Security. For example, there are many ways to design so-called "add-on" accounts so that they are the functional equivalent of "carve-out" accounts. The president's initial plan envisioned diverting 4 percent of payroll taxes and borrowing trillions of dollars to cover this diversion while cutting guaranteed benefits. This is functionally indistinguishable from a plan that claims to dedicate all 12.4 percent to Social Security, yet borrows the same trillions of dollars to fund "add-on" individual accounts, which are combined with a structure of lower Social Security benefits.

The national discussion has made clear over the last few months that there is no sound reason to accept any move toward partial privatization, while the arguments for resisting such a move are compelling. The White House itself admits that private accounts do nothing to restore solvency and there are there are many options to universalize pension savings that do not require a dime of privatization. Yet despite the lack of a rationale for such partial privatization, we are now entering the "Rosemary Woods privatization" period, where private account advocates strain and contort themselves to keep partial privatization efforts alive in forms other than the carve-out model the president's team initially laid out. It is becoming more and more clear that the driving force behind such partial privatization plans is not saving Social Security or boosting private savings, but simply privatization for the sake of privatization.

Some journalists and pundits have argued that even if there is nothing compelling or necessary about partial privatization, progressives should compromise – presumably on the assumption that there is no particular downside to opening the privatization door. This could not be more off the mark. There are profound downsides to any step towards privatization.

The Harm of Adding Risk to the One Leg of the Retirement System that is Guaranteed and Risk-Free: Progressives should be leading the fight to increase savings, retirement security and wealth creation among middle-income and hard-pressed working families – including encouraging more pension and private savings, and responsible market investment. Yet, as has long been noted, retirement security is a three-legged stool involving 1) pension savings; 2) personal savings and home equity; and 3) Social Security. Of these, only Social Security is guaranteed and risk-free. As we have seen, a person who is part of a massive lay-off can see his or her pension savings, personal savings, and home value all decline because of the same negative economic event. Social Security stands as the one part of our system that is not susceptible to such economic risks.

Those, like me, who argue for a bold Universal 401K seek to spur additional savings and investment in the legs of our retirement system that do involve risk. That is why the advocates of Universal 401Ks, automatic 401Ks, and USA Account-type plans should be the most adamant on insisting that Social Security remain guaranteed and risk-free.

Privatization Plans Are All Designed to Devalue the Progressive Social Insurance of Social Security. Advocates of partial privatization have long been guilty of ignoring, underestimating, and undermining the social insurance value of Social Security – providing a deceptive picture of the true significance and benefit of the program. Social Security is a compact among all Americans to ensure a modicum of economic dignity no matter what life may bring. Much of the value of Social Security lies in its role as insurance against the threat to economic dignity that can come though disability, through the early death of a provider, poverty, or longevity that can drain savings. For example, currently one-third of payouts go to survivors or workers who have become disabled.

Despite this, privatization advocates continually paint a distorted picture of Social Security's value by describing it only in terms of its return on investment. Everyone would think it was absurd to tell parents who had bought auto and fire insurance that they had been terrible investors and had robbed their children of their inheritance because – with no accidents or fires – they had a negative return. Everyone understands that this is a distorted frame for assessing the true value of insurance; while you hope you never need it, insurance can make all the difference for a family if life takes a difficult turn.

Virtually every partial privatization plan is designed to make Social Security recipients undervalue this social insurance benefit of Social Security and to over-value the private account. Each plan is designed to make people think the individual account is a better deal than it is, by hiding the fact that it offers no disability, survivor, or poverty insurance or by obscuring the reality that benefits are being reduced or debt is being increased to pay for it. Take, for example, the White House's initial proposal: the account was specifically designed to make the private account appear to be a better deal than it was by hiding the fact that benefits were being decreased to pay for it. It was the equivalent of encouraging an couple who borrowed $10,000 from their credit card in order to set up a $10,000 IRA to never factor into their planning that they have to pay back their credit card debt with interest. Even though it would have been identical to its announced plan, the White House was adamant that the offset not be taken out of the account itself, as that more transparent design would have given a more accurate picture of the value of private accounts and made the account look more meager and the traditional benefit more robust.

Virtually all privatization proposals are also designed to make the payroll taxes dedicated to the traditional benefit look like a worse deal than they are, since the payroll taxes also cover the full load of the social insurance for survivor's and disability benefits. Such partial privatization plans, therefore, create an inaccurate undervaluation of Social Security's true benefit by encouraging recipients to inappropriately compare the returns from a small portion of payroll taxes with the overall value of Social Security's progressive social insurance.

The architecture of all of these plans to integrate private accounts into the Social Security system, therefore, is designed – whether by intent or effect – to create a distorted picture of Social Security so that the fortunate and the healthy are encouraged to gradually pull out; thereby starting a slippery slope toward a world with individual accounts for the fortunate and a politically weak welfare program for the elderly poor and disabled. Social Security has been a progressive crown jewel for decades, partly because it is not only a compact between generations but also a powerful compact among all working Americans – the healthy and middle class as well as the working poor and disabled. There is no reason for progressives to knowingly participate in the unraveling of that consensus.

In light of these downsides, compromise for the sake of compromise on privatization for the sake of privatization is hardly the bedrock principle that progressives should stand on.


2. Accounts Must Be Progressive: Currently we have an upside-down tax incentive system for savings. Those at the higher part of the income ladder are not only far more likely to have an employer-provided pension with matching contributions, but they also receive a 35 percent deduction on every dollar they put in a qualified retirement savings accounts. A moderate-income worker in the 10 percent bracket, on the other hand, is unlikely to have an employer-provided account with matching contributions, and if such workers do save, they get 10 percent on the dollar, less than one-third the incentives of those at the top. Due to this upside-down incentive system for savings, of the $146 billion that the federal government forgoes each year to encourage retirement savings through tax deductibility, a pathetic 3 percent goes to the bottom 40 percent of earners, while the top 10 percent of earners receive 49 percent of these tax subsidies.

This is a major reason why we have a Swiss-cheese retirement system. In 2003, 85 percent of workers in the lowest wage quintile and 73 percent of small-business employees had no employer-sponsored pension. The same was true for 75 percent of Hispanic and 60 percent of African-American workers. Overall, less than half of American workers have an employer-sponsored pension in any given year. The results for retirement security are not pretty: Among households of those 55 to 59 years old, the median amount held in IRAs and 401(k)s is only $10,400.

Despite this, President Bush has pushed forward Retirement Savings Account and Lifetime Savings Accounts that would only exacerbate the unfairness in the current system. These new plans would deliver the overwhelming bulk of additional tax incentives to the 5 percent of Americans who are already contributing the maximum to an IRA or 401K account. It as if President Bush saw only 5 percent of Americans with a full slice of cake, and decided that what our nation needed most was a plan to give that 5 percent an extra helping of icing. No progressive should buy into a "let them eat icing" plan even if it is outside of Social Security. An acceptable progressive savings account – even if not as generous as a Universal 401K – should at a bare minimum have refundable tax incentives for the most hard-pressed savers, and ensure that that at least 80 percent of the benefits are distributed to the bottom 80 percent of American workers. Anything else only keeps our upside-down system more firmly planted on its head.

While measures to make 401K enrollment more automatic are smart and important reforms, progressives should not be complacent to just call for these reforms. Without measures to have robust matching credits for low- and moderate-income workers and tax reform that would lead to a flat tax credit for savings, those arguing only to make 401K enrollment more automatic will do little to reach the huge numbers of Americans who are falling through the cracks or to turn our upside-down system for savings incentives right side up.

3. No Increase in the National Debt: In early 2001, projections from both the Congressional Budget Office and the administration's own FY2002 budget suggested we would achieve $7.3 trillion in surpluses from 2005 to 2014. Now, independent estimates from Goldman Sachs and others project $4.8 trillion in deficits over that period. That is a $13 trillion swing – what former Nixon Secretary of Commerce Peter Peterson has called "the biggest, most reckless deterioration of America's finances in history."

Some have argued that any increase in government debt to fund these proposals would be matched by increases in private savings and therefore be a wash for overall national savings. While many dispute this, even if it was true, setting this as our new gold standard for Social Security or retirement savings reform would represent a radical lowering of the bar for dealing with the baby boom retirement challenge. Only a handful of years ago, it was uncontroversial that the main economic motivation for early Social Security solution was for this generation to increase national savings to ease the burden for our children and grandchildren.

If we are truly committed to both fiscal discipline and increasing private savings, there are many options to do this. For example, if we were willing to simply allow the estate tax structure to remain as it is scheduled until 2009 – which includes allowing the exemption per couple to rise from $3 million to $7 million, while avoiding outright repeal of all estate taxes on the wealthiest estates. With the savings from this modest measure we could easily save enough to provide significant matching incentives to over 60 million American workers. While this would mean higher estate taxes for the wealthiest 10,000 estates a year, it would be only a shift in tax policy, not a tax increase. A plan that called for higher estate taxes on only 10,000 estates while giving 50-100 million American workers a refundable tax cut to encourage savings would mean that for every 1 wealthy estate that would see higher taxes than under complete repeal, at least 5,000 Americans would get a tax cut that could help them to someday build an estate of their own.

During a period when there should have been an increasingly urgent focus on the need to increase savings, the Bush administration's fiscal policy has taken us three giant steps backwards on national savings. In this light, it is absolutely imperative that any new proposals for savings be accomplished without a further escalation in our national debt.



For more information on the Universal 401K proposal, see: Gene Sperling, "A Progressive Framework for Social Security Reform," Center for American Progress, January 15, 2005.

Posted by DeLong at April 6, 2005 07:21 PM