Government Takeover of Retirement Assets

Are the advocates of “fiscal responsibility” merely misguided? Or are they up to something more devious? The President’s Executive Order is vague about the sorts of budget decisions being entertained, but we can get a sense of what is on the table by looking at the earlier agenda of Peterson’s Commission on Budget Reform. The Peterson/Walker plan would have slashed social security entitlements at a time when Wall Street has destroyed the home equity and private retirement accounts of potential retirees. Worse, it would have increased the social security tax, disguised as a “mandatory savings tax.” This added tax would be automatically withdrawn from your paycheck and deposited to a “Guaranteed Retirement Account” managed by the Social Security Administration. Since the savings would be “mandatory,” you could not withdraw your money without stiff penalties; and rather than enjoying an earlier retirement paid out of your increased savings, a later retirement date was being called for. In the meantime, your “mandatory savings” would just be fattening the investment pool of the Wall Street bankers managing the funds. And that may be what really underlies the big push to educate the public to the dangers of the federal debt. - Ellen Brown, The Final Red Herring: The Threatened Bankruptcy of Social Security, Web of Debt, March 2, 2010

Democratic Policy Group Would Limit COLA Increases and Cut Social Security for Top Earners in U.S.

November 30, 2010

Bloomberg - A Democratic-led policy group is defying party history by proposing changes to Social Security to pave the way for recommendations this week by President Barack Obama’s deficit-cutting commission.

Washington-based Third Way said its plan would raise the retirement age, trim or eliminate Social Security benefits for high-income retirees, limit cost-of-living increases, and provide money to help young workers create private retirement accounts.

The proposal is timed to help create a buffer for congressional Democrats to support politically unpopular deficit-trimming measures, said Third Way spokesman Sean Gibbons.

“Whatever comes out of the commission is going to be a hot potato,” Gibbons said. “So we wanted to send something over that was especially hot.”

Social Security costs will exceed tax revenue beginning in 2015, according to the trustees’ 2010 report. The shortfalls will be covered by the plan’s trust fund until 2037, when those reserves are projected to be exhausted. Over the next 75 years, the trust fund would need another $5.4 trillion in current dollars to pay all scheduled benefits.

This month the Obama commission’s co-chairmen proposed gradually raising the retirement age to 68 and reducing Social Security annual cost-of-living increases, drawing a rebuke from Democrats led by House Speaker Nancy Pelosi of California. Democrats have branded their party as the protector of Social Security, a message that helped them take control of Congress in 2006. Republicans won the House majority in November.

‘Achieve the Goals’

Pelosi’s spokesman Brendan Daly said in an e-mail that any debt-reduction proposal must “achieve the goals of reducing the deficit, promoting economic growth and preserving Social Security.”

Republicans including House Minority Leader John Boehner of Ohio, set to become speaker in January, have argued for raising the retirement age and limiting or halting benefits for higher- income retirees. Most Democrats have opposed such means-testing out of concern that Social Security would become a poverty program and lose support among higher-income voters.

“The strongest and loudest voices on the left have nailed up the barricades on Social Security and said ‘hell, no’ and don’t want any type of cuts in benefits at all,” Third Way co- founder Jim Kessler, former policy director to Senator Chuck Schumer of New York, said in an interview.

In September, more than 100 House Democrats and 20 Democratic senators signed a letter to the commission warning the members not to touch Social Security.

Alice Rivlin

A handful of Democrats have advocated benefit cuts in addition to tax increases, including former Congressional Budget Office Director Alice Rivlin, a member of Obama’s debt commission, and Bill Galston, a former domestic policy adviser to President Bill Clinton.

The Third Way proposal is “an effort to break the silence, to make it a little easier for congressional Democrats who are thinking these thoughts privately,” Galston said.

Third Way describes itself on its website as “the leading moderate think tank of the progressive movement.”

The chairman of the group’s board of trustees is John L. Vogelstein, former president of private-equity firm Warburg Pincus LLC, and the vice-chairman is David Heller, global co- leader of Goldman Sachs Group Inc.’s securities division. Among the 12 Democratic members of Congress listed as honorary co- chairmen are Representative Jane Harman of California and Senator Evan Bayh of Indiana.

Bipartisan Policy Center

Obama’s deficit panel needs agreement from 14 of its 18 members to send a plan to Congress.

Rivlin also is a member of the Bipartisan Policy Center in Washington, which on Nov. 17 proposed increasing the amount of wages subject to Social Security payroll taxes and reducing the growth in benefits.

The plan by Kessler’s group, a copy of which was provided to Bloomberg News, will propose boosting monthly benefits for the lowest-income retirees while reducing them for higher earners. Cost-of-living increases would be smaller.

Some retirees would have to pay taxes on their full Social Security payments. Currently, individual retirees with $34,000 in outside income and couples with $44,000 must pay taxes on 85 percent of their benefits. The Third Way plan would require individuals earning $50,000 a year and couples receiving $60,000 to pay taxes on 100 percent of the benefit.

Social Security benefits would be reduced on a scale starting at individuals with $150,000 in outside income and couples with $250,000, and eliminated for individuals earning $200,000 and couples with $400,000 in income.

‘Should Not Receive It’

“Those who should not need Social Security at all should not receive it during their high-income years,” the proposal said.

The retirement age, now scheduled to rise to 67 in 2027, would gradually increase to 68 by 2041, to 69 by 2059, and to 70 by 2077. This would reduce total benefits by roughly $1 trillion by 2040, according to the plan.

The plan would provide annual subsidies of up to $500 to help workers under age 30 create 401(k)-style retirement savings accounts.

Editor's Note: The buzzwords in the sentence above are a red flag. Remember, the House Education and Labor Committee held hearings on October 7, 2008, where Teresa Ghilarducci, a professor at the New School for Social Research in New York City, suggested the following: "I propose … that the Congress allow workers to swap out their 401k assets, perhaps at August levels, for a Guaranteed Retirement Account. Just a one-time swap, trading your 401(k) for a Guaranteed Retirement Account that will be composed of the equivalent of government bonds that pay a 3% real return."

It also proposes options for tax increases, including raising the payroll tax cap from $106,800 to $190,000 by 2020.

Tim Penny, a former Minnesota Democratic congressman who served on Bush’s Social Security commission, said he was “hopeful” about the Third Way report.

“Even if you love to death these entitlement programs, and we are in the process of loving them to death, at some point they begin to crowd out everything else,” said Penny. “There’s an immorality to that.”

‘Dealing With Reality’

Some Democratic lawmakers have said the party needs to face up to politically unpopular remedies.

“Those who say don’t touch it aren’t dealing with reality,” Senator Kent Conrad, a North Dakota Democrat and chairman of the Budget committee, said in a Nov. 12 interview on CNN.

House Majority Leader Steny Hoyer of Maryland said in June that Congress should consider raising the retirement age and providing lower Social Security and Medicare benefits to wealthier beneficiaries.

Even the AARP senior citizens’ group that’s long fought benefit cuts appears to be open to at least some cutbacks. John Rother, executive vice president for policy at the senior citizens’ group AARP, praised the Bipartisan Policy Center plan.

“It’s more politically realistic” than the Obama panel’s draft and “in general I would characterize this as a more centrist approach,” said Rother.

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The deficit commission appointed by the President has called for an increase in the retirement age for Social Security, as well as other cuts in benefits over time. And the deal that Obama made with the Republicans just gave deficit hawks new ammunition by increasing the projected deficit by nearly $900 billion over a decade. Social Security will be in the cross-hairs. The deficit commission has tried to camouflage these cuts by emphasizing that Social Security benefits for the very poor would not be reduced, and might even be increased. But in the commission's proposal, the cuts would affect middle-class retirees. Social Security has also been softened up by the element of the tax deal that temporarily cuts payroll taxes. Supposedly, the trust funds will be made whole by a transfer from general government funds. But this increases the deficit. So Obama has created a kind of pincer attack on Social Security: One arm is the deficit commission, which has created the blueprint; the other is the tax-cut deal, which increases the deficit, adding to the artificial hysteria that Social Security is going broke. The tax-cut deal creates a new budgetary reality. Suddenly, the ten-year deficit will be almost $900 billion larger than projected. This, in turn, will give new ammunition to the deficit hawks. And here is where Obama has set up Social Security to take the hit. The supposed crisis of Social Security is a phony. Social Security is financed by payroll taxes. Reduce unemployment, increase wages, and the crisis disappears. Even with only modestly better unemployment rates and wage growth, the modest projected shortfall could be eliminated by eliminating the cap on income subject to tax. Obama also signaled Democrats in Congress that he might well include Social Security cuts as part of a grand deficit-reduction deal. If that occurs, the civil war in the Democratic Party will only deepen. The best idea to emerge was this: Democrats should demand, in return for their aye votes, that Obama appoint Elizabeth Warren to chair the National Economic Council, to succeed the departing Larry Summers. Maybe Warren could even get Obama to think twice about the political and economic wisdom of throwing Social Security on the pyre of deficit reduction. - Social Security: The Coming Cave-in, December 12, 2010

All the important people are now telling us that if Congress doesn't approve the tax-deal package, it will be the end of the world! The major risk of this deal is that it would undermine Social Security. The deal temporarily lowers the Social Security tax by 2 percentage points. In principle, the tax rate will go back to its current rate after the end of next year. However, several prominent Republicans have already made it clear that they will call the expiration of this tax cut a tax increase. And they will point out that it is an extremely regressive tax increase that disproportionately hits low- and moderate-income workers. If the payroll tax is indefinitely lowered by 2.0 percentage points, then Social Security's finances will appear much more shaky. As it stands, Social Security is fully funded through the year 2037, but that doesn't keep the Washington Post and National Public Radio from running endless scare stories about the program's funding crisis. If the payroll tax is permanently reduced by 2.0 percentage points, it would double the program's projected 75-year shortfall. This would give far more ammunition to the Social Security fear mongers. While Obama's deal ostensibly provides for general revenue to be placed into the trust fund to make up the lost payroll tax revenue, there is little reason to believe that this funding would persist beyond the first year. Again, does anyone believe that President Obama will stand up for Social Security on this point? In short, this deal is a very large first step toward cutting and/or privatizing Social Security. If the president wants to remove this risk, he can simply arrange to have the exact same tax cut given to workers from general revenue. There is no legitimate reason for the Republicans to reject this change in structure, unless their intent is to destroy Social Security. It's really that simple. The structure of the deal would be changed unless the point is to undermine Social Security. - The Tax Deal and the Apocalypse, The Huffington Post , December 13, 2010