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Monday, July 19, 2010 Previous | Next

Part II: Social Security Under Attack: Cuts Proposed, Higher Retirement Age Suggested

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The attacks on Social Security have steadily intensified in the past few months. House Majority Leader Steny Hoyer recently called for a higher retirement age and House Minority leader John Boehner suggested raising the retirement age to seventy. Meanwhile, President Obama’s bipartisan eighteen-member commission dealing with the nation’s public debt is due to come out with a report in November that is expected to recommend cuts to Social Security. We speak with Dean Baker of the Center for Economic and Policy Research.

This is Part II of the conversation. Watch Part I Here

AMY GOODMAN: We’re joined by Dean Baker, economist and co-director of the Center for Economic and Policy Research. The big buzz is privatizing Social Security, that Social Security is what’s breaking us, it’s not affordable.

Dean Baker, I’d like to ask you what I asked you during the broadcast, that it’s not affordable. Explain your response to this.

DEAN BAKER: Well, it’s really absurd on the face of it. I mean, the program has a separate stream of financing. We all pay a Social Security tax when we work, 6.2 percent of our wages, and employers contribute 6.2 percent on behalf of workers. And that actually has been running a surplus. We’ve been paying more into the program than benefits have been paid out. This was a design that was put in place by the '83 Greenspan Commission. They raised taxes. They also raised the retirement age. It is going up to sixty-seven, now sixty-six. And the result of that is that there's been this huge surplus run, over two-and-a-half trillion, over the last roughly twenty-five years. And the program is supposed to continue to run a surplus for a bit more than a decade, at which point we’re supposed start drawing down on the money in the trust fund, the money that we’ve accumulated. So this idea that somehow we can’t afford this, we’ve actually been paying more than was need for benefits, and according to the Congressional Budget Office, the program, as it currently stands, could pay all scheduled benefits through the year 2039 with no changes whatsoever.

Now, when you go further out — 2049, '59, ’69 — at some point you are going to be facing shortfalls. The main issue there is people are living longer. And at some point, you're either going to have to increase what you pay in, some source of revenue — you could raise the cap, there’s different ways you could do that — or some cut in benefits or raise the retirement age. But this is well into the future. So the idea that, you know, five years, ten years, fifteen years out, that we’re facing some crisis, that’s just simply not true. And everyone who’s familiar with the situation knows that.

AMY GOODMAN: Federal Reserve chairman Ben Bernanke has warned that entitlement programs like Social Security and Medicare will have to face cuts. This is what he told the House Budget Committee last month.

    BEN BERNANKE: The type of programs are not self-funded. They’re unfunded liabilities to a significant extent at this point. They are the biggest single component of spending, going forward. Now, there are various ways to address this. You can restructure entitlement programs. You can cut other things. But at some point, you need to address the overall budgetary situation. If you don’t, you’ll get a picture like this one, where interest rates are rising, interest payments are rising, because the debt outstanding is growing exponentially, and at that point, things will come apart. A famous economist once said, anything that can’t go on forever will eventually stop. And this will stop, but it might stop in a very unpleasant way in terms of sharp cuts, a financial crisis, high interest rates that stop growth, continued borrowing from abroad. So, clearly we need to get control of this over the medium term, and we’re certainly going to have to look at entitlements, because that’s a very big part of the obligations of the federal government, going forward.

AMY GOODMAN: Economist Dean Baker, your response?

DEAN BAKER: Well, this isn’t the first time Mr. Bernanke has misled Congress on something very important. You recall, he was a big factor in pushing for the TARP and fundamentally misrepresented the situation in financial markets to get Congress to approve it. But he’s done the exact same thing here again. He uses the term "entitlements" a lot. People here in Washington do that. They know better. Again, the story with Social Security, we’re all looking at the same numbers. Ben Bernanke would not, if he had him here, tell you anything other than what I just told you, that the Congressional Budget Office says the program could pay all benefits through the year 2039 with no changes whatsoever. Relatively minor changes would keep it fully solvent decades more into the future. The bigger problem is Medicare and Medicaid. But again, Mr. Bernanke knows full well, it’s not that those programs are out of control; it’s that our healthcare costs are out of control. So the real problem is that we have to fix our healthcare system. We pay more than twice as much for our healthcare per person as people do in Germany, in Italy, France, Canada, whatever country you choose to pick. If our per-person healthcare costs were the same as what they are in those countries, we would be looking at enormous budget surpluses for the indefinite future, rather than deficits. The problem is that people like Mr. Bernanke don’t want us to challenge the insurance industry, the highly paid medical specialists, the pharmaceutical companies. Instead, they’re saying cut Medicare, Medicaid for the elderly. So it’s just really a dishonest story. The issue here is healthcare. That’s what we should be talking about.

AMY GOODMAN: So, Dean Baker, what did the so-called landmark healthcare legislation do?

DEAN BAKER: It extended coverage to a lot of people that wouldn’t have had it otherwise. So, in that sense, I think it was a very good thing. It also established community rating, so that people who get sick and lose their job could still hope to get covered, because otherwise typically people, when they lose their job, no one is going to cover them if they have a serious health condition. So, in that sense, I think it was a big step forward. But in terms of covering — controlling cost, it’s really hard to see that accomplish much. We have to go back to the drawing board. And what’s really pernicious is you have all these people running around Washington saying, "Oh, we tried that. We didn’t get anywhere, so now we have to cut Social Security, we have to cut Medicare." That’s not acceptable.

AMY GOODMAN: You’ve just put out a report on Social Security. You look at the impact of the three common proposals for cutting Social Security and the impact they’ll have on retirees. Tell us.

DEAN BAKER: Yeah, well, we looked at three things that are often suggested: one, raising the retirement age —- and this is an accelerated increase, because, as I said, it’s already scheduled to go up to sixty-seven for workers who hit age sixty-two after 2022, so it is already going up, but they propose to accelerate that and push it up to seventy; secondly, a change in the benefit formula so that workers will be getting less who retire, say, three, five, ten years out, than they otherwise would have; and the third one is a change in the annual cost of living adjustment. Currently it’s tied to the Consumer Price Index; there are proposals actively being debated that would reduce that by about three— or four-tenths of a percentage point a year. Not too long ago, they were talking about doing it by one percent a year.

Now, all of these would lead to substantial cuts in benefits, and the point we make in this report is not just that they cut benefits, but it’s a very large cut in retirement income. The big issue here is that most middle-class workers have taken a very big hit to their retirement income as a result of the collapse of the housing bubble. For most middle-income workers, most of their wealth was the equity in their home, which in many cases got wiped out with the plunge in house prices. In addition, they lost money in their 401(k)s, as well, if they had any. And remarkably, when people talk about cutting Social Security down here, almost no one seems to have noticed that we had this huge collapse of the housing bubble that’s destroyed much of the wealth of these near retirees who they want to cut benefits for. So if you want to talk about cutting benefits, you know, thirty, forty years out — and we could have that discussion — I still wouldn’t be terribly anxious to do it. But we could see these people. We know that someone who’s fifty-two, fifty-three, and basically has almost nothing, the typical wealth of someone in their — between forty-five and fifty-four is about $80,000, counting the equity in their home. That’s a middle-income household. They’re not going to have much for retirement. We know that. They don’t have many more years in the work force. They’re not going to be able to have huge savings. So when you talk about cutting their Social Security, in many cases, that’s almost one-to-one a cut in their income. If you cut their Social Security five percent, you’re cutting their income five percent. That’s a very big hit.

AMY GOODMAN: Dean Baker, put all of this in the context of the passage last week of what is called the landmark financial regulation bill.

DEAN BAKER: Well, I mean, I guess what I’d say, the regulation bill, again, it had some good aspects, but I think, long and short, the banking industry or the financial industry got off incredibly cheap, because here was — we’re suffering incredibly. I mean, it’s — you know, again, I hang out with people in Washington who are all employed, but, you know, you look around the country, we have an unemployment rate that’s close to ten percent, and what’s more, it’s expected to stay there long into the future. Those people didn’t do anything wrong. You have people who lost their jobs in the construction industry, in the manufacturing industry, retail trades, every sector of the economy. They can’t find other jobs. It’s not that they’re lazy, they’re not willing to work, or they don’t have the skills. It’s we messed up, "we" meaning the people who run economic policy. They’re sitting there unemployed, and the people who made out like bandits from it are those on Wall Street, and what they get with the financial reform is, you know, they can’t do a little of this, they can’t do a little of that, but basically their profits, their bonuses, are going to be largely unaffected. They’re still going to be incredibly wealthy. I suspect most of them are laughing pretty hard right now.

AMY GOODMAN: Speaking of Wall Street deals, what about the deal with Goldman Sachs, that they would pay — what was it? — $550 million as a fine?

DEAN BAKER: Well, you know, that’s a tough one. You get to some technical issues. You know, suppose the SEC had carried this suit through, they had brought suit against Goldman Sachs, could they have gotten more money? It’s hard to say. You know, if you actually carry these things through, they get fairly complex. You don’t know what judges will rule. You don’t know what — if it went to a jury, I don’t know how the trial would proceed. But in any case, I don’t know what they would have come up with at the end of the day, so I can’t necessarily take issue with the $550 [million], saying it was too small or too large. I wouldn’t say one or the other.

What I would say is the question is, do we really think that this is going to change practices on Wall Street? This particular case was so egregious, I mean, it was almost Goldman Sachs put it up on a billboard: "We’re ripping off our clients." The vast majority of cases where they’re engaged in improper behavior of different types, it’s not so egregious, it’s not so clear cut, there’s not such a clear trail. So I was glad to see them pay what I consider a reasonably, you know, stiff fine. Goldman, you know, they aren’t going to — I don’t think anyone is going to, you know, go hungry because of this. I mean, it’s a company that’s going to make, you know, somewhere in the order of $10 billion a year in profit, their bonus pool somewhere in the order of $22 billion.

AMY GOODMAN: Well, they made it back in after-hours trading. They made it back in after-hours trading that night.

DEAN BAKER: Yes. Yeah, so this is not — this is not going to hurt them in a big way. The question is, is it the sort of sanction that’s going to make them think twice about engaging in improper behavior? My guess is that basically what it does is it tells them, you’ve got to be a little more careful; don’t — you know, don’t put up neon signs. You know, cover your rear.

AMY GOODMAN: We’re coming up on the seventy-fifth anniversary of Social Security. Can you talk about why FDR originally established it and what you see, in the next few years under President Obama, will actually happen?

DEAN BAKER: Well, Social Security was started in the context — of course, it was the middle of the Great Depression. At that point, being old meant being poor. You know, if you couldn’t work any longer, the vast majority of people had not put aside significant savings during their working careers. Pensions were held by relatively few people. So the poverty rates among the elderly were well over 40 percent. And to a large extent, if people were able to get by, it was only with the help of their children. And Roosevelt set this up with the idea this was going to provide insurance, this was going to provide security, for both the elderly but also disabled, people who get injured during or hurt during their work, or sick during their working career. And also people who die young, it supports their families.

And it was a remarkably successful program, by almost any reasonable measure. We have poverty rates among the elderly, now it’s about ten percent, basically about the same as for the adult population as a whole. People who are disabled have some protection. Any number of my friends I know or have were assisted by it, because they had a parent die when they were still young, and it helped support them as they were growing up. So it was an enormously successful program.

It’s also incredibly efficient. People don’t appreciate this, but the administrative costs of Social Security are just about a half of one percent of what gets paid out in benefits each year. And if you compare that to the private sector, it’d be twenty, thirty times as much gets eaten up in administrative expenses.

So, it was about providing security for people who are working, in their old age, against illness, against early death. And it’s been a great success that way.

AMY GOODMAN: Do you see a different trend under President Obama than under President Bush in terms of what will happen to Social Security? Ultimately, President Bush didn’t succeed in cutting it.

DEAN BAKER: Well, I worry about what will happen under President Obama. You go back to when President Clinton was in the White House, President Clinton proposed cuts to Social Security. He was recently on a panel here at a program put on by the Peterson Foundation, and he just got right up, and he said, "I wanted to cut Social Security, but, you know, they wouldn’t let me." Dick Gephardt, you know, at that time the leader of the Democrats in the House, and he said Dick Armey also opposed it. He goes, "They wouldn’t let me, but I wanted to do it." You know, he just said that in very open terms, which is something we knew back in the '90s, those of us who were fighting against it. But it was just quite striking that this was one of the regrets of his presidency, that he wasn't able to cut Social Security.

And you have a lot of the same people that were in the Clinton administration who are back working with President Obama, and I do worry very much that many of them want to cut Social Security. One of the things that I — you know, I’m not longing for President Bush to be back in the White House, but, you know, there was a relatively unified stand among Democrats against President Bush’s plan to cut Social Security. And that made it more difficult for him to get very far, and of course he never actually introduced a plan. Nothing ever got voted on by Congress. It didn’t come that close to being done. When you have a Democrat in the White House and he says he wants to cut Social Security, or at least people close to him say that, then it becomes much more difficult, because it’s not clear how you organize against that, because certainly you will have Democrats who want to support their president. So, again, I find it very worrisome that — you know, you’re looking at his deficit commission, he appoints his two top appointees, the Republican and Democrat co-chair, who he picked. Both were quite explicit: they want to cut Social Security. So I do think we have to be very worried about cuts to the program under — during the Obama administration.

AMY GOODMAN: Dean Baker, economist and co-director of the Center for Economic and Policy Research, thanks very much.

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