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The Administration's Social Security Privatization Plan: Reading the Fine Print

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The Administration's Social Security Privatization Plan: Reading the Fine Print

By Rep. Michael H. Michaud

There has been a lot of discussion lately about the Administration's plan to privatize Social Security. In previous columns, I have discussed why privatization is such a bad idea in general, and why I oppose it-it costs $5 trillion in the next 20 years, drains the existing system, and puts everyone's retirement at risk.

However, as with most complex proposals, it is also very important to read the fine print. In this case, the devil truly is in the details: it turns out that that when you look at the actual proposal, the Administration's plan for Social Security is even worse than it first appears, because it leads to dramatically reduced benefits for everyone.

How does that happen, specifically?

The privatization plan is being sold as a way to help Social Security's finances. But since the plan takes massive sums out of the system and diverts them into private accounts, privatization is actually counterproductive. The truth is, privatization has nothing to do with helping make Social Security solvent-that's just a red herring, because the privatizers know that it actually makes Social Security's finances worse.

Instead, their real trick for lowering the costs of Social Security is to cut benefits. But they can't come out and say that because, of course, any direct benefit cut would meet massive opposition. So they do it in a much more subtle way, hidden inside the overall plan. It's called "indexing"- by changing the indexing formula, they can take a big bite out of everyone's retirement benefit.

Indexing is an important feature of Social Security. As everyone knows, wages go up over time, and in general, most people are better off nowadays than they were in 1940. Retiring with dignity means something very different today than it did back then, because we all expect to have a lifestyle that reflects the improving standard of living in America.

So, Social Security has always been set up so that benefits are "indexed" to wages-meaning, as people are paid more and the standard of living in America goes up, benefits also go up. However, the Administration would like to change the formula so that benefits are "indexed" to prices instead. That means that the amount of benefit only increases to match inflation.

The reason they want to do this, of course, is that wages have risen in America much faster than prices, so they are hoping this change will keep benefits a lot lower in the future. The problem is, it means much lower benefits for seniors, and a much lower standard of living for them than everyone else has. If we had done this from the beginning, seniors would still be stuck at a 1940 standard of living, while everyone else got better off.

This is simply wrong. Seniors shouldn't be condemned to live in poverty. The numbers make this very clear. Today, a worker who retires at age 65 gets a benefit of $15,336 per year. But if price indexing had been used instead-like the Administration wants-that same retiree would receive only $6,180 per year. That is 60% cut in benefits.

This is a subtle, backdoor benefit cut, but it is no accident. In fact, in a leaked confidential memo, the White House Director of Strategic Initiatives openly said that these kinds of benefit cuts are a necessary part of the Administration's plan.

And such cuts would apply to everyone under the privatization plan, regardless of whether they decided to take private accounts or not. Under the privatization scheme, benefits for everyone are expected to be at least 40% lower.

Privatizing Social Security is a bad deal for everybody. And the closer you look at it, the worse it gets.

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