How Social Security Works
Executive Summary
- The Correct Explanation
- Social Security Explained
Wall Street’s plan to boost their bonuses now that all of their mortgage-backed securities have crashed is to steal old people’s money. George Bush, The Cato Institute, and Heritage Foundation think this is a great idea. We have a different word for it. We prefer the word “disgusting.” But perhaps its a matter of opinion. To stop this from happening it’s imperative that we all understand how Social Security works because most things said about it are false.
The Correct Explanation
There is a massive amount of misinformation out there, mostly promulgated by slimy elitists who hate any benefit that goes to the working person, and would, in fact, deny workers the benefits of their own labor. Michael Hudson has written in Harpers how Wall Street would like to “liberate” the roughly $4.7 trillion (2005) figure from retirees in order to create a new stock bubble, which will end up leaving many retirees destitute after it pops. All of Hudson’s Harper articles can bee read at this link.
https://www.harpers.org/subjects/MichaelHudson
(although a subscription is required, however, Hudson’s articles for Hudson are essentially the top of economics writing available anywhere).
These forces want to turn over retirement savings to the corrupt casino of Wall Street since it has done such a good job with 401ks up to this point. Ellen Frank explains the details of the program very well, and understanding of this material can help people combat false information pushed out by the proxies of elite financial power like Cato and the Heritage Foundation.
We were impressed with the explanation of Social Security by economist Ellen Frank. Social Security is deliberately misrepresented by conservative and Wall Street aligned economists who want to privatize the system so it will drive revenue to Wall Street through privatization. However, the history of pension privatization is abysmal. We demonstrate in previous articles how both the privatization of the Argentinean pension system and the US 401k system (a form of privatization) is a straight up scam. Many economists get behind it however because they are paid off by Wall Street or directly work for them.
Social Security Explained
The (Social Security) trust fund is just an accounting device. Social Security cannot in fact run out of money because Social Security is not ultimately a financial system. It’s ultimately a transfer program that transfers resources, not money, but actual economic resources from working people to nonworking retirees. Therefore, it only functions in the present time. So although we can talk about saving for Social Security and saving for the future, it’s only in the present time that Social Security is actually operating. So although we can establish a trust fund and establish a savings pool, the savings pool is more of an accounting device that states what the future problem is going to be than it is a solution to any future problem.
You can’t actually save milk, bread and housing and things like that. Things that are going to be needed in the future have to actually be produced in the future. So in 20 years’ time or 30 years’ time or whenever it is that you retire, the question of whether there will be enough money for your retirement is really a question of whether there will be enough resources available. Will the generations who are working be able to produce enough to cover their own needs and cover your needs as a retiree? That can only really be decided 20 or 30 years from now when you retire. So in that sense, Social Security cannot go bankrupt and it’s always going to be politically possible for retirees to have a public pension system. To talk about Social Security going bankrupt and not being available when your generation retires or my generation retires is really just scare tactics as far as I’m concerned – Ellen Frank.
References
We found more excellent detail on Social Security by Douglas Orr at Eastern Washington University.
Social Security Quote
Put simply, moving to a system of private accounts would not only put retirement; some at risk—it would likely put the entire economy at risk. The current Social Security system generates powerful, economy-stimulating multiplier effects; this was part of its original intent. In the early 1930s, the vast majority of the elderly were poor. While they were working, they could not afford to both save for retirement and put food on the table, and most had no employer pennon. When Social Security began, elders spent every penny of that income. In turn. Each dollar they spent was spent again by the people and businesses from whom they ad bought things. In much the same way, every dollar that goes out in pensions today creates about 2.5 times as much total income. If the move to private accounts counts reduces elders’ spending levels, as almost all analysts predict, that reduction in spending will have an even larger impact on slowing economic growth. The current Social Security system also reduces the income disparity between the rich and the poor. Private accounts would increase inequality—and increased inequality hinders economic growth. For example, a 1994 World Bank study of 25 countries demonstrated that as income inequality rises, productivity growth is reduced. Market economies can fall apart completely if the level of inequality becomes too extreme. The rapid increase in income inequality that occurred in the 1920s was one of the causes of the Great Depression.
There is a commonly accepted myth that buying stock in the stock market provides funds directly to businesses that they can use for new investment. This is completely incorrect. Only when someone buys stock that is part of an initial public offering (IPO) does the money go directly to the firm. If you were to buy a share of General Motors stock tomorrow, the money you pay would go to the stockowners and not to General Motors. If a large number of people were to suddenly enter the stock market, it would drive up the selling price of stock and create a windfall for those who currently own stock, but it would not provide a penny to the firms whose stock is traded. Economists Dean Baker and Bob Pollin did a study a decade ago during the IPO boom that illustrates this distinction. They found that for every $113 in stocks traded; only $1 actually went to businesses to finance real investment.
The British experiment with private accounts has indeed failed to provide an adequate and stable retirement income for the majority of citizens. The United Kingdom is now trying to figure out how to switch back to a defined-benefit system of retirement insurance. The problem is that the trillions of pounds that were diverted into the stock market can’t be brought back into the defined-benefit system. Chile’s system is one that President Bush often mentions. His proposal is likely to be similar because one of his advisors, Jose Pieria, designed the system in Chile for the Pinochet military dictatorship. Under that government, workers were encouraged to opt out of the system of pension insurance and into private accounts. Over the past 25 years, the return on stocks in Chile has averaged over 10%—a lighter return than we can expect in the U.S. stock market over the next 25 years. Yet, even with that extremely high rate of return, the average Chilean retiree relying on private savings win receive a benefit less than one-half as large as someone who lad remained in the old system, and that benefit lasts only 20 years. If a retiree is ‘unlucky” enough to live longer than that, he will simply run out of retirement income. Those in the old system not only receive a higher benefit, but the benefit lasts s long as they live, and continues to provide benefits to their surviving spouse. Lie United States’ Social Security system is the most efficiently run insurance program in the world, with overhead of only 0.7% of annual benefits; for every $100 >aid into the system, $99.30 is paid out in benefits to retirees. In the British and Chilean systems, at retirement, workers convert their private accounts to annuities provided by private insurance companies. In the United States, overhead for annuities provided by private firms averages about 20%; for every $100 paid in, $20 gets phoned off. And almost no annuities are indexed for inflation.