Framed: PRAs (Personal Retirement Accounts)

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“Personal Retirement Accounts”

On the Saturday, Feb 12, 2005 radio broadcast of the Democratic Party response, Sen. Charles Schumer (D-NY) offered up a phrase that effectively splits the issue:

Does Social Security need fine-tuning, as most Democrats believe? Or does it need to be replaced with something completely different, as the president wants to do? Unfortunately, the president's plan to privatize the system is not the answer.

The following phrases are recalled until further notice:

  • Personal Retirement Accounts
  • Private Retirement Accounts


If you or someone you know is currently using this phrase, please go immediately to Forward Framing for repairs.

The connotations of “personal” and “private” are being misused. These suggest personal control. This is erroneous because the proposed plan would not provide personal choice about investment options. These options would be limited to a well-defined and curtailed selection of plans that would only return limited benefits. Further, the benefit to the average worker would be very limited because the contributions would be limited by the compensation of that worker.

The Problem

There are a number of problems with “Personal Retirement Accounts”:

  • The proposal is intended to destroy Social Security as we know it. It is not intended to fix it. This is a slippery slope initiative, as defined by George Lakoff.
  • The real benefits of personalizing or privatizing retirement accounts is largely illusory. See “The Cost/Benefits of Retirement Plans,” below.

The underlying premise of fixing Social Security is spurious. Social Security is not a bad program that needs to be fixed; it is a strong program that is weakened by a large number of conservative attacks on it:

  • The Bush Administration has borrowed against Social Security, in violation of the principles of the “lock box” proposed by Al Gore.
  • The “shortfall” of funds for Social Security have been largely brought on by lapses in the minimum wage and the steady toll of anti-union legislation, which has undermined wages and other compensation.
  • Republicans and other conservatives have consistently waged war on Social Security, preventing it from keeping pace with the needs of the elderly. This is a breach of trust with workers: workers should receive the benefit of a trouble-free retirement in exchange for placing themselves at risk and taking on the hard jobs of society for the 35 years that they are expected to perform in the workplace.

The Cost/Benefits of Retirement Plans

Raising the minimum wage only $1 per hour is roughly four times as efficient for raising the retirement revenue of a minimum wage worker as privatizing social security. (See Bush's SS Plan Bites the Dust.)

If you worked full time at minimum wage for your entire adult life, starting when you left high school and retiring at age 65, you would have earned a grand total of $540,500. That means that you and your employer will have paid in $67,022 in social security tax. Let's say that the Republicans were generous and let you put half of that (your half, that is, "your money") into a private account. Let's say that you could earn 11.5% compound interest on it every year from age 18 to age 65. You would have, on retirement, $36,570 in your own personal private account. Let's say you lived for ten years after retirement, not a bad estimate these days in times of rising healthcare. That's 120 months, meaning you will get, for having set up a private account, an additional payment of about $25 per month for the rest of your life.

(I'm assuming a 2000 hour work year, which allows for two weeks of non-paid vacation. I suspect this is generous for people earning minimum wage. I also took dollars uncorrected for inflation, even though wages might rise and costs certainly will. But these factors don't change the fundamentals of the model. I believe that the only thing that significantly changes the outcome is the interest rate. If you invest in Uncle Joe's business, and he's rich enough never to go bankrupt and can afford to pay you 30% per annum, you're going to do better.)

What would happen if we raised the minimum wage by just $1 per hour? Well, you and your employer would both pay a little more tax. Between you, you would pay in $248 per year more in tax. That adds up to a whopping $11,656 of additional contributions to Social Security over your lifetime. In other words, the system could afford to pay you over $11,000 more in retirement benefits. If you lived ten years, this would be an additional $97 per month ($97.13, actually).

In this model, I’ve compounded interest annually, rather than on a daily basis. This would tend to add slightly more to the value of investments. However, the rate that I’m using for overall market growth, 14.5% per year, is already adjusted for that.

Realigning the Frame

Social Security Is About Security: It doesn’t help to maximize your profits if you can lose them. What are we going to say to 75-year-olds who invested unwisely in the market (or some other questionable investment)? “Oh, too bad. Go die!” If you are 75 and the payments stop coming, you don’t have time to go out and build a new nest egg. The important point about Social Security is not to maximize return it is to make sure that there is a return. No return: no security.

Privatizing Social Security Is Piratizing Social Security: That’s right. Piratizing [sic] is defined as the “activity of pirates.” The idea of piratizing Social Security really springs from demands by the investment community to get their hands on a huge chunk of the retirement investments. As it stands, billions of dollars are accumulated in T-bills as securities for Social Security, the so-called trust fund. If you were a pirate, er, investment specialist on Wall Street, wouldn’t you want your one to three percent commission on these billions of dollars? As long as they go to T-bills, and no one evaluates how they should be invested, there’s no commission. But make retirement accounts “pirate”, er “private”, and suddenly Wall Street gets its three percent cut. Say no to these pirates. They should get this the old-fashioned way, by earning it.

What Progressives Value and Want

Security. Retirement savings should be secure.

Low Cost. The overhead for the Social Security Administration is 1%. Any fees for private accounts should be limited to one percent.

Fairness. Workers typically put in 35 years of hard work that entitles them to a decent retirement. It is only fair that they should get a defined benefit at the end of that period—one that can’t change because younger workers want to slough off and have a good time at their elder’s expense.

Consistency. The rules should not change when you get close to the goal. Those nearing retirement should not have their benefits altered long after they earned them. Any change should only take place with new workers in the market—so that they have adequate time to adjust to the new system.



Counter—Phrases to Describe the Neoconservative Plans

Privatizing Social Security Taking 3% per year can easily mean that the pirates get 30% of your savings for retirement—due to the magic of compound interest. Every time the pirate sucks funds out of your nest egg it gets weaker. Pretty soon the shell will crack!

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The key to eliminating this threat is to focus on these issues:

Security: It is appropriate for young people to maximize return. They can afford to take risk. If they lose out on a deal, they have many years to learn from their experience and recover from their mistake. Retirees do not have this luxury. Time is not on their side. If they make a mistake, it can mean running out of funds, which can result in death or a sudden and huge burden on their children. Risk is appropriate for young people; security of payments is appropriate for the elderly. This means that the only appropriate investment for retirement funds is T-bills. The market can go down for unforeseen periods. In the past, it has retrenched for as much as twenty years. That means that anyone within twenty years of retirement must invest in T-bills to be relatively safe. If they don’t, they could see the market crash as they want to retire, wiping out their savings.

Fees: The Social Security Administration averages 1% overhead on the administration of Social Security. This is the gold standard for retirement fund fees. Any proposal should have fees limited to 1%. The reason we want to emphasize this is that this rate of return is too low to attract Wall Street. A one percent return will not add to their margins. It will, in fact, shrink them. Wall Street is smart enough to know that getting a 1% return on administering these accounts is not worth their while. Make sure to insist that any return be comparable to the rate for SSA, because this is the poison pill that Wall Street will refuse to swallow.

Uncertainty: Typically, an investment will gain ground over time. But this assumes that the investment can’t be wiped out. Investment specialists are quick to point out that even in times of trouble, such as the Depression, the market has gained ground (albeit slowly) over any significant period of its history. While this is true, it is an average. For any investor who held funds in a company that went bankrupt during the Depression, that investor was simply out their money. They didn’t make a meager return, they made NO RETURN. There is no guarantee, if you put your funds in the market, that you will get a return AT ALL. You can, in fact, LOSE IT ALL. This is inconsistent with the “security” promised our retirees. There is too much uncertainty in other investments to justify trying to maximize returns. And if the only investment you are going to be reasonably able to make is in T-bills, why not just let SSA do it for you?

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