Panel Plans to Send More Tax Dollars to Wall Street

A presidential panel outlined three plans for increasing private investment of payroll taxes for retirement security, but some observers charge all three plans will leave women with less money and more risks.

Estelle James

WASHINGTON (WOMENSENEWS)-A hand-picked panel charged by President Bush with finding a way to guarantee the future solvency of the Social Security system has put forth three controversial proposals for using different methods for employees to place a portion of their retirement funds in private hands rather than the Social Security system.

Leading women's organizations and democrats have criticized the report saying that the plans neglect many of the concerns of women and may leave them worse off than they are now. The panel's two female members, however, insists that women and low- and middle-income workers would benefit if its recommendations become law.

Plan One: 3.5 percent Payroll Contribution to Individual Retirement Accounts

While all three options presented by the commission include the voluntary diversion of a portion of payroll taxes into private, Individual Retirement Accounts, they contain significant differences. The first proposal is the simplest, allowing workers to redirect up to 3.5 percent of payroll taxes to Individual Retirement Accounts. Growth in the government benefits portion would continue to reflect cost-of-living increases.

Critics charged that diverting even 2 percent of the contribution would have an impact on traditional benefits.

“If you divert 2 percent of your payroll taxes into an IRAs, for some, that constitutes a 30 percent reduction in your benefits,” said one such critic, Peter Orszag, an economist at the Brookings Institution, a liberal-leaning, Washington think tank.

Women's advocates also caution that this proposed change would mean the program would take in less money, so even those who elect not to participate still risk losing full funding of benefits.

“If people can start diverting payroll taxes to IRAs, then Social Security runs out of enough cash to pay benefits in 2007, and it blows through the trust fund in 2024,” said Joan Entmacher of the National Women's Law Center. The situation is a problem for all Americans, but most troublesome for women, who disproportionately rely on Social Security in retirement, she added.

Plans Two and Three: More Cash in Individual Retirement Accounts,
Change in Benefit Formula

Proposal two allows workers to redirect 4 percent of payroll taxes to Individual Retirement Accounts, diverting up to $1,000 per year to the account, while proposal three redirects 2.5 percent of payroll taxes, but requires an additional 1 percent in personal contributions. Both plans change benefits calculations, indexing them to price increases, which tend to move slower than wage increases. As a result, if these plans are adopted, commission member Estelle James, a consultant for the World Bank, said, there would be a “reduction in the rate of the traditional benefits.”

Entmacher says that is an understatement: “What happens for women is that you get really steep benefit cuts,” she said.

To balance out the reductions in two of the proposals, retired or disabled lower-wage earners would receive a larger percentage of their payroll contributions than higher-wage earners, said a second commission member, Olivia Mitchell, a professor at the Wharton School of Business.

Proposals two and three also alter the survivors' benefits configuration so that women could collect both their own and their deceased spouse's Social Security. The proposals also permit a divorced spouse to receive an equitable share of accumulated account assets.

Women's groups charge that privatizing a portion of what constitutes the only income for many elderly women adds a level of risk that makes a marginal income even more fragile. In two of three proposals, a worker who chooses not to participate in the privatizing option would still see a decrease in traditional benefits-an event that could spell disaster, particularly for elderly women who live alone, and 25 percent of whom rely on Social Security as their sole income.

In addition, a study by the Women and Social Security Project, supported by an umbrella organization for more than 100 women's organizations, suggests that the proposed changes could represent a 50 percent drop in benefits levels for some. The study also suggests that the changes in survivors' benefits may not represent an actual increase in retirement income for women at the bottom of the economic ladder. Furthermore, the group warns that women in divorce proceedings may not have an easy time recouping account assets.

Martha Burk

“Where are the benefits for women?” asked Martha Burk, president of the National Council of Women's Organizations, which underwrote the study. “They are not here.” The options set forth by the commission mean that women will need to work harder, longer and with fewer benefits, she said.

Burk described the commission's suggestions as “bait and switch” tactics in an attempt to demonstrate the value of privatizing to the nation's women, minority men and poor. “The bait: increased benefits for low-income workers, which in itself is pretty insulting to think that someone will be earning minimum wage for an entire lifetime,” Burk said.

Burk from the women's council said the premise of the proposals are based on uninterrupted work, meaning that the proposed increases in minimum benefits are applicable only to those who had worked continuously in full-time, low-paying jobs for 30 years or more. Women take off an average of 11.5 years, or work part-time in order to fulfill a caregiving role, and the three options allow no provisions for such circumstances.

In addition, women, who typically earn approximately 74 cents to each dollar earned by a male counterpart, will be unable to invest at the same rate. “Privatization can't escape the simple reality that you can't save money you don't earn,” said Lisa Maatz of the Older Women's League.

Commission Members Say Options Specifically Help Women

The commission spent a great deal of time on the particular concerns of the nation's elderly women, hearing testimony from a number of advocacy groups, including the OWL, the Voice of Mid-life and Older Women, said the two of the commission's female members.

“We are all very concerned about the poor, about widows and the elderly,” Mitchell said.

James offered a list of provisions that would specifically help women. “We have included an improved minimum benefit for low earners and enhanced survivor's benefits. If the husband dies, a woman can keep her own benefits plus inherit her spouse's. We have seen from the example of other countries that widows benefit substantially because she doesn't have to choose between them.” She added that privatizing a portion of benefits would have an additional psychological effect. “Women, some for the first time, will be able to accrue wealth, and this is empowering.”

However, these provisions apparently did not persuade Rep. Robert T. Matsui, a Democrat from California, a ranking member of the House Social Security subcommittee that the plans were worthwhile. Matsui said the commission failed to meet its mandate because it did not find a way to keep the system solvent without reducing benefits and without massive infusions of additional revenue.

He also rejected the commission's claims that the proposals would benefit the nation's women and minority men, large percentages of whom rely on Social Security as their only source of retirement income.

“I find it offensive that the commission preyed upon women and minorities by telling them that they would be better off with privatized accounts. It is so offensive, because it is just wrong.”

The three proposals are viewed very differently by Michael Tanner, of the conservative Cato Institute. He said that “nay sayers,” while outspoken in their criticisms, have offered no concrete alternative proposals. “In their few public statements, however, they reveal a preference for draconian new taxes for young workers and the slashing of benefits to America's elderly as their ‘solution' for Social Security,” he said. “This is unacceptable.”

Tanner contends that individual savings accounts will enable Americans to accumulate wealth and control their retirement funds.

“Such worker empowerment can close the ‘savings gap' between rich and poor in America,” he said. “It will end the scandal whereby American workers-especially minority workers-pay into a system for a lifetime and never receive benefits.”

Enron Fallout Highlights Investment Risks

Underlying the commission's proposals is a core belief that privatization permits all Americans to accumulate wealth. Yet, under close scrutiny, women may not reap the same rewards from investing as men, reports OWL, because women traditionally invest in a more conservative fashion, yielding lower returns.

Moreover, new concerns about the safety of stock market investments have arisen in light of the collapse of Enron, the former Wall Street high flyer the government is investigating for its allegedly misleading business practices and alleged defrauding of investors.

“Enron highlights to people that there is a very real chance that you could lose a great deal,” Entmacher said, since a privatized Social Security would create accounts with risks similar to those in other private securities accounts.

Proponents of privatized accounts concede that positive rates of return are not guaranteed, and that private investment comes with an inherent element of risk. To protect investors, the commission's proposals limit the choices.

“The plans are similar to thrift savings-they are balanced, conservative and diversified,” James said. “We have eliminated the possibility of major mistakes,” she said, even as she acknowledged that seasoned investors as well as neophytes could fair poorly in the market. Enron, for example, was marked as a sound investment even in conservative financial circles.

The White House praises the commission's work. “They have clearly made a case for private accounts,” White House spokeswoman Claire Buchan said after the report was released in December, “and we look forward to a national discussion as to how best to bring those about and ensure the long-term viability of the . . . system.”

Meanwhile, womens' groups continue to encourage very different changes within the Social Security law.

“We should strengthen and improve Social Security,” Entmacher said. “But the commission's proposals would undermine this vital program and leave women and families at greater risk and with less to live on.”

The National Council of Women's Organizations, through the Women and Social Security Project, is crafting alternative proposals that will preserve the basic structure of the system while highlighting specific benefit improvements to reduce older women's poverty and correct gender inequities in the current system.

The president's commission has recommended more study-at least a year-before any of the options are chosen for legislation.

Ann Moline is a freelance writer in Washington.

For more information:

National Committee to Preserve Social Security and MedicareViewpoints: Women's Social Security Benefits:

Women and Social Security Project of the National Council
of Women's Organizations:

President’s Commission to Strengthen Social Security: