The big winners of private investment accounts (PIAs)

From In These Times:
George W. Bush’s plan to privatize Social Security has nothing to do with enhancing workers’ retirement income. Rather, it is a scheme to redistribute money from the majority of people who work to the minority of people who own the banks and brokerage firms. The vehicle for enabling the fundamental transformation of Social Security—and transfer of wealth—is the Private Investment Account (PIA). PIAs will allow current participants in the Social Security program to divert up to 4 percent of their present 12.4 percent payroll tax deduction going to the Social Security Trust Fund and invest it in individualized 401(k)-type accounts managed by private financial institutions. Diverting that percentage of payroll taxes to PIAs will generate what are called “transition costs” of around $2 trillion over the coming decade. Social Security is a “pay as you go” system, with those working contributing via payroll taxes to provide benefits for those currently retired or disabled. Since Bush has already stated that “the one thing I’m not open-minded about is raising the payroll tax rate” (which would cover the projected shortfall), the only alternatives are either to cut Social Security benefits for future and/or current retirees, or to borrow money in public markets by selling Treasury bonds. The Bush administration is using the concept of PIAs to sell the whole idea of privatization to the public. They claim that the accounts will result in greater net income at retirement. But will the public really benefit from diverting their Social Security money into PIAs?
So who are the real winners here? The answer is clear: Big Finance. Congress has already used $1.6 trillion of the Social Security surplus over the last 20 years to cover the general U.S. budget deficit. The diversion of payroll taxes to PIAs means that, at minimum, another $2 trillion would be diverted from the Social Security Trust Fund. The banks, Wall Street brokers, insurance companies, mutual funds and other financial institutions that will manage and manipulate the PIAs will directly benefit. Those financial institutions will charge administrative fees of typically around 2 percent, not to mention a variety of other related charges, such as when a participant switches from one PIA fund to another, leaves or re-enters the workforce or arranges for annuities at retirement.
But the biggest gains to financial institutions will come not from fees but from the interest they’ll charge for financing the federal government’s borrowing of $2 trillion transition costs. Treasury Secretary John Snow has already indicated that the Bush administration will offer Treasury Bonds to the big financial institutions at above normal rates of interest. Even more potentially lucrative are the revenue and profit streams from reinvesting the several trillion dollars worth of PIA funds they will manage.
Bush and his advisers know they could correct the alleged $3.7 trillion shortfall by 2042 (or 2052) without introducing PIAs, through modest increases in the payroll tax for wealthier taxpayers; an extension of the estate tax, currently scheduled to expire after 2009; or simply reversing Bush’s projected $11 trillion tax cuts for millionaires through 2042. But the administration’s objective is just the opposite—to dismantle Social Security as we know it and replace it with a totally privatized retirement system that benefits corporate interests.


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