If It Ain’t Broke….Which It Ain’t
BY GABRIELA BOCAGRANDE n Wednesday, February 2, 2005, the terror continued. The President of our patriotic and free national homeland spoke from his bully pulpit once again to varnish and hype the State of the Union. In a continuing drumbeat of terror, he announced that Social Security would be in trouble by 2018—just when your five-year-old is about to go to college to prepare for a working life. Subsequently, he warned, your tot will be condemned to old-age destitution. By 2042, Social Security will be “exhausted.” When Bush read these predictions off his teleprompter, a certain amount of booing issued from the Democratic side of the aisle. This was unexpected. Washington can keep a straight face through quite a lot. We have all sat still for Nixon’s “I am not a crook” speech, Reagan’s “Peacekeeper” forward-based missiles, the absurd—and extremely costly—Strategic Defense Initiative that does exactly nothing, and of course decades of Soviet-based terror, with warnings that the Communists were just about to a) nuke us or b) invade us. But this President and his cronies are so chronically mendacious that it is no longer good enough to say that they “misspoke.” In 2005, with trade deficits and oil prices at all-time highs, dollar value at an all-time low, and a potentially endless war on terror that drains a billion a week from the national treasury, foreign capital may well be about to abandon the U.S. economy as a bad bet. Bush & Co. therefore plan to replace these more savvy investors with middle-class savings in private retirement accounts. This is not a good idea. Many commentators, actuaries, and politicians are already booing. They predict that the privatization of Social Security will produce legions of old people living in doorways and eating from dumpsters. And here on the World Bank beat, we don’t have to predict or argue. We know that this is what will come to pass because in other countries, it already has. The United States, which occupies a privileged position at the World Bank and the International Monetary Fund (IMF), has a number of not-completely-transparent uses for these institutions. One of the lesser known of the “Bank’s” and the “Fund’s” functions is their ability to stage-manage, in poorer, weaker countries, the imposition of policies that an elected administration could never get away with here in the homeland. Like privatizing Social Security, for example. Just because Social Security is the deadly third rail in U.S. politics doesn’t mean that it’s the Third World third rail too, now does it? So, why not try it someplace smaller and less—heh, heh—consequential, where the stakes aren’t so high? From the 1980s until the present day, Latin America has always looked like a promising place to take a run at creating “ownership societies” for old people. With help from the Bank and the IMF, Argentina, Bolivia, Brazil, Colombia, Chile, the Dominican Republic, El Salvador, Mexico, Nicaragua, and Peru have regressed to different degrees in this direction. Due to U.S. pressure, this policy for financing old age became much more popular in South America than it has been (until now) in North America, since, for one thing, far fewer people ever got old there. One of the first places to privatize pensions was, after all, Chile in 1981, where at the time, one of the world’s most ruthless dictators was cooking up economic policy, and politicians did not worry about rails of any kind. You complained about your public pension going private in Pinochet’s Chile, by God, and your life became short and fleeting. You, for one, would not be needing Social Security at any time, ever. Because Chile did it early and thoroughly, the system developed there was the most widely discussed and copied. It was also one of the most drastic of the pension system overhauls. Chile replaced the pay-as-you-go system, where current workers fund the benefits of current retirees, with a pray-as-you-pay system, where current workers fund their own retirements, if they are lucky, if they invest wisely, and if no one rips them off too badly. Because the privatization of Social Security started long ago in Latin America, and the evidence about its relative performance is now accumulating, the Inter-American Development Bank (IDB) held a seminar in December 2004 to review the results. In the parlance of the IDB, results are “mixed.” Now, when the development banks call the results of their programs “mixed,” they typically mean “catastrophic failures.” As far as I know, despite routine financial collapses in the economies they manage, nothing they have ever done has been publicly called “categorically misconceived,” or anything like that. So, okay, the results are mixed. Carolin Crabbe and Juan Giral, who produced “Transition Issues and Deepening Pension Reforms,” the document distributed at the seminar, studied four cases: Argentina, Bolivia, Chile, and Mexico. They found that a) the poor did not benefit at all from privatized pension programs because they did not have enough money to save, b) the commission costs on the private savings account were unexpectedly high, and c) the savings of middle- and higher- income earners should be invested in such a way as to help pay for the poor. They also discovered that the entire process would have produced results that were much less mixed if there had been adequate and realistic data on which to base the conversion from public to private accounts, there had been more effective monitoring and evaluation of the programs, and if the institutions responsible for the new investors had been adequately prepared. Also, Ms. Crabbe and Mr. Giral warned, the characteristics of the economy and the labor force should be taken into account. Let’s take these points one-by-one, shall we? First: The poor did not benefit because they could not save. As a matter of fact, poor people are notorious for having empty bank accounts and limited stock portfolios. This is why we call them “poor.” Number two: The commission costs were high. Also understandable. Private companies charge more than the government for their services because they depend on profits. For them, breaking even isn’t good enough. Breaking even does not pay for private jets, lavish birthday parties on wholly owned Greek islands, thoroughbred race horses, and stuff like that. Administrative costs are therefore going to be higher. Number three: Higher-income people should help pay for the poor. Whoops. What happened to the “ownership society”? Who wants to own an old person with no savings? Raise hands? Number four: Adequate and realistic data are necessary. Excellent advice. In the United States, we understand that our system is entirely solvent until 2042, at which point benefits will have to be cut about 30 percent if current economic and demographic trends continue. Psssst—by then, the earth will be 10 degrees hotter overall, half the population of Africa under 40 will be dead of AIDS, most Americans will be dead of toxic fallout from the Clear Skies Initiative, and the few gringos still alive will be on their way to Mars (also a bank-breaking Bush program). If we are going to address the problems of 2042, why not start with something more crucial, like planetary viability? Number five: Effective monitoring is necessary. Hey! You guys in Texas! Remember Enron? This could happen to you. Again. And finally, Ms. Crabbe tells us, the characteristics of the economy and the labor force should be considered in a conversion to private pensions. Here, our expert is not really talking about the economy, as in employment and retirement. She is talking about what Mr. Bush is also talking about without mentioning it—capital markets. Let’s put on our thinking caps. If privatized Social Security does not benefit the poor, and if middle-income people will have to pay for the destitute elderly, so it doesn’t benefit them either, then why does anyone want it? And why do they want it so badly? Like, enough to dedicate half the State of the Union address to it, together with a two-day tour through the boring square states in the middle of the country? Who does benefit? Rich people. That’s right. After all, does anyone, anywhere, for any reason whatsoever believe for one instant that George Bush is worried about the old-age incomes of future generations of middle-class Americans? Has he ever worried about anything like that before? Come on. This is the tax-cuts-for-the-rich, no-bid war president. Bush’s constituency has noticed that the stock market went into free fall after 2000, a full year before Osama struck, and its recovery stalled a year ago. With the huge budget deficits brought on by tax cuts and the war against—what was it? Iraq? Iran? Osama? Obama? I forget. Anyway, the dollar is at a record low against the euro. Soon now, investors who hold our free homeland’s debt will begin to withdraw their funds because of the dollar’s continuing decline. To keep their dividends up, rich people are going to need billions of bucks pouring into private investments from other sources. They themselves will have wisely hedged their bets by diversifying their portfolios and investing in France, where economic conditions appear to be more stable. It is interesting to note that the experts who wrote the paper on the mixed results of pension privatization in Latin America were not sociologists, actuaries, or economists. They were finance experts. Here is what they had to say about the rationale for privatization: “One of the additional benefits expected from the reform of pension systems in all countries (studied), is the anticipated growth in capital markets.” Essentially, the experts are telling us that because the more savvy and mobile investors invest abroad, privatizing pension funds can, essentially, create an enormous new pool of suckers dumb enough to bet their savings on their own national economies. However, the experts report that privatizing pensions did not even spur growth in the capital markets of Latin America because the “anticipated growth in equities is hampered by the lack of corporate governance in the region.” Hey, Texas, here’s Enron again. And WorldCom, Fannie Mae, Richard Grasso, and the New York Stock Exchange—shall we go on? The U.S. homeland is no stranger to problems of—how do we say this politely?—corporate governance? We do not need to learn this lesson the hard way. Let us benefit from those we have forced to go before us. In The New York Times, Larry Rohter reports that in Chile, where the first generation to depend on privatized pension is starting to retire, people are finding that the program is “[f]alling far short of what was originally advertised under the authoritarian government of General Augusto Pinochet.” The poor do not have accounts large enough to provide the $140 monthly benefit, and middle-class accounts are making up the difference. “Even many middle-class workers who contributed regularly are finding that their private accounts—burdened with hidden fees that may have soaked up as much as a third of their original investment—are failing to deliver as much in benefits as they would have received if they had stayed in the old system.” Then there is Argentina, where privatizing Social Security ultimately played a major role in the economy’s collapse in 2001, after which 50 percent of the population suddenly found itself living below the poverty line. Mark Wiesbrot, an economist at the Center for Economic and Policy Research in Washington, reports that in Argentina: “Social Security privatization deprived the government of a large amount of tax revenue. Payroll taxes that had gone to the government to support the old pay-as-you-go Social Security system were instead diverted to private accounts. As a result, the government lost an amount of revenue that has been estimated at 1.0 percent of annual GDP (the equivalent of $100 billion a year in the United States).” When the Argentine economy suffered a four-year economic downturn, the government defaulted on its debt, capital fled the country, production stopped, and incomes vaporized just like that. This could happen to us. Our government is up the wazoo in debt and in 2003 borrowed the $138 billion Social Security Trust Fund surplus for the year before to help fund the government. What happens when the $138 billion has to be borrowed from Citibank instead? And finally, let us learn from Nicaragua, where corporate governance issues were almost as unimportant as they are in Houston. This wretchedly poor Central American country makes an interesting cautionary tale. There, the crooked president, Arnoldo Alemán, named his crooked crony, Miguel Aguado, as superintendent of the transitioning pension fund. The wholesale theft of public pensions was temporarily arrested, together with the President, when labor unions denounced the ploy and the Superintendent was obliged to flee the country. At this time we do not know where, precisely, he is, but rumors suggest that he is in Chile, where he is almost certainly not living on Social Security. If Gabriela Bocagrande has anything to say about it, neither she nor Social Security will be exhausted in 2042.