Washington, DC -- Ranking Member on the Senate Finance Committee Max Baucus joined Democratic Senators Dick Durbin, Charles Schumer and Jon Corzine Wednesday in calling on President Bush and the Republicans to come clean about the effects of the "privatization tax" contained in the President's Social Security privatization plan.
With the new "privatization tax," the Republicans are going to give with one hand and take away with the other. Their plan will allow individuals to take money from the Social Security Trust Fund and put it into private accounts. But to recoup this money and lost interest for the Trust Fund, the Republicans will issue the new privatization tax, which will eliminate benefits by up to 70 percent or more.
"The notion of private accounts in Social Security mentioned by the President as part of a reform package is not all that it seems," Baucus said. "At the same time that the private accounts are adding to retirees' income, much, if not of all of this additional income is being offset dollar for dollar through reductions in their Social Security benefits. Moreover, if the investments in retirees' private accounts do poorly, the retirees' could end up worse off financially than they would have without the private accounts at all."
While the President and Republicans would lead the American people to believe that private accounts will earn significant benefits beyond what could be earned in the traditional system, the Democratic Senators said today it is simply not true thanks to this hidden tax.
Durbin said, "We believe America must honor its promise to those who have worked hard, played by the rules, and earned the right to a secure retirement that cannot be taken away. Having to give up part of your retirement benefit to pay for the transition to a privatized system is not living up to our promise. We do not support proposals to reduce Social Security that would result in deep benefit cuts."
At retirement, workers with private accounts would be subject to a reduction in their Social Security benefits equivalent to the amount that would be in their account if the payroll taxes diverted had earned interest at the same rate as the rate paid on Treasury bonds.
Schumer said, " I want to make sure I am being clear about this, so every New Yorker and every American understands what I'm saying -- no big numbers, no percentages, no fancy talk. The President has two big priorities, Social Security and tax cuts, and both conveniently take effect after he leaves office. These budget gimmicks insult the intelligence of the American people"
Examples of how the privatization tax will work:
- If an individual's account earns the average rate of return (4.6 percent above inflation), they are still going to have to give back 70 percent of the account.
- If an individual's account earns 3 percent above inflation, which is the risk-adjusted rate of return assumed by CBO, they would have to give back your entire earnings.
"The promise of 'ownership' under the President's privatization plan is an empty one," said Corzine. "In fact, under the administration's proposal, the government would effectively lend you money and then ask you to pay it back with interest. That's not ownership and it sure doesn't sound like much of a nest egg to me. The president's proposal to cut guaranteed benefits in favor of individual bets on the market strikes at the very core of Social Security's promise - that it's a rock solid guarantee which will be there when you need it the most. Those who disagree with Social Security's promise have a right to call for the program's repeal. But they shouldn't pretend that privatization promises security for America's seniors. It doesn't."
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FACT SHEET:
Explanation of the Benefit Offset or "Privatization Tax"
In his State of the Union Address, President Bush outlined some of the details of the private accounts he is proposing, but did not mention a critical fact about those accounts — individuals who chose to have a private accounts also would get a large, automatic reduction in their Social Security benefit at retirement. The amount of the reduction would equal a large portion of the amount in their private accounts.
A senior Administration official admitted this point in his background briefing on February 2:
"…in return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return." 1
According to the Congressional Budget Office the private accounts are, in fact, expected to produce a risk-adjusted rate of return of 3% above the inflation rate. Therefore, the automatic reduction of Social Security benefits would equal the entire value of the private accounts1. In effect, the automatic benefit reduction would constitute a 100 percent tax on the retirement savings in those accounts. This tax is the "privatization tax" that workers must pay at retirement.
How the Private Accounts Would Work
When fully phased in, workers who chose to participate in the private accounts would have 4 percent of their wages diverted into the accounts. At retirement, workers with private accounts would be subject to a reduction in their Social Security benefits equivalent to the amount that would be in their account if the payroll taxes diverted to the account had earned interest at the same rate as the rate paid on Treasury bonds.
If a worker earned the average rate of return assumed by the Administration (4.6 percent above inflation on a mixed stock-bond portfolio), the privatization tax would recapture an amount equal to 70 percent of the account. 1 If a worker earned a 3 percent rate of return, after inflation, the privatization tax would recapture an amount equal to 100 percent of his account. 1 If a worker earned only a 1.5 percent rate of return, the privatization tax would still be based on a 3 percent rate of return. That is, the reduction in the worker's Social Security benefit would exceed the amount in the worker's private account, producing an effective tax rate of 139 percent. The worker would have less combined income (from the private account plus the Social Security) than if the worker had not chosen to have an account. 1 CPBB, "How the Individual Accounts in the President's New Plan Would Work", Senate Finance Committee, Democratic Staff -- February 8, 2005
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