Social Security: The Hidden Dangers of Privatization

Social Security Is An Insurance Not Pension Plan

Social Security is the widely used term for Title II of the Social Security Act which in technical terms is called Federal Old-Age, Survivors and Disability (SSDI) Insurance.  The key word in that title is INSURANCE.  Social Security (retirement), Social Security Disability (SSDI) and survivors insurance is funded by payroll taxes (FICA) paid by workers and their employers into the Social Security trust fund.  Workers earn coverage for themselves and family members (children, spouses, widow(er)s and disabled adult children) by paying Social Security taxes.   Monthly benefit amounts are based on a worker’s taxable earnings during his/her lifetime and vary by category and household.  No one needs more than 10 years of work to be eligible for any Social Security benefit.  Your Social Security statement, which is sent each year to every worker age 25 or older, gives an estimate of retirement, disability and survivors benefits that could be paid, as well as other important information.  All 3 programs use the same benefit formula so changes in one affect them all.  As of December 2004, 69% of all Social Security beneficiaries were retired workers, 17% were disabled workers and 14% were survivors of deceased workers.  Since the talk of privatization has been focused on the retirement aspect of Social Security, I am going to alert you to the hidden dangers of Social Security privatization that you are not being told about.

VERY IMPORTANT REMINDER: Disease, tragedy and death do not discriminate on the basis of age, sex, race or educational background.  They can strike at anytime throughout your life without warning, and you may need to file claims for these other essential Social Security insurance benefits.

Social Security Disability Benefits – to qualify individuals must have a severe physical or mental impairment that has lasted or is expected to last at least 12 months or result in death that prevents them from working.  Most people qualify for Medicare after receiving disability benefits for 2 years.  When a person stops working because of their disability, they may qualify for disability insurance if they are below normal retirement age. Then, if they are still disabled when they reach normal retirement age, their benefits automatically convert to retirement insurance, but they get the same amount.  In 2001, the Government Accountability Office (GAO) studied several plans to change Social Security. It concluded that, compared to the current program, people with disabilities would get much lower benefits under plans that would use payroll taxes to create individual private accounts.

A Downward Spiral Into Poverty For Millions Of Americans

Since talk of Social Security privatization started, Congress has had to deal with a manufactured “crisis” and has not been able focus on actual crisis areas, such as the Social Security Disability program (designated by GAO several times to be a high risk area), Medicare and Medicaid.  The following chilling scenario already happens to millions of Americans of all ages everyday, due to the crisis with the other programs mentioned above.  If privatization of Social Security is approved, the chances of this happening on a even wider scale will increase dramatically, and the effects will be even more devastating than they are today.  Keep in mind when reading this example, that under the proposed Social Security privatization plan, people will be allowed to put up to $1000 per year of their payroll taxes into a private investment account that cannot be touched under any circumstances, until they reach retirement age.  Also keep in mind that the average American has very little money, if any at all in savings accounts, in case of emergency.  Most would not have enough savings to survive on for more than two months if they could no longer work.  Those that have investment accounts rather than savings accounts, which often pay higher interest rates, are at the mercy of the very unreliable stock market and millions of dollars as we all know have already been lost there.  

EXAMPLE:  It is 2006 and the Social Security Privatization Act has passed.  Americans are now allowed to divert a maximum of $1000 a year from their payroll taxes into a relatively safe government managed investment account.  They are not under any circumstances (according to current proposals) allowed to touch this money until retirement age.  Our subject John graduates from college at 21 and lands an entry level job right out of school at a local computer firm in his area.  His starting salary is $30,000 per year.  The company offers a traditional pension plan and after 5 years he is vested in the plan.  After the first year of employment, if he should he lose his job, he can transfer the money into a private account of his own choosing outside the company plan or keep it where it is until he reaches retirement age.  When the SS Privatization plan took effect, the company dropped the 401k plan that they offered, in addition to the traditional pension plan, in order to cut costs.  They do offer health insurance with a choice of 3 different HMO plans, and again to cut costs, the employee must contribute a portion of their own pay in order to be covered under one of these plans.  Also to keep costs down the company does not offer any private disability insurance plans.

Jump ahead to the year 2011 and John at 26, is now earning $50,000 per year.  He has been taking full advantage of the new SS Privatization plan and for the last five years has diverted $1000 a year of his payroll taxes to his private account.  He also has about $50,000 in a traditional savings account and decides he wants to purchase a new house.  He decides to put down $30,000 out of his savings on the new house, and the mortgage payments are $650 per month for the next 30 years.  In 2014 John decides he needs a fuel efficient hybrid vehicle and decides to buy a new $25,000 car taking out a 4 year loan.  After a $3000 down payment out of his savings, and trading in his old vehicle, his payments are around $350 per month, since he was able to take advantage of a no interest loan incentive offered by the manufacturer. 

It is now January of the year 2016, and John at 31 is still single, paying the mortgage on his house and the payments on car he bought back in 2014.  His salary is now at $60,000 per year and he has continued for the last five years to divert the full $1000 per year of his payroll taxes to his private account.  His savings account due to the house and car payments has remained fairly stagnant at around $17,000.  By most standards he is living the “American Dream” – nice house and car, good job, health insurance, modest savings and a retirement account.  Then suddenly in the month of June, and without any warning, John experiences a life altering event (accident/illness) and his doctors determine that he is permanently disabled, and will never be able to work at any job, ever again.

John, as a result of this unfortunate circumstance looses his job of 10 years, and remember his company did not offer him private disability insurance.  He is then told by his doctors that he should apply for Social Security disability/SSDI.  He begins the benefit application process by himself and the waiting game begins.  He now has no income and must live off that $17, 000 savings account that he has.  Four months go by and finally John hears back from Social Security that his disability claim has been denied (68% of all cases are currently denied at the initial phase of the process).  He now has 60 days in which to file an appeal for a reconsideration, or in some states a hearing, and at this point decides to hire an attorney.  Once the appeal is filed John is forced again to wait while his claim sits in an SS office for months with not enough staff to look at it.  In the meantime John’s savings are quickly being used up on paying his mortgage, car payments and all the other bills he has.  His company no longer pays for his health insurance so he must take advantage of COBRA for the next 18 months.  His health insurance premium under COBRA now costs him $250 per month instead of the $40 per month he was paying through his job. That does not include the co-pays.  John’s expenses for just his mortgage, car payment and health insurance alone are at $1250 per month now.  At this point, John’s savings account is all gone and he has to roll over the pension money he got from his employer into a money market IRA at his credit union - because he is disabled they allow him to take it early without penalties.  There is about $25,000 there for him to live on. 

Another 6 months goes by and due to severe backlogs within the SS system there is still no word on his claim.  At this point the $25,000 is gone and the bill collectors start harassing him.  He has no money left to pay the mortgage, car payments or health insurance, let alone any other bills.  He has no choice but to start maxing out all his credit cards.  Another 4 months goes by and still no word on his SS claim.  With all his credit cards used up, no financial resources at all for backup, he goes down to Social Services (welfare/food stamps/Medicaid) and asks for help.  He finds out that much to his dismay, he does not qualify because of his assets (the private account that he diverted his payroll taxes into is considered an asset even though he cannot touch it until he retires).  At this point John is so far in debt that the bank threatens to foreclose on his home.  They have already repossessed his car, and he no longer has health insurance.  He is in a panic by this point and his lawyer contacts SS to let them know that his client is in dire need, and requests that the process for his SS claim be given more attention.  Again due to backlog and lack of SS employees to process claims quickly, this process takes another two months and by that time John has lost his home, his credit is ruined and he must now file for bankruptcy.  He has had to move back home with his parents.  Finally John gets his Social Security Disability claim approved and since he hired an attorney to get his Social Security disability benefits, John must now pay him 25% of all the retro pay he got up to $5300 from waiting for his claim to be processed.  John still cannot afford health insurance and under current laws must wait 24 months from disability date of eligibility before he can get Medicare benefits. 

Under traditional Social Security/SSDI, John would receive disability/retirement pay of $30,432 per year. Because he diverted that $1000 per year into a private account and paid less into the Social Security program he will now only receive a YEARLY disability benefit of $5464 to live on for the next 36 years (provided they do not raise the retirement age again).  (Note: the money that has been diverted into his private account each year, according to current proposals cannot be touched under ANY circumstances until he reaches retirement age).  When John finally does reach retirement age, and his SS disability benefits automatically turn into retirement benefits, John will get $5,464 from SS, $14,133 from his private account for a total of $19, 567 per year to live on.  That is a total yearly retirement benefit cut under SS privatization of $10,835 or 36%!

To see how you will do try this:

Social Security Benefits Calculator – Based on proposed Social Security privatization plan

All numbers are annual benefits adjusted for inflation. Calculations are based on Congressional Budget Office (CBO) economic assumptions.  Individual accounts will do nothing to restore long-term solvency there is talk that further benefit cuts are necessary. Since there is no specific proposal, these estimates assume that benefits are “price indexed,” a proposal made in Plan 2 of the Social Security Commission.  Check here for more information on how these figures were calculated 

Needless to say John’s American dream has now become the American nightmare under Social Security privatization.  Many more people may have to file for bankruptcy and now Congress is passing legislation to make that process even more difficult for needy Americans.  Currently it can take anywhere from 4 months to 4 years to get approved for Social Security Disability benefits.  Since January 2004 there have been over 2 million NEW applications for Social Security Disability benefits and as of October of that same year there were still over 1,200,000 people still waiting for decisions on their claims.  Among Disability Insurance beneficiaries (disabled workers, their spouses and children), 88% were under age 62.  Unless something is done to fix this crisis the numbers will continue to grow.  Congress needs to take the time to fix the problems within that part of Social Security instead of diverting its attention to a privatization plan that is going to cut benefits and create a legacy of poverty.  If these problems aren’t solved NOW, not only will Americans get less benefits in the future but it will take even longer to access them.  We need legislation quickly to provide the funds necessary to hire and train more SS workers, and educate claimants and physicians on the Social Security Disability process and what is required to make the benefit application process quicker and more simplified.  We also need Congress to pass legislation removing the 2 year wait for Medicare for Social Security disability recipients.  Once a claim is approved, Medicare should become available immediately.  When the flaws in the Social Security Disability program are fixed, this will also reduce the number of people forced into state social service programs, Medicaid, and having to file for bankruptcy since many are forced into those programs now, as a result of these problems. 

The Effect Of Privatization On Survivors Benefits

When a person dies certain members of their family including widows, widowers (divorced widows/widowers - if married at least 10 years or more), children and dependent parents age 62 or older may be eligible for survivors benefits.  Family eligibility for these benefits depends on your age when you die.  (Special Rule – if you only worked 1-1/2 years in the three years just before your death, your children and spouse caring for those children are eligible for benefits.)  Survivors benefits can be paid to children at any age who were disabled before age 22 and remain disabled, unmarried children under 18, or up to age 19 if they are attending high school full time, and under certain circumstances, stepchildren, grandchildren, or adopted children.

If you have worked long enough, there is a one-time payment of $255 that can be made when you die but only to your spouse or minor children if they meet certain requirements.  The benefit amount a survivor receives also depends on the survivors’ ages and relationship to the worker. A widow or widower, at full retirement age or older, receives 100% of the worker’s basic benefit amount.  A widow or widower, age 60 or older, but under full retirement age, receives about 71-99% of the worker’s basic benefit amount.  A widow or widower, any age, with a child under age 16, receives 75% of the worker’s benefit amount.  Children receive 75 percent of the worker’s benefit amount. The maximum family benefit is generally between 150-180% of the deceased’s benefit amount.  As with retirement and disability benefits, the survivors benefit rate depends on the length of time you work and how much you have paid into the system.  So with SS privatization, since you are contributing less to the system, your survivors will receive a smaller amount in Social Security Survivors insurance as well.

When considering if Social Security privatization is right for you, I leave you with this one question:  “Are you feeling lucky today?”

©Copyright LJ Fullerton – 3/20/05 - Revised  2/28/09

Note: The author in 2001, fought for 1-1/2 years to get her own Social Security Disability benefits.  During this time she used up all her life savings, pension money and was on the verge of bankruptcy before her claim for benefits was finally approved in June of 2003.  She then had to spend over half of her SSD check each month on health insurance premiums, medicines and co-pay fees until she became eligible for Medicare in June of 2004.   She now relies totally on these benefits due to several incurable health conditions, and daily has to deal with the stress of living on the brink of total poverty in addition to her illnesses.  Her personal story can be found here:
A Bump On The Head

LJ Fullerton
President/Co-Founder – Social Security Disability Coalition
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