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401(k)s are retirement robbery: How the Koch brothers, Wall Street and politicians conspire to drain Social Security

On the eve of the Reagan presidency in 1980, Milton and Rose Friedman published “Free to Choose,” a proposal for gradually phasing out Social Security. The entitlements of retirees would be honored as would the accumulated credits of contributors who had not yet retired. But no new payroll taxes would be collected. The final elimination of Social Security would allow “individuals to provide for their own retirement as they wish.” Among the advantages would be that “it would add to personal saving and so lead to a higher rate of capital formation [and] stimulate the development and expansion of private pension plans.” While the Friedmans argued for such a plan, they acknowledged that immediate privatization of retirement was unrealistic in the current political climate, but they would accept incremental reforms with the hope that one day total privatization would become politically feasible.

That same year, the conservative Koch brothers-financed Cato Institute published “Social Security: The Inherent Contradiction,” by Peter Ferrara, which argued that instead of being required to participate in Social Security, people should “be allowed to choose from a variety of insurance and investment options offered in the private market. The previous year, two years after its founding in 1977, the institute had published an article by Carolyn Weaver in which she made the case for privatization, and in 1980 it also sponsored a conference on Social Security privatization that drew, among others, two hundred congressional staffers.

When Ronald Reagan came into office in 1981, Social Security was facing a shortfall in revenue necessary to meet expenses. Reforms of some type were necessary. Privatization, while undoubtedly attractive to Reagan and his inner circle, was not politically feasible. It was a new idea that still had not gained traction in the governing class, and the United States was not Chile, with a military dictatorship that could impose it by fiat. Social Security would have to be reformed by raising taxes or lowering benefits, or some combination of the two to bring its budget back into balance. Increasing the then contribution rate of 5.35 percent would be a tax rise that was anathema to Reagan‘s conservative principles. Instead, there would have to be benefit reductions.

Reagan had appointed David A. Stockman, an advocate of neoliberal economics, as his director of the Office of Management and Budget and charged him with reducing welfare entitlements. Stockman soon turned to the problem of Social Security, which he described as “one giant Ponzi scheme.” What particularly bothered him was its intentionally redistributional feature wherein lower-income groups received greater returns on their contributions than higher- income ones to keep them out of poverty. This he saw as “closet socialism,” an unearned welfare benefit. His planned cuts were announced in May 1981. The main cut reduced benefits of those who retired early at age sixty-two before their age of full retirement at sixty-five. Their benefits would be slashed from 80 percent to 55 percent of full retirement age benefits. Negative reaction was immediate from senior groups, labor unions, and politicians. The Senate passed a 96–to-0 motion in opposition.

Facing such a firestorm of opposition, the Reagan administration retreated and regrouped. It then chose a different and less confrontational course of action. In 1983, the president named a commission with Alan Greenspan at its head to devise internal reforms for Social Security financing. As a result of Greenspan Commission recommendations, reforms were made to both increase revenues and decrease benefits—the first benefit decreases in the history of Social Security. It was a compromise. Reagan had to accept a tax increase that would rise to 6.2 percent that he did not want. Supporters of Social Security had to accept benefit cuts that they did not want.

The main reduction of benefits came from a gradual increase in the normal retirement age from sixty-five at the inception of the program in 1935 to sixty-seven for workers born after 1960. The more that retirement was delayed, the less that the fund would have to pay out in benefits... 

Read entire article at Salon