Donna Shalala stresses importance of public debate
on Social Security and Medicare

by Chuck Hoven

(Plain Press, February 2005) In a speech at West Tech Loft Apartments on December 23rd, University of Miami President Donna Shalala spoke on two topics on which she says the nation is about to enter a major debate – Social Security and Medicare.

Shalala, a 1958 graduate of West Tech, served as Secretary of Health and Human Services in the Clinton Administration and as a Social Security Trustee.

On Social Security, Shalala said, “The issue is whether we want to privatize part of Social Security.”
“First, let’s talk about whether there is a problem with the current system,” she said. “You are inclined to say ‘where’s the beef?’ when you find out Social Security is actually going to be ok until 2042. The baby boomers will be 100 years old by the time the Social Security System doesn’t have enough money to pay out to those who are in the system. So we will actually be through the baby boom generation by the time that Social Security runs out of money. And then it doesn’t completely run out. It is just short by about 30%. It will actually have about 70% of the money that it needs to pay those beneficiaries after 2042.

Asking rhetorically, “Is there really a crisis that is going to loom in our lifetime?” Shalala said, “Social Security is fully funded. It is fine until 2042. And most people agree upon that number.”
Shalala then addressed a recommendation by a presidential commission to allow new individuals entering the Social Security System to invest 2%-4% of Social Security payroll taxes in the private market. She said this proposal “actually creates more problems for Social Security.”

Shalala noted that the current system depends on new people entering the Social Security System to pay for those receiving benefits. “Taking money out of the system will cause more debt and shorten the life of Social Security, “ she said. Shalala says to fund this transition to private retirement accounts we would have to put more money into the Social Security System to keep it solvent. “You’ve got to fund the transition, you do that by borrowing and the country is already deeply in debt.” If you don’t fund the transition, the shortage in the fund would occur sooner than the projected 2042. For example, she said, the date the system is fully funded could go down to 2025.

“This is one of the reasons we are saying, ‘hey, maybe we better stop and look,’” says Shalala.
The proposal to use part of Social Security payroll tax for private investment will potentially create a problem for two populations dependent on Social Security – the disabled and women, Shalala said. She noted that not all people who receive Social Security benefits are over 65. She said the way the current proposal for privatization of part of Social Security is designed in all the presidential studies, “you will receive at least a 20% cut in your benefits if you are disabled.”

 Women, who generally live longer than men, would also face insecurity in their final years as funds in the private accounts run out. Funds in private accounts pay out so much per year depending on life expectancy. If you outlive the projection, the fund runs out.

While Wall Street stands to get a windfall from the increased investment in the private retirement accounts, Shalala says big Wall Street firms are not out lobbying for this proposal. She believes they are worried about increased regulation. Shalala believes a new government agency will be needed to regulate these many small investors, something Wall Street doesn’t want.

Shalala said another thing that may happen is that having both Social Security and a private investment account may create a false sense of security causing some Americans to believe that they don’t need to save. This would not be good for the economy, depleting money from savings banks used for home mortgages and other loans, said Shalala. 

Under a private retirement fund, how much you get depends upon when you retire. In the stock market, everything depends on timing, said Shalala. “Most people can’t control when they retire,” she said. If there was a significant drop in the stock market like that that occurred in 2001, she said, people ready to retire and dependent on that private retirement account would be stuck with substantially less money than they anticipated based on what was in the account before the market drop.

Shalala encouraged people to save and said there is nothing wrong with owning stock. She believes the government can play a role in encouraging savings and private investment. However, she warned against the proposed private retirement accounts as a government organized plan that would result in “people having less money when they retire than under the current system. It is not clear to me that moving toward privatization will do anything more than undermine and make the system a little less secure than it currently is.”

Shalala said the Clinton administration’s economic advisors encouraged private investment and savings, but they advised adding on to Social Security not substituting for Social Security. Noting that the average Social Security cheque of $800 per month is not enough to live on, Shalala said, “I am not opposed to government devising ways for Americans to save more for their retirement. I believe Americans ought to save more so they are in better shape for their retirement. The question is whether you do it by substituting or adding on. That is where the debate is going to be.”

“Privatization of Social Security has not worked anywhere in the world,” said Shalala. She said proponents of privatization pointed to Chile as a model of the system they proposed. “Chile,” she said, “went belly up, because investments in the Chilean market went belly up. No one is arguing anymore that there is some private system out there that is so good we ought to model ourselves on it.”

On the subject of Medicare, Shalala noted two recent developments, the creation of a Medicare Drug Benefit and attempts to increase drug importation from Canada.

“Importing drugs from Canada is an attempt to create pressure on pharmaceutical companies because they charge us more. On the surface, it sounds rational. But it doesn’t solve the problem,” she said.

The problem is that “drug companies are giving big discounts to every country in the world and shifting the costs to the United States,” said Shalala. She said the countries benefiting from this situation were not just poor third world countries, but highly developed wealthy countries as well.
Shalala called upon the United States government to use its purchasing power to help lower the costs of drugs for Americans. She said simply importing more drugs from Canada “doesn’t solve the fundamental problem that drug companies are giving big discounts to every country in the world and they are shifting the rest of the cost onto Americans.”

In closing Shalala said, “Social Security and Medicare and the two most fundamental programs in our society that have transformed what it means to be Americans. No American family would buy a house, or send their kids to college, or buy a second car if we didn’t have Social Security and Medicare.

“Those programs are cross subsidies to middle class, middle aged Americans so they can do other things. If they had to take from the bottom line of their check for their elderly relatives equivalent of what they are getting form Socials Security, if they had to go out into the market and purchase a health care plan for everyone in their family over 65, they could not do all those other things. “

“That is why,” she said,  “it is such a central debate.” A debate Shalala termed,  “one of the most important debates in this century because it defines whether seniors are going to live independently or not. It defines us as a country.”

 

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