I've been meaning to write something on Social Security for quite a while (although I suppose I did write something here
, although this proposal seems to be DOA) and I think I'll try to do that today. It seems like an appropriate time, given that we just heard the President's State of the Union address last night.
My first thought is regarding the general need for reform. I may be completely off base here, but my understanding is that the money currently being borrowed by the Federal Government from Social Security overpayments is not being borrowed by simple accounting slight of hand, but rather the Federal Government is issuing treasury bonds to the Social Security Administration (SSA) to cover the borrowing. I believe the Federal Government started doing this after our last big round of Social Security reform in the 80's under Reagan. (where they raised the payroll tax rate, and supposedly that fixed everything - hah!) If this is actually the case, that means to me that when the SSA needs to start drawing on the interest and principle of these bonds in about 13 years, the Federal Government should honor its debts, and pay up. However, the current administration is emphasizing that Social Security will be running a deficit in 13-14 years, and saying that they do not want to be subsidizing Social Security out of the general budget. To me, it seems that they are arguing that the Federal Government should not be responsible for its debts and it should not have to pay back the treasury bonds that the SSA owns. If that's the case, what kind of precedent does that set?
My other concern is not so much structural, but rather involves the minutiae of the reform plan. I have read a couple articles, the most recent being this Washington Post/MSNBC article
, which cite unnamed senior administration officials and discuss aspects of the reform plan. One particular aspect that I've heard about occasionally since before the election is the idea that your private account would not actually be all your own money -- that the government would take a substantial chunk of it once you reach retirement. This is rather ugly, and goes contrary to what President Bush said in his speech last night -- "You'll be able to pass along the money that accumulates in your personal account, if you wish, to your children . . . or grandchildren," Bush said last night. "And best of all, the money in the account is yours, and the government can never take it away." -- but still, it would go a long way to making privatization work financially... which perhaps is why the idea keeps surfacing. The basics of the plan are:
Under the proposal, workers could invest as much as 4 percent of their wages subject to Social Security taxation in a limited assortment of stock, bond and mixed-investment funds. But the government would keep and administer that money. Upon retirement, workers would then be given any money that exceeded inflation-adjusted gains over 3 percent.
. . .
Under the system, the gains may be minimal. The Social Security Administration, in projecting benefits under a partially privatized system, assumes a 4.6 percent rate of return above inflation. The Congressional Budget Office, Capitol Hill's official scorekeeper, assumes 3.3 percent gains.
If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's.
Quotes via this MSNBC article
, hat tip to Reason
Granted, the return rates are rather low and perhaps the gains could be a lot more, but still I have a hard time seeing this going over very well with anyone who is planning on their private account to help provide for them after they retire. Either this idea is going to be dropped, or it will be buried and most average people won't know anything about it until they start getting close to retirement. At that point, things should get really ugly, since who's going to want to give a substantial chunk of their supposedly protected private retirement account back to the government? And Congress, always willing to placate, will probably try to reform this away as well, and the public debt and structural debt should get even worse than it is today.
Well, at least there's something to look forward to...
And if I seem a little obsessed by retirement, well, I guess I am. I'm starting to realize how fast time flies, and I have no intention being stuck with little or no retirement savings as we get older -- especially since aging is not something that happens randomly to only a few people and it is something that we all have the opportunity to plan for well in advance.
Of course, this probably means I'll be one of the few people who will get hit by a proverbial bus at age 35, but at least Matt will have a good foundation to retire someday...
OK, it is really time to stop now, this is getting ridiculous.