Sunday, February 06, 2005

More Detail on Social Security

The New York Times has done an excellent job in providing information that makes it a lot easier to understand the Bush Administration's plans for Social Security and private accounts.

First, read the White House Press Conference on Social Security from February 3 (link from the NYT). It's very long* and not always easy to understand, but it contains both a summary of the Administration's thinking and sometimes critical questions from reporters.

Then read today's New York Times editorial and Paul Krugman's February 4 column. Both also refer to the White House press conference.

Anyone who has been trying to follow the Social Security debate may understand much of what the press conference and commentary explain. However, there is at least a good amount of additional detail available here, and I suspect most people will learn some things they didn't already know.

Several points are reinforced that leave me even more skeptical than I was before about what the Administration is trying to do. A few examples:
  • The private accounts are optional. You can decide to participate or not, and if you don't, your payroll taxes are not reduced. In other words, you remain part of the traditional system.
  • Once you're into the private account, you can't opt out. If you aren't happy with something about the account or its performance, all you can do is put it all into bonds, which will approximate the return you would have gotten by staying in the traditional system.
  • In order to benefit from the private account, you have to earn a net real return of three percent over the life of the investment.
  • Many retirees will be required to annuitize some of the amount in their private account at the time of retirement. If they die earlier than actuarial projections, the amount unpaid from the total annuitized is lost. In other words, the amount unpaid from the annuity is not available to be passed on to heirs.
  • Private accounts are projected to have zero net effect on the problem of Social Security solvency. In other words, that problem still has to be fixed, either through tax increases, benefit reductions, or a combination of both. The Administration has no answer for that and is effectively punting it to Congress to be worked out through future negotiations with the Administration.
  • Estimates by some critics of the administrative costs of private accounts appear to be overstated, in some cases pretty grossly.
  • The Administration really doesn't have any idea what the transition cost is. This is the amount required to fund continued benefit payments after payroll taxes are reduced by the amount to be invested in private accounts. They're talking in the 700+ billion range, but that figure seems shaky.
  • There doesn't seem to be any way to logically think of the return on private accounts amortizing the transition cost. In other words, it seems that the transition cost becomes part of the overall problem of Social Security solvency.

And there's a lot more. I'm still where I was in my previous post, Social Security and Proctology. I'm convinced that this private account business is a bad idea. It doesn't have anything to do with fixing the solvency crisis, however big that crisis may actually be. We need to take a non-partisan approach to making the system solvent without chopping it up. If we want to encourage saving, which I believe is necessary, then a broad approach similar to the Thrift Savings Plan available to federal employees might be the right answer. However, TSP is in addition to Social Security, as any new program to encourage savings should be.

And all things considered, I would rather be a proctologist than a Social Security expert.

*Reading the press conference transcript requires approximately one pot of coffee to maintain consciousness.


6 Comments:

Blogger American On Line said...

I agree with you Tom that it's a bad idea. It was a great headline though. The cynic I am believes that - in part - it was meant to target wall street pocketbooks for the next election cycle.

It was never a plan with details, but an evolving headline, a moving target that keeps changing as the talking points fall apart.

Example, Bush SOTU:

"In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children or grandchildren. And best of all, the money in the account is yours, and the government can never take it away."

Today's NYT: "Those who had low wages in their working years would be required to put at least part of the money in their accounts into lifetime annuities, instruments that make a guaranteed monthly payment for life but then expire and cannot be left to heirs."

http://www.nytimes.com/2005/02/05/politics/
05benefits.html

This reminds me of Hillary's plan for health insurance. DOA.

12:12 PM, February 06, 2005  
Blogger Kevin said...

Yeah... this is pretty much my take too. Nice job of articulating it in a coherent way, Tom.

Excellent observations, AOL. Particularly the analogy to Hillary's Health Care scheme. I liked that one.

9:50 AM, February 07, 2005  
Blogger Anselm said...

You are right that this in no way helps the long term SS problems, and in fact the transition costs are just extra costs. But as a separate issue, I don't see any down side other than the transition costs. It is almost inevitable that the personal accounts will do better than 3%, perhaps much better. Regular SS doesn't get inherited either. But most importantly it helps the poor the most. The wealthier you are, the less you depend on SS and the more you have other sources of income. This will allow the poor to have investments they would otherwise not have, to have the opportunity to have more money in retirement, and to be part of a system (capitalism) they geenerally feel left out of.

9:26 AM, February 08, 2005  
Blogger Kevin said...

Anselm,

I'm not so sure that it's realistic to think that this privatization scheme would only be a net benefit which would help the poor the most.

SSI already invests the money that's paid in. But, they're investing it in low risk bonds. To beat that return rate, Bush is proposing that these hypothetical accounts be able to be invested in higher return stocks and bonds. But, a fundamental axiom of capitalism is that the higher the risk, the higher the potential profit (the side that Bush is wanting to put all his eggs in.

9:57 AM, February 08, 2005  
Blogger Kevin said...

hehe... I'm at work and my boss came by. In my haste I accidently posted that last comment prematurely.

Anyway... the flip side of higher risk/higher potential gain is that there is also a higher potential to lose money.

The NYT ran a piece on Chile's privatization scheme which Bush has cited as supporting evidence that his scheme is the way to go. Thing is... Chile's scheme hasn't panned out as well in reality as the rosy theorists predicted:

http://www.nytimes.com/2005/01/27/business/worldbusiness/27pension.html?oref=login

10:42 AM, February 08, 2005  
Blogger Markkind said...

I see what you all are saying but, and maybe it's my lack of knowledge in this area, I think don't think the plan is all that bad. Yes it's a gamble and yet it's a thrown bone to the investors but I'm not so sure that's a bad thing. I'm warming up to the idea, despite the cited evidence that it's a bad idea.

Though I'd rather scrap the program altogether and create a Basic Income Guarantee.

6:35 PM, February 08, 2005  

Post a Comment

<< Home