The Secrets of the Social Security Plan

Via MSNBC/Wash Post comes this very interesting analysis of the "real" Bush plan for Social Security reform. The most interesting element?

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.

That money would augment a guaranteed Social Security benefit that would be reduced by a still-undetermined amount from the currently promised benefit....

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.

With a 4.6 percent average gain over inflation, the government keeps more than 70 percent. With the CBO's 3.3 percent rate, the worker is left with nothing but the guaranteed benefit.

There's a lot to quibble with here--the 4 percent annual return on investments lowballs returns (though it's true that many people, given choices, would elect for conservative investments). But this is an interesting clarification of a Bush plan that has yet to show specifics in the pre-legislative phase. And who knows what sort of Frankensteinian monster will actually rise up off the table if and when any legislation is actually passed.

Whole story here.

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  • ||

    So its not going to be as remotely "open" as the Chilean system. Talk about rearranging deck chairs.

  • ||

    This wrinkle I've just now heard of will doom any Social Security plan change because the only way to get popular backing would have been to put the question, "Do you own your money or does the government?"
    This answers that.

  • ||

    The worst of both worlds. This plan has the government controlling massive investments in the private sector, and keeping the proceeds. Can you imagine a better recipe for corruption and waste?

    I really didn't think that Bush would make things worse on Social Security, but if this is his "reform", then I am agin' it.

  • digamma||

    Amen, R.C. Dean. Nick didn't even mention the fact that you'll most likely have to spend the whole account on an annuity immediately upon retirement, which throws the whole "You can leave it to your grandkids" thing out the window.

  • ||

    digamma,

    Its pretty clear (if this indeed his "plan") that Bush is nutless on the issue.

  • ||

    You don't own it, you can't pass it to your heirs, what's the point? Lots of administrative fees for Wall Street?

    I suppose they think they can ram through about anything as long as it's coated in pleasant words like personalization. Maybe they can link it to terrorism somehow.

  • ||

    Now that we know what the plan is (or appears to be), its relatively inconsequential nature may be one of the reasons why Bush was so mum on the details of the "reform" during the election.

  • ||

    From the MSNBC/Post article:

    But critics of the Bush plan said the proposed "claw back" renders the whole idea of "personal retirement accounts" virtually meaningless. Indeed, the system would ultimately look something like a proposal made by President Bill Clinton, in which the government would have invested Social Security taxes in the stock market.

    That idea was criticized by conservatives because the federal government could end up choosing winners and losers in the financial markets. But under the Bush system, the government is still choosing the stocks and bonds to be bought with Social Security money, said Jason Furman, a former Clinton administration economist. Individuals would get a limited choice, and the government would still keep most of the returns.

    "They hope people will think they will take on these accounts and after 40 years, they'll have this huge windfall, but that won't happen," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "I think they're trying to confuse people."

    Stephen Moore, a conservative supporter of Bush's Social Security effort, said the mechanism would undermine the president's notion of an "ownership society."

    In a nod to lawmakers worried about the budget deficit, the White House will also hold down the initial cost of the Social Security plan by phasing it in over three years, beginning in 2009. The administration official said funding the individual accounts would cost $754 billion through 2015. But because of the phase-in, the personal-accounts system would not be fully effective until 2011.

    In its first 10 years, 2009 to 2018, the system would cost more than $1 trillion, Furman said. Between 2019 and 2028, the cost would jump to about $3.5 trillion, he said.

  • ||

    thoreau,

    This may be an instance where Kerry and Bush are equally bad. :)

  • dave munger||

    The 4 percent real return is actually fairly optimistic. If inflation is 3 percent, that's a 7 percent annual return on investment. You'd have to be fairly aggressive ot get that kind of return.

  • digamma||

    That idea was criticized by conservatives because the federal government could end up choosing winners and losers in the financial markets.

    The more I think about that, the scarier it gets. Every week, Jesse Jackson could start a campaign for the government to divest from a different company, only to call it off when the company made a donation to the Rainbow coalition.

    Think of that Bozell group that floods the FCC with complaints every time something on TV gives them wood, and imagine them with the power to send a company's stock into the toilet. Yikes.

  • ||

    digamma,

    I have to write that while I am not a big fan of Bush, I thought that at least on this issue I could agree with him on. I fully and wholly support privatization. But, instead of nodding in agreement at Bush's plan, here I am standing with look of gaping horror on my face.

  • ||

    digamma at February 3, 2005 09:23 AM

    I believe the owner of an annuity has a property interest in the portion that has not been paid out. Eventually that portion is reduced to zero, but until that time the owners heirs will receive it if he dies. Such is the case for my mother's annuity anyway.

    Just stating facts, not speaking in support of Bush who judging by proposals so far is, as Gary Gunnels says above, "rearranging deck chairs."

    The "reformers" who solve "problems" that don't exist are bad enough, but what about those that give us a monster even worse than the one they've slain?

  • ||

    Isaac Bertram,

    You are correct re: annuities. You don't "own" the money in the account though; its more of a creditor-debtor situation (its analagous to a checking account in that way).

  • ||

    Point taken.

  • ||

    So, the government is going to own hundreds of billions of dollars of voting shares in major companies. I don't even want to _think_ about how the government will vote those shares.

    Social Security "reform" is a direct grab by the government for literal direct control over the private sector.
    --G

  • ||

    Gotta agree with Gary. I was expecting a plan I could at least halfheartedly support. THIS plan scares the hell out of me. What kind of "ownership society" has the government controlling all those shares?

    Just give me control over my own money, dammit.

  • ||

    Perhaps Bush is engaged in an elaborate work of performance art: take a cause for which there is near-universal support ("Save Social Security First" polled somewhere north of puppies and Christmas snow when Clinton rolled it out), and systematically elimate one political movement after another, until finally, George Bush is the only person in the country who supports it.

  • ||

    That cannot be the plan, unless the whole thing is a suicide pact between the Republican Party and Rove. The Democrats will rightly tear that plan to shreds. There is no way it is going to get passed. It doesn't even make sense... you put in 40000, you get 20000? Oh joy. That's going to sell well.

    BTW, there are varieties in annunities. There are annuities that last as long as you live (they pay out the most), and those that last 20-30-40 years once the payout starts. They pay out considerably less, but they can be passed on.

  • ||

    Toxic,

    Let's hope it was a trial balloon then. :)

  • ||

    Toxic, the money you get from the accounts would be in addition to a guaranteed benefit. That's what the principal and the earnings up to 3% annually are taken for - to fund the guaranteed benefit.

    I think.

  • ||

    The shock troops seem rattled by this article over on The Corner and Free Republic. Hopefully this plan, if this is indeed Bush's plan, is DOA.

  • Xmas||

    That plan that MSNBC is giving out sounds like nonsense.

    I'm wondering if this was simply a misunderstanding or even a deliberate mistatement of the proposed personal account system.

    I can think of positive way of wording this: Any money earned in the personal account above what was paid into it during your working lifetime is your family's to keep. The account will be burdened with steep taxes and fees for withdrawal outside of normal retirement criteria.

    As for who will control the money, it's simply bad to assume that the government will be the one managing the funds. It's easier to believe that they'll simply adjust the tax laws to allow for a deduction equal to what was paid into accounts that meet the Personal Account's criteria.

  • ||

    All the problems what we got wit the social securities is because of the white mans descrimination.

  • ||

    For all the talk about Social Security reform, etc., Bush spent a fair amount of time talking about hardcore social conservative issues, including opposition to gay marriage and abortion.

    Eye of the beholder, perhaps? Here's how much time Bush spent on the issues by my count:

    Social security- 9:50
    Gay marriage- :41
    Stem cells- :53

    No mention of abortion outside of the stem cell issue.

    Sounded to me like he was just namechecking those social issues for the base, but isn't going to aggressively pursue them like social security reform or the energy bill.

  • ||

    Dammit, wrong thread.

  • ||

    This is extremely diasppointing, but I can't say I was expecting much in the first place.

    Re: annuities, that makes it even worse. The vast vast majority of annuities are terrible investments. They are not much more than very expensive insurance policies.

  • ||

    In the voice of Simpson's comic book geek: "Worst. Conservative. Ever."

    joe blow

  • ||

    . The vast vast majority of annuities are terrible investments. They are not much more than very expensive insurance policies.

    Thats cause of the white mans descrimination what we got.

  • ||

    have to write that while I am not a big fan of Bush, I thought that at least on this issue I could agree with him on. I fully and wholly support privatization. But, instead of nodding in agreement at Bush's plan, here I am standing with look of gaping horror on my face.

    Comment by: Gary Gunnels at February 3, 2005 09:56 AM


    Social Security "reform" is a direct grab by the government for literal direct control over the private sector.


    I agree with you both. This plan is just...disturbing. Is there anyone here interested in starting an end-social-security-as-we-know-it coalition with me? I am still young, I haven't wasted all my tax dollars yet....
    Why can't the current government, and society in general, just see that FDR's social security idea isn't invincible and untouchable, and that the government is SUPPOSED to make changes? Jus throw the whole concept of social security out, let the baby boomers cut their losses, and let my generation and all the generations after mine keep our own fucking money.
    Like all these stupid rhetoricians keep insisting, it's for the children. Seriously, if you're thinking of us, just cut the goddamn program up like an unwanted credit card, and leave me and my dollars be.

  • digamma||

    smacky: there's this thing called an election....

  • ||

    I know, election. But our current election system is rigged so that the same cookie-cutter, rich-boy puppets from secret societies are the only ones who get press coverage, campaign dollars, and public recognition. We all know Howard Dean wasn't fazed out really because of his big scream. [That was awesome, anyway.]

    No, if whoever are really controlling politicians do not like someone who disrupts the status quo, they will find a way to ruin their chances of an effective political career. Pardon the oxymoron.

  • ||

    smacky: there's this thing called an election....

    Yup, and Democrats and Republicans are doing their best to open a door for a third party, but our leadership has their heads up their asses.

  • ||

    I wouldn't get our panties in a wad just yet. This could be a bunch of crap that the opposition was feeding the Post or they could just be misinterpreting the plan all together (intentionally or otherwise). I'll reserve judgment on Bush's mysterious SS plan until he actually sees fit to fill us in on it. It the plan is actually what the Post implies it is, then Bush, Rove, and Co would be the stupidest men in the history of politics. I just can't believe that is the case.

  • ||

    Maybe I'm missing something, but why not increase the tax incentives for contributions to things like a 401k or IRA or whatever the other names are? The incentives might even include deductions from the payroll tax. Then include a means test to reduce the benefits paid out, but partially exempt from the means test money from a 401k, to maintain incentives for growing your own fund.

    Or something like that. It just seems simpler than the system described above. I'm not a big fan of tinkering with the tax code (except to simplify it), but I'd rather expand the incentives to participate in an existing, mostly-private system, rather than create another parallel, mostly-public system.

  • ||

    I posted this in the bankruptcy thread:

    This isn�t my ideal situation, but it�s what I hope we could just turn SS into. Get rid of the payroll tax and pull all the money out of general revenue. The payroll tax is awful. Means test it and keep the same name because it sells better than �Elderly Welfare.� Increase retirement deductions so you can put money in private accounts if you want. The best of both world, everyone gets a �private account� if they want one, but it�s run by a company that you choose and actually competes in the free market instead of for the government contract (hence lower management costs). Plus, the poor elderly, that we�d pay for if they f�ed up their private account investment anyways, still won�t end up in the gutter.

    I don�t trust the government to manage 300 million retirement accounts semi-effectively and there will be some major screw-ups that will end up costing us way more in the long-run. Between Bush�s plan and the current situation, I�ll take the devil I know.

  • ||

    Mo-

    I'm with you. The only tweak I'd add is that the means testing has to be on some sort of sliding scale, otherwise there's less incentive to save. If every $1 you save is $1 less in guaranteed benefits, why save? On the other hand, if every $1 you save is $0.50 less in benefits, then there's still an incentive to save but there's also a way to bring down the cost to the taxpayers.

    This plan has boondoggle written all over it. Just increase the tax advantages for saving and implement a sliding-scale means test to reduce the cost.

    Besides, my understanding is that the REAL monstrosity is Medicare. Medical expenses are currently growing faster than inflation, and its arguable that Medicare has contributed to that (both via direct subsidies, as well as indirect costs of regulation and whatnot). I don't claim to have any answers there, but that seems like a more urgent issue.

  • ||

    Given that the current earnings yield on stocks ia about 4.5% real, on reits 3.0% real and bonds 4.5% nominal - 2.5% inflation = 2.0% real, a mixed portfolio would give about 3.5% less investing costs of say 0.5% , for 3.0% net real return.

    Higher past returns were accompanied by higher past investing costs, so a 5% past real return from a similar portfolio was also about 3.0% net after past almost 2% investing costs.

    The whole problem with SS privatization is to have an economy that is bad enough for SS not to have enough cash flow for benefits, yet an economy good enough to replicate past returns.

  • ||

    SS itself estimates paying only 73% of expected benfits, from which medicare b payment is deducted. Taxes affecting SS are not inflation adjusted. In essence,in the future, SS becomes a fully income taxed fixed pensionafter med B is deducted.

  • ||

    I now see that "Ownership Society" means "government ownership of society" (i.e. controlling shares of private sector).

  • ||

    About 1/3 of retirees have SS as 90% of their income. So throwing SS out isn't much of an idea in my opinion. Most people simply have no idea how much money it really takes to quit work, given how long life expectancies have become, and the black box retirement calculators don't help. Retirees often have 0% return from their portfolios. They are simply spending their money down.

  • ||

    Smacky,

    "No, if whoever are really controlling politicians do not like someone who disrupts the status quo, they will find a way to ruin their chances of an effective political career."

    Well, that "who-ever" is the voter, thus the problem with democracy and the necessity to adhere to a constitutional republic.

  • ||

    http://postgazette.com/pg/05034/451818.stm


    Free us from the pathetic Social Security system

    I am again dumbfounded by the Post-Gazette's opinion. Your Jan. 27 editorial on Social Security ("Phony Crisis") is appalling. First of all, President Bush has not made up the crisis. Two previous presidents, along with Al Gore and John Kerry, have acknowledged the problem.

    What really bothers me is the attitude toward private retirement accounts. As a young worker, I get angered yearly by my Social Security statement which describes the pittance that the large amount of Social Security tax I pay will get me when I retire. Placing this alongside my 401(k) statements is hilarious. The Social Security that I will receive will be a small fraction of what I will get from my 401(k) and other retirement plans. I can do much better than the 1-2 percent that Social Security will earn in 50 years!

    In my opinion, it is un-American to force every working American to pay into such a pathetic system. Granted, Social Security is an absolute necessity to the disabled, but that portion can be funded with a much lower FICA tax.

    A famous American once said: "Give me liberty or give me death."

    Make mine financial liberty, please.

    JASON THIEL
    Scott

  • ||

    It should be noted that the U.S. was a past winner in the investment world, placing an upward bias in expectations. Almost never will anyone point out the 2.5% real return for the Belgian stock market. Someone in the U.S. bought English railroad stock, or Russian Czarist bonds, but these losses don't appear in the U.S record.

  • ||

    SS is old age welfare, there is no investment return to the recipient.

  • ||

    Jason, you ASSUME you can do better. We do not know the future.

    SS is old age welfare, there is no investment return to the recipient.

    If you have high cost funds, down market when starting retirement, or just bad luck, then that SS payment might look good after all.

    In fact you probably will do better, if willing to read and study about investing, at least as if it was a part time job. And in the end, go buy a bunch of low expense, low turnover index funds.

  • ||

    from article:
    "But the government would keep and administer that money."

    Does this mean the federal government will become the single largest holder of private stocks?
    Isnt that ultimately a 1000x's worse than lousy rate of return?

  • ||

    If we want welfare for the elderly than let's just have welfare for the elderly. SS is just another government program that needs to be dropped.

  • ||

    Wellfellow,

    The U.S. is a Constitutional Republic. So then are you protesting the sad fact of non-existent democratic "voter authority", as I am? I wouldn't want a pure democracy, I just don't like the fact that you need to have a predetermined "in" in order to have political power, especially concerning help from public exposure via the media.

    http://www.citizensforaconstitutionalrepublic.com/


    http://www.citizensforaconstitutionalrepublic.com/#AMERICA%20IS%20A%20REPUBLIC%20-%20NOT%20A%20�DEMOCRACY�!


    Also, TPG:

    Yup, and Democrats and Republicans are doing their best to open a door for a third party....

    Are they? Please elaborate.

  • ||

    The Post's article has been corrected. See:

    http://www.washingtonpost.com/wp-dyn/articles/A59136-2005Feb2.html?nav=hcmodule

  • ||

    When this is the best idea the Republicans can come up with, can somebody explain to me why the Libertarian Party remains so clueless and irrelevant?

  • ||

    Brett, though I sometimes clash with LP bashers, against your indictment I have no reply.

    Well done!

  • ||

    thoreau, it turns out the WP story was wrong and has been corrected.

    However, as I seem to become more and more libertarian and the Republican party seems to move farther and farther away from a small government mindset, I do seriously wonder why the LP remains such a fringe party. Is it due to the stigma of being the "drug legalization party"? Is it because they have too many anarchist radical types?

    I'm sure there have been lots of threads on the LP here and I'm a relative newcomer to H&R. But I know there are many out there who feel as I do.

  • ||

    Brett,

    Poor communication skills. We expect to reason our way to significance. Republicans and Democrats know that arguments from emotion are more successful generally.

  • ||

    Are they? Please elaborate.

    Both parties have basically spent the last 12 years alienating every part of their base at one time or another.

    Yet the idiots in charge of the LP continue to run around their national offices playing grab ass.

  • ||

    When this is the best idea the Republicans can come up with, can somebody explain to me why the Libertarian Party remains so clueless and irrelevant?

    Because those that truly care enough to lead are the talentless zealots focused on one specific issue that attracted them to the party in the first place.

  • ||

    I'm going to cut and paste something I posted in another SS thread lower down:

    I know this is slightly off-topic, but there's one MONSTROUSLY unfair and fraudulent thing about the current Social Security system that I've never, EVER seen mentioned in the news; maybe most people don't know about it.

    Get this: I've been working (at least part time) since 1986, and have paid SS taxes for years and years.

    However, I haven't paid into SS for my entire working life. I taught for three years in Massachusetts (where certain public employees do not pay into Social Security because they belong to the state retirement plan), and I had an SS-free job for a few years before that, too.

    Now I work in the private sector again, and paid a big chunk of FICA last year, but when I got one of those "benefit forms" from SS I saw that if I became disabled or forced to retire tomorrow I'd never see a dime of SS money, because in order to get SS you need to do more than work a minimum number of years; you also, apparently, have to make sure you've been paying into the system for the majority of the past ten years, or else anything you did before that no longer counts toward your work total.

    So despite having paid steadily into the system from 1986 through 1995, and for about 18 months in 1999 and 2000, as far as Social Security benefit calculations are concerned I've only been paying into the system since January of last year.

    The form also told me I won't be retiring until I'm 67. This whole thing would irritate me more if I hadn't decided years ago that I'd better plan for my old age based on the assumption that I'll never receive a penny of the money I paid to FICA, even if I live to be ninety.

  • ||

    Bush has certainly got some splainen to do.

  • ||

    Did I really just write that...?

  • ||

    Jennifer at February 3, 2005 06:06 PM

    I'll cut and paste something I said to someone else on the other thread.

    "You really want to get bummed. In ten years I get to retire and you will be one of three workers who will get your payroll tax given to me."

    Two down, do I have another volunteer? :)

  • ||

    "However, as I seem to become more and more libertarian and the Republican party seems to move farther and farther away from a small government mindset, I do seriously wonder why the LP remains such a fringe party. Is it due to the stigma of being the "drug legalization party"? Is it because they have too many anarchist radical types?"

    Brett,
    The people headed in the "right" direction will always be the "fringe."
    Get jiggy with it.
    And the "right" direction will always be anarchist because the problem is the heirarchy.
    Get jiggy with it.
    With regard to "radical," thinking is radical for most folks.

  • ||

    Brett,
    I just happened to read this from Mark Morford's column in the SF Chronicle. The question he poses he doesn't answer. What's true of computer operating systems is true of politics.

    "Here, then, is my big obvious question: Why the hell do people put up with this? Why is there not some massive revolt, some huge insurrection against Microsoft? Why is there not a huge contingent of furious users stomping up to Seattle with torches and scythes and crowbars, demanding the Windows Frankenstein monster be sacrificed at the altar of decent functionality and an elegant user interface?"

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