Friday, February 04, 2005
the bush plan for social security
the upshot is a tripartite plan:
1) after decades of the federal government's general fund borrowing FICA tax revenue from social security administration (SSA)'s trust fund, the general fund will default on its $1.8 trillion debt to the SSA, destroying the trust fund. (the white house doesn't call it default, but that's what it amounts to.) this will help counter the longer-term effect on the general fund/national debt of bush's tax cuts, as the government will no longer have to repay that debt, giving the white house some latitude to make the bush tax cuts "permanent".
2) having ended any notion of a trust fund, the SSA clearly has insufficient resources to pay benefits as promised going forward -- these benefits were to be paid (after FICA revenues are exceeded by benefit payouts, estimated to be in 2018) out of the general fund's gradual repayment of everything it has borrowed and spent over the decades. now, instead, future social security benefits will be substantially cut so that SSA's benefit payments are in cash-flow balance with FICA receipts -- so that in equals out. the white house has referred to this as a move to "price indexing" instead of the current "wage indexing" of annual benefit growth to compensate for inflation.
3) FICA payers would then be given the option to redirect about a third (four points of the 12.4 points we all pay in FICA on gross wages) to a "personal account" savings plan that will operate something like a government-run 401(k). that, then, is money that will not go to pay for SSA benefits -- and, because benefits were put into cash-flow balance in part 2), this is effectively cutting benefits a second time -- by about one-third of an already reduced pie..
Thus, having already implemented phases one and two, the private accounts are a good deal for workers. Phase two and -- especially -- phase one, however, are terrible deals for workers. The cuts undertaken in step two (and made necessary by phase one) are bigger than the gains you can make by starting your account. The important thing, as the chart at the bottom of this page indicates, is that what you're being promised by the Bush administration is worse, on average, not only than what you're being promised right now, but worse than what currently scheduled benefits can afford.if you see it better in flowcharts, see tunesmith's at daily kos.
what they are saying is that for your private account to be a good deal for you, it will have to not only outperform treasury bonds (estimated to be a 3% real return) -- it will have to outperform by enough to make up for the cost of privatization, which will be financed by benefit reductions.
the bush administration expects people to, on average, get a 4.6% RoR(*) in their "personal accounts", as opposed to 3% under SSA's care. this appeal to greed in step 3) is a big part of the plan's attraction -- the average accountholder will supposedly make 1.6% per year more. but the costs of privatization in step 2) amount to more than that 1.6% advantage! in effect, privatizing would reduce benefits even if it performs as expected for an average individual.
by how much? see that table and weep:
If the Administration uses price indexing to restore actuarial balance, then the benefit reductions under the plan that the Administration otherwise outlined today would be very large. For instance, a worker born in 2000 who has average wages, participates in the private accounts, and retires in 2065, would have total benefits (from Social Security and the private account) that are 50 percent below the Social Security benefit scheduled under current law (and 34 percent below what Social Security would be able to pay even if no steps are taken to restore solvency).my generation would look forward to getting a 27% reduction in benefits -- assuming i manage to make the 4.6% real annualized return of the average individual in my personal account.
clearly, however, the average individual is not the whole story -- millions will make more than 3%, and millions will make less, and millions more actually lose money. if you do well with your new "personal account", of course, you may not care; if you don't, however, you very well may. and many, many people won't do well. the hard truth is that a large percentage of professional investors do not outperform treasuries, much less naive investors.
what becomes of those people? and how is that "social security"? beats me. so why is this the plan?
if i had to guess, i'd say the answer is fees. the net effect of this plan is to have the government borrow trillions -- $4.5 trillion over 20 years -- and send it to wall street. wall street, then, will collect fees on those trillions -- on transactions, on custodial duties, on marketing -- significantly enlarging the new york financial sector and making some people very wealthy.
that those people are also political patrons is, well, an ethical dilemma of the first order.
(*) -- the issue of economic performance going forward -- the average american rate of profit growth, which was 3.4% per annum over the last 75 years, is expected to slow to 1.9% over the next 75 as demographic changes in the american population take hold. this should diminish real annualized capital gains in the stock market accordingly, slowing the pace of real total gains from 6.5% to 4.6%.