Monday, December 06, 2004
Social Security
In an attempt to stir up a can of worms before I depart for vacation in California, I propose a discussion of the proposal to privatized Social security. This topic, of course is inspired by Bob Novak's column in the Washington Post, which can be accessed on-line via his home town newspaper the Chicago Sun-Times.
First, let me start with the statement that there is very little that is commonly accepted about this issue and the proposed solution. Deep divisions exist within both political parties and even among economists and public policy specialists there is little agreement, both on the scope of the problem, its severity, and most importantly how to fix/solve it. Generally speaking, however, the groups can be broken down into two camps; on the one hand, there are those that favor finding ways to maintain or adjust the current system (Democrats), while on the other hand, there are those that favor a total "overhaul" starting with the idea of private investment accounts (Republicans).
Let's start with some facts, or at least some things that don't appear to be too contentious. Currently, working individuals pay approximately 12.4% of their paycheck to the "Social Security Trust Fund," which goes to pay the current recipients of social security. For example, one can grossly oversimplify the situation this way: I pay 12.4% of my salary so that my grandmother who is 85, retired, and sadly suffers from Alzhimers can get a monthly social security check. In other words, the current crop of workers pays the current crop of benefits. So what you pay in social security taxes doesn't go into an account with your name on it that you get access to at 65, but rather goes into a general pool and is divided up roughly evenly among the group of people determined eligible to receive the benefit. Now, there are several important wrinkles to this system. First, the social security tax is capped. By this I mean that after a worker earns a certain amount of annual income (approx. $87,900) they don't pay the 12.4% any longer. Second, when the system was designed in the 1930s, there were many, many more working people than eligible people (approx. Between 8:1 and 12:1 depending on who's information you choose to rely on) than there are now, (approx. 4:1) and will be when the "baby boomers" retire (approx. 2:1). In addition, Social Security was never deigned to be the sole financial support for Americans retirement. It was designed and only has the capacity to be "supplemental." It was and is, however, designed to be guaranteed, hence its categorization as an "entitlement program," which means that if one works and dutifully pays into the system, when they become eligible they will receive their fair share, no questions asked, backed by the full faith and credit of the United States. Finally, the trust fund is not really at "trust fund" at all, at least not in the way that say your real tives set up a trust fund for college education or other family expenses, rather it is simply an earmarked account within U.S. Treasury designed to deal only with the Social Security System. Congress can, and frequently has, (both during Dem. and GOP control) changed the law to allow the funds to be spent on other government programs provided the money is always repaid (hence the often reported I.O.U.).
Anyway, moving to the substantive issue, private accounts. The proposals sound like this, rather, than contributing 12.4% to the "trust fund" taxpayers will pay something like 8-10% with the remaining 2-4% available for investment in whatever way the individual worker sees fit. Sounds great, right. I work hard, I get to keep more money and do with it what I wish. Well not exactly. These proposals have many economic drawbacks that have yet to be adequately addressed. Moreover, as I hope to show, there is also a philosophical drawback, but I'll get to that later.
First, the economic issues. Note that nowhere above were the outgoing benefits mentioned. In fact the only part of the system being discussed is the pay in, not the pay out. Savvy politicians have all promised that privatization will have no effect on benefits, nor will it require a raise in the age with which people become eligible for the benefit. How can this be you ask? Simple, it can't, or at least not without what are called "transition costs." In other words, some amount of money will have to be influxed into the system to make up the gap that occurs when the younger of us decide to reduce our contributions to the trust fund to fund the private accounts. Further complicating matters is the fact that these costs cannot accurately be predicted, because there are too many variables. We don't know how many people will opt out, nor how soon people will become eligible, and with life expectancies getting longer and longer we don't know how long some people will remain alive and eligible for benefits. Estimates put the transition costs at between $1 and 2 trillion over 10-15 years, but in reality no one knows. Where does this money come from? Even better question. Answer, no one knows because no one is talking about it. Lindsay Graham's proposal suggests raising the cap from $87,900 to approx $200,000 to cover the difference, but that may not be politically tenable, especially for a tax cutting GOP White House. Other solutions include government borrowing, or raising other taxes and fees, but no one is being specific. In addition, reducing benefits and raising the eligibility age are also possible, but those options have even more associated political costs than raising the payroll tax cap. In the end economically it may not make as much sense as people think, but the control issue is compelling, especially with the recent gains in the stock market and emphasis of the government not on work and income, but on investment and wealth. Everyone has seen what the stock market is capable of doing and wants a piece, however, few understand the inherent risks involved and those that do stand to benefit greatly from the increased numbers of investors.
There are additional economic problems as well. The first is the guarantee. The trust fund is invested in government bonds and treasury notes, which while not aggressive are backed and solid at about 2%. The stock market is inherently more volatile, while it is true that the S&P 500 for example has averaged a gain of between 10-15% each year that is by no means a guarantee and is much more subject to the whims of the economy than are government bonds. Second, the US has one of the worst savings rates in the entire world. While touting economic freedom on one hand, the government is slowly but surely forcing consumers to save money. The message is arguably contradictory. Workers are being told that privatization is good because they will have more control of their money, but will they? Well it depends, they may have more control to a point. The worker will still have 12.4% of their pay deducted, but now will get some to invest on their own, but only in certain accounts. Investing in say a new roof, or PS2 is not an option, but buying shares of Mircosoft or AT&T is, who does that benefit (business of course because they spend that money to create more products that we buy and increase corporate profits, yes, that may create some jobs, but really the majority of the benefit goes to executives and other corporate officials in the form of compensation and corporate investment). Humm, sounds like government mandated savings to me. I may get more choice in the investment, but I still don't get to do with my money as I please. Here's the problem with that. Suppose that the government removes the restrictions so I loose only 10% to the trust fund, but get to keep in cash the extra 2.4% in cash. I then buy all the PS2 games (replace any other consumer items in here TV, DVD, etc..) I want and don't save anything for my retirement. Further assume that I get very ill at age 75 and require medical attention for which my share of Social Security can't cover, who pays for me to be treated? Answer, the American taxpayer, (we don't really deny medical treatment to anyone, remember the Hippocratic oath "do no harm," it is estimated conservatively, that taxpayers pay over $10 billion a year to subsidize emergency rooms and pay for the medical treatment of the poor and uninsured) pays twice, once to subsidize my PS2 games when I'm young and spry and once to pay my medical bills when I am old and feeble. Sounds great, right, where do I sign up?
Ok, so enough economics, there are many more problems there, some are fixable others aren't at least not cheaply. What about philosophy? The question that I think needs to be asked and isn't, is what is it that we as the United States stands for? What do we think is the appropriate standard of living that people who have worked hard their entire life, done everything we have asked for, and made it to retirement deserve? DO we want people working until they are 80-85 just to be able to enjoy the fruits of their labor, or do we invasion a point in which people should be able to relax and benefit from their hard work? I don't have a problem encouraging people to save, educating them that social security is not to be relied upon in retirement, creating a more independent retirement community are all laudable goals, but providing some sort of safety net for the poor and less fortunate, should also be part of plan. I know that no one is proposing the elimination of Social Security, yet, but the bigger goals need to be kept in mind when proposing any sort of reform that could imperil a person from receiving the fruits of their labor. I'll post more on this aspect later, but this should be enough for now....Enjoy and, while blogging may be light over the next 10 days, I'll try to check in from California when I can.
First, let me start with the statement that there is very little that is commonly accepted about this issue and the proposed solution. Deep divisions exist within both political parties and even among economists and public policy specialists there is little agreement, both on the scope of the problem, its severity, and most importantly how to fix/solve it. Generally speaking, however, the groups can be broken down into two camps; on the one hand, there are those that favor finding ways to maintain or adjust the current system (Democrats), while on the other hand, there are those that favor a total "overhaul" starting with the idea of private investment accounts (Republicans).
Let's start with some facts, or at least some things that don't appear to be too contentious. Currently, working individuals pay approximately 12.4% of their paycheck to the "Social Security Trust Fund," which goes to pay the current recipients of social security. For example, one can grossly oversimplify the situation this way: I pay 12.4% of my salary so that my grandmother who is 85, retired, and sadly suffers from Alzhimers can get a monthly social security check. In other words, the current crop of workers pays the current crop of benefits. So what you pay in social security taxes doesn't go into an account with your name on it that you get access to at 65, but rather goes into a general pool and is divided up roughly evenly among the group of people determined eligible to receive the benefit. Now, there are several important wrinkles to this system. First, the social security tax is capped. By this I mean that after a worker earns a certain amount of annual income (approx. $87,900) they don't pay the 12.4% any longer. Second, when the system was designed in the 1930s, there were many, many more working people than eligible people (approx. Between 8:1 and 12:1 depending on who's information you choose to rely on) than there are now, (approx. 4:1) and will be when the "baby boomers" retire (approx. 2:1). In addition, Social Security was never deigned to be the sole financial support for Americans retirement. It was designed and only has the capacity to be "supplemental." It was and is, however, designed to be guaranteed, hence its categorization as an "entitlement program," which means that if one works and dutifully pays into the system, when they become eligible they will receive their fair share, no questions asked, backed by the full faith and credit of the United States. Finally, the trust fund is not really at "trust fund" at all, at least not in the way that say your real tives set up a trust fund for college education or other family expenses, rather it is simply an earmarked account within U.S. Treasury designed to deal only with the Social Security System. Congress can, and frequently has, (both during Dem. and GOP control) changed the law to allow the funds to be spent on other government programs provided the money is always repaid (hence the often reported I.O.U.).
Anyway, moving to the substantive issue, private accounts. The proposals sound like this, rather, than contributing 12.4% to the "trust fund" taxpayers will pay something like 8-10% with the remaining 2-4% available for investment in whatever way the individual worker sees fit. Sounds great, right. I work hard, I get to keep more money and do with it what I wish. Well not exactly. These proposals have many economic drawbacks that have yet to be adequately addressed. Moreover, as I hope to show, there is also a philosophical drawback, but I'll get to that later.
First, the economic issues. Note that nowhere above were the outgoing benefits mentioned. In fact the only part of the system being discussed is the pay in, not the pay out. Savvy politicians have all promised that privatization will have no effect on benefits, nor will it require a raise in the age with which people become eligible for the benefit. How can this be you ask? Simple, it can't, or at least not without what are called "transition costs." In other words, some amount of money will have to be influxed into the system to make up the gap that occurs when the younger of us decide to reduce our contributions to the trust fund to fund the private accounts. Further complicating matters is the fact that these costs cannot accurately be predicted, because there are too many variables. We don't know how many people will opt out, nor how soon people will become eligible, and with life expectancies getting longer and longer we don't know how long some people will remain alive and eligible for benefits. Estimates put the transition costs at between $1 and 2 trillion over 10-15 years, but in reality no one knows. Where does this money come from? Even better question. Answer, no one knows because no one is talking about it. Lindsay Graham's proposal suggests raising the cap from $87,900 to approx $200,000 to cover the difference, but that may not be politically tenable, especially for a tax cutting GOP White House. Other solutions include government borrowing, or raising other taxes and fees, but no one is being specific. In addition, reducing benefits and raising the eligibility age are also possible, but those options have even more associated political costs than raising the payroll tax cap. In the end economically it may not make as much sense as people think, but the control issue is compelling, especially with the recent gains in the stock market and emphasis of the government not on work and income, but on investment and wealth. Everyone has seen what the stock market is capable of doing and wants a piece, however, few understand the inherent risks involved and those that do stand to benefit greatly from the increased numbers of investors.
There are additional economic problems as well. The first is the guarantee. The trust fund is invested in government bonds and treasury notes, which while not aggressive are backed and solid at about 2%. The stock market is inherently more volatile, while it is true that the S&P 500 for example has averaged a gain of between 10-15% each year that is by no means a guarantee and is much more subject to the whims of the economy than are government bonds. Second, the US has one of the worst savings rates in the entire world. While touting economic freedom on one hand, the government is slowly but surely forcing consumers to save money. The message is arguably contradictory. Workers are being told that privatization is good because they will have more control of their money, but will they? Well it depends, they may have more control to a point. The worker will still have 12.4% of their pay deducted, but now will get some to invest on their own, but only in certain accounts. Investing in say a new roof, or PS2 is not an option, but buying shares of Mircosoft or AT&T is, who does that benefit (business of course because they spend that money to create more products that we buy and increase corporate profits, yes, that may create some jobs, but really the majority of the benefit goes to executives and other corporate officials in the form of compensation and corporate investment). Humm, sounds like government mandated savings to me. I may get more choice in the investment, but I still don't get to do with my money as I please. Here's the problem with that. Suppose that the government removes the restrictions so I loose only 10% to the trust fund, but get to keep in cash the extra 2.4% in cash. I then buy all the PS2 games (replace any other consumer items in here TV, DVD, etc..) I want and don't save anything for my retirement. Further assume that I get very ill at age 75 and require medical attention for which my share of Social Security can't cover, who pays for me to be treated? Answer, the American taxpayer, (we don't really deny medical treatment to anyone, remember the Hippocratic oath "do no harm," it is estimated conservatively, that taxpayers pay over $10 billion a year to subsidize emergency rooms and pay for the medical treatment of the poor and uninsured) pays twice, once to subsidize my PS2 games when I'm young and spry and once to pay my medical bills when I am old and feeble. Sounds great, right, where do I sign up?
Ok, so enough economics, there are many more problems there, some are fixable others aren't at least not cheaply. What about philosophy? The question that I think needs to be asked and isn't, is what is it that we as the United States stands for? What do we think is the appropriate standard of living that people who have worked hard their entire life, done everything we have asked for, and made it to retirement deserve? DO we want people working until they are 80-85 just to be able to enjoy the fruits of their labor, or do we invasion a point in which people should be able to relax and benefit from their hard work? I don't have a problem encouraging people to save, educating them that social security is not to be relied upon in retirement, creating a more independent retirement community are all laudable goals, but providing some sort of safety net for the poor and less fortunate, should also be part of plan. I know that no one is proposing the elimination of Social Security, yet, but the bigger goals need to be kept in mind when proposing any sort of reform that could imperil a person from receiving the fruits of their labor. I'll post more on this aspect later, but this should be enough for now....Enjoy and, while blogging may be light over the next 10 days, I'll try to check in from California when I can.
# posted by mouldfan : 5:22 PM
