I believe Bush said he was proposing(") letting younger workers take part of the money from their SS contributions and invest it in the stock market.(")
(") because I’m not sure of the quote and really haven’t the slightest idea when he made the comment.
Anyway taking any money from the SS contributions cannot help SS.
pervert: * Let’s ge back to the idea of wether or not the proposed reforms would save or sink SS.*
Rrroight! Here we go:
The CSSS2 plan and the Bush Plan are both advocating the phasing-in of individual accounts (IAs) that would begin with the 4% of salary/$1000 cap condition. Gains from the IAs would be offset (up to an amount equal to the value of contributions and 3% interest) by reductions in traditional SS benefits.
Both plans would steeply reduce all future Social Security benefits from the current levels, in addition to the compensatory reductions to offset the IAs, by changing the benefit calculation formula so that benefits would be price-indexed rather than wage-indexed.
In fact, so far I’ve seen no significant difference in these two proposed plans, although I may have missed something. I’ll try to be careful about referring to them separately, though.
Addressing my earlier six questions, one by one:
- What will the proposed plan(s) do to solve the projected medium-term SS funding crisis?
I haven’t seen a long-term analysis of the Bush Plan like the CBO analysis we’re using for CSSS2, but as I said, they don’t seem to be significantly different. In that case, both plans make SS funding problems significantly worse between now and about 2020. Their funding shortfall begins to decrease around 2030 and is eliminated around 2055.
In this scenario, what causes the funding problem is the IAs (the “transition costs” or diversion from paying current benefits to saving for future benefits that we were talking about earlier), and what solves it is the benefit cuts from price-indexing. The IAs themselves are intended to be revenue-neutral to the system in the long run (at least, this is explicitly stated as a goal of the Bush Plan).
- What will the proposed plan(s) do to promote long-term financial stability for SS beyond the medium term?
As far as I can tell about CSSS2 from the linked analysis, once the transition costs were paid for over the next half-century, the program outlays (i.e., benefits paid) would just go on shrinking as a percentage of GDP, well into the next century. In fact, benefits would sink far below the corresponding of revenues, meaning that SS would be taking in far more money than it was spending (by the end of this century, SS would be running a much greater surplus than it has during the past 20 years of high payroll contributions).
This IMO is rather troubling: in the first place, I don’t know why we’d want to adopt a system that was projected to take in a continually-increasing excess over what it paid out in the course of several decades (though I will make some guesses in subsequent points). In the second place, it raises concerns about the continuing adequacy of the projected benefits (which will also be addressed further in a later point).
So my verdict AFAICT on points 1) and 2) for the proposed plans is: They make the funding problem worse sooner than it would be under the current system, and keep SS running at a deficit for the next 50 years or so. After that, though, they cut expenditures to the balance point and just keep on cutting them thereafter, with no visible end in sight.
In short, they start out in the near term by worsening the funding problem, fix it in the medium term about midcentury, and **over-**fix it thereafter by running the program at an ever-increasing surplus into the long term.
Well, that’s all for now at one in the morning. Tune in next post for the continuation of this exciting saga of glamour, high-stakes gambling, and the depraved amours of ennui-ridden postfeminists in an impeccably manicured Dallas suburb! (Okay, well, the “high-stakes gambling” part is somewhat accurate, at least.)
(In passing, pervert, I would like to comment with astonishment on the weird development that we now seem to be able to debate a topic and actually understand each other’s posts. When did this happen? IIRC neither of us used to be able to explain the simplest statement to the other without getting snarled in a massive web of confusion.)
But you see, you are wrong on both counts. 1st of all, and most importantly, the money invested in private accounts can only be used for retirement benifits. Kimstu made the point earlier that this state of affairs bears a striking similarity to simply allowing the government to keep the money. What I’m saying, is that in a broad sense, this money is not being taken away from SS.
Secondly, again I have to point out that taking money from SS could, in fact, help SS depending on where the money was spent. Imagine, for instance that the money was used to invest in some interest bearing asset, and that this interest was then used to supplement SS benificiaries income.
I know you would like to cling to your pet ideas, but I’m afraid that in this case (at least the way you have expressed them) you are factually incorrect.
I agreed with your analysis. Let me just address one point and take a brief diversion.
Agreed. I am not very worried at all about the idea of a plan which continues to take in more money than it needs.
I guess what I am saying is that I do not see SS surpluses continuing into the future as much of a problem at all. We could simply lower the payroll tax. If you notice, the CBO analysis basically assumes that the tax rate will remain constant. Especially at the medium term you are looking at.
You may not have noticed. I took a couple months (almost anyway) off of the boards. I have tried to alter my posting style since then.
My own aside. I’ve been watching Greenspan testify before congress about this issue all morning. Surprisingly they are having a very civil discussion. Both sides seem to be zeroing in on various solutions to the problem. Fascinating in the extreme.
pervert I’m convinced you just have to be dizzy from all this spinning.
1st of all, and most importantly, the money invested in private accounts can only be used for retirement benifits.
That might be so but so what. How does that help SS. It might help some wall street types but there is a risk for the owner not present in SS. Also that money is not left in the SS plan.
Kimstu made the point earlier that this state of affairs bears a striking similarity to simply allowing the government to keep the money. What I’m saying, is that in a broad sense, this money is not being taken away from SS.
Kimstu made the point earlier that this state of affairs bears a striking similarity to simply allowing the government to keep the money.
Yeah they might as well keep it the owners probably won’t see it.
What I’m saying, is that in a broad sense, this money is not being taken away from SS.
You should really start your fairy tales with “Once upon a time…”
Just checking in to acknowledge that I’ve left us hanging on the SS privatization plan analysis, and I do intend to get back to that within the next couple days. Sorry, this has been the multi-conference/multi-deadline week from hell at work!
pervert: *I am not very worried at all about the idea of a plan which continues to take in more money than it needs.
I guess what I am saying is that I do not see SS surpluses continuing into the future as much of a problem at all. We could simply lower the payroll tax. *
We could, but will we? Will we end up instead with an SS surplus that just gets borrowed away into general revenues, as many claim is the real fate of the current surplus? I don’t see why we should deliberately design a system that’s going to be so out-of-balance in the long term, and keep getting more so.
Anyway, on to the next points of the analysis. What I now want to consider about CSSS2 and/or the Bush Plan is this:
- What will the proposed private investment accounts accomplish in terms of SS funding?
This seems to be a pretty easy one: Diddly-squat. That is, the private investment accounts (IAs) are designed to be revenue-neutral for Social Security in the long term. In the short-to-medium term, as discussed in points (1) and (2) above, their transition costs worsen the funding shortfall, but once we’re over the transition-cost hump, the IAs themselves aren’t saving the system any money.
AFAICT this is because most of the money in the IAs is sort of “fungible” with the regular SS benefits. That is, if you invest some of your SS contributions in an IA, everything you invest plus 3% interest is exactly offset by additional cuts to your regular SS benefits.
If you make more than 3% on your IA, the SS revenues don’t make a corresponding profit on that: they still cut your benefits only by the capital-plus-3% amount. On the other hand, if you make less than 3% on your IA, the SS revenues don’t absorb the cost of that: they still cut your benefits by the same amount. It’s the individual investor who takes the risk of a lower-than-3% return and gets the advantage of a greater-than-3% return.
In short, the funding situation for the modified (i.e., price-indexed benefits) Social Security plan with the IAs is exactly the same as the funding situation for the price-indexed-benefit plan without the IAs.
As noted before, what saves the system money is not the private accounts, but rather the cutting of traditional SS benefits by indexing their rise over time to prices rather than wages. The hope is that the private accounts will compensate investors for these price-indexing benefit cuts by providing juicy greater-than-3% returns, but we’ll get to that issue in our next points.
(Some of these issues are discussed in a concurrent GQ thread, Why would private accounts help?)
[QUOTE=Kimstu]
In short, the funding situation for the modified (i.e., price-indexed benefits) Social Security plan with the IAs is exactly the same as the funding situation for the price-indexed-benefit plan without the IAs.True enough. But just consider them as a selling point. We want to fix SS by changing the payout formula. In exchange we are going to give some ownership to part of the system to those paying into it. Remember that the IAs are also transferable.
Think of the IAs this way. They are a wash. They don’t hurt, but they don’t help. Bush and others want to add them in a small and voluntary way to SS in order to increase participation, ownership, and asset diversity. Greenspan made this point earlier. If you limit your consideration to the accounting perspective, IAs do not add or detract from SS. However, when you look at the underlying assets held by the system, IAs represent a radically new way to store the wealth collected. Specifically, they put the money into something which ostensibly has an intrinsic value. As an investment vehicle, it earns money completely seperate and independant from the government’s willingness or ability to tax.
I think the more important points are to be found in these changes to the benifits formula. I’d be really curious to see if you can come up with a good reason not to index benifits to prices rather than wages. I don’t mean that in a snide or challenging way. I’m generally curious to see another side to this part of the issue.
One more thought.
My memory may be rusty, but isn’t there a minimum income provision? I thought I remember seeing something about a minimum threshold below which the plan would not let someone fall. That is if you are wealthy and have bad luck with your IA investments the general SS fund will not make that up. However, if you are poor and have bad luck the general SS fund may make some of that up, up to some minimum income level.
pervert: Remember that the IAs are also transferable.
To the best of my knowledge, that’s only partly true. Specifically, the proposed plans will require annuitization of part or all of the IA upon retirement age, so that the beneficiary will have at least a minimum regular income from it. Only the money left over in the IA after this mandatory annuitization, if any, will be transferable. But I’ll look into that more carefully and discuss it in more detail in the subsequent analysis points.
pervert: I think the more important points are to be found in these changes to the benifits formula. I’d be really curious to see if you can come up with a good reason not to index benifits to prices rather than wages.
Easy: because it will cut benefits too much. As we saw in the discussion of points (1) and (2), under the proposed plan(s) in the long term, benefits will drop drastically below revenues and continue to drop. As time passes, price-indexed benefits will be less and less adequate as income supports.
Now, there have also been some good arguments made to the effect that continuing to use the wage-indexing formula will make benefits too large. I’m not yet convinced that keeping the current wage-indexed benefits will necessarily be absolutely unaffordable, but I acknowledge that it’s a serious issue. However, even if the current wage-indexing benefits formula is unsustainably expensive, that doesn’t mean that our only alternative is to switch to a price-indexing formula that’s unsustainably parsimonious. We could index SS benefits to a mean or median average of wage and price increases, for example. We could come up with an infinite variety of formulas to reach a balance between too much and too little. It might be rather complicated to figure out what the optimal formula would be, but it certainly ought to be doable. There’s no reason we have to limit ourselves to an either/or situation where we have to index SS benefits either only to wages or only to prices.
pervert: *My memory may be rusty, but isn’t there a minimum income provision? *
Yes, I think so. Again, this will be addressed in more detail in the discussion of point (4), which is coming up next. Thanks for your patience as the debate slowly proceeds!
I’m not sure at all that I follow this argument. Are you saying that the fact that SS expenses will fall below revenue itself proves that retirees will not have enough money to live on? I’m afraid that does not make sense. Remember the graph you were looking at was “as a percentage of GDP”. That is, it shows retiree benifits falling as a percentage of GDP rather than falling in any other sense.
My appologies. I did not mean to propose any binary choice. We were discussing the current law and Bush’s proposals.
But you assertion here begs the question you dodged in the last point. How would you define “parsimonious” when it comes to retiree benifits? You do know that once a person retires his benifits are indexed to prices, right? That means that current retirees use a very similar formula for updating thier benifits that Bush is proposing for the entire retirement system.
As I’ve said before, I’m willing to be convinced that indexing benifits to prices is unnecessarily stingy. Many of the hypotheticals seem persuasive. But I can’t seem to figure out if this sort of thing would really cause large numbers of the elderly to slip into poverty. I also have not heard any other purpose of SS which would override this consideration.
I need to ask a favor though. Please try and drop the idea that we would continually take in larger and larger surplusses. I have not tried to make points by claiming that the government would actually cut retirees checks by 30% when the trust fund runs out. Even though this is the current state of the law it is a ridiculous assertion. I admit that even if the SS law is unchanged right up to the date that the trust fund runs out, something would be done to continue paying retirees their benifits. Borrowing, most likely. But it could also be accomplished with a tax increase. Are you willing to admit that a more likely scenario to ever increasing surplusses is a tax cut or an increase in benifits?
Not at all. I’m looking forward to it.