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29/04/2005

Private Accounts



Since George W Bush won the 2004 election he became determined to tackle his domestic agenda. Top of the list seems to be Social Security. I am still not clear on the logic surrounding this issue, so I’ll try to understand it by writing down what I’ve been told.

So, first of all the Social Security plan of FDR is currently running just fine, but the future is beginning to look dire because of the number of baby boomers that will begin to retire in the coming years. This is because there isn’t enough money going into the system to cover the payments. We still have about twenty years before the amount of money going into the system equals the amount of money going out of the system. However, there is money in the system that the government owes to social security recipients, because the government spent this money on other programs and wrote IOUs to Social Security. After another twenty years of redeeming these IOUs Social Security will be broke.

So, how does George W Bush plan to fix the problem?

Last night he proposed two ideas that would help fix this problem. The first was to decrease the amount of money the wealthy receive after they retire. This is known as means testing. Obviously this is a fuzzy concept, because it is difficult to know how to determine if you qualify as being wealthy. After you retire your income is much lower than while you are working. If you put your money in foreign accounts, stocks and bonds can it be hidden from the US government in a way that allows one to collect the full payment?

The second solution is to create private accounts. This plan is confusing to say the least. Why is this even being considered? Don’t we already have 401K and IRA accounts? Aren’t these private retirement accounts? So, cutting the amount of mandatory contributions to social security and making those mandatory contributions go into a private 401K or IRA account would essentially be the same exact plan as creating these accounts. So, how does this solve the social security crisis? Wouldn’t that be the same as cutting the amount of money going into social security by the amount of money that is now going into the 401K or IRA plan?

The problem is that Social Security is running out of money. How does this second idea solve the problem?

But, why would the administration be so determined to impose these private accounts without explaining how they solve the problem?

Perhaps the social security plan of George W Bush is just one small step in the direction of getting rid of the program. In order to get rid of a popular plan one must move slowly and deliberately. It wouldn't be popular to eliminate Social Security in one step. But, what is the point of these individual accounts? This plan increases risk with the possibility of making more money. However, the administration doesn't advertise the possibility of loosing more money. Hence the politicians are not being honest with the public. Why don't they want to be honest about this simple truth? This is because they want the plan to pass. Why do they want the plan to pass if it is going to be more risky than the current plan? Social Security can be fixed easily by correcting for the effects of inflation and raising the cap on contributions to 1950 levels for example. Why doesn't the administration want to do this? This is because they want to impose individual accounts. Why do they want to impose individual accounts? They want to do this because after these accounts are in place they can make the simple argument: “Why do you want to give the government your money to invest for you? Can't an average person just take a portion of his take home pay and invest it himself?” Once they make this argument a majority may follow the piper to this tune. I am sure that they will entice people with stories of someone who invested in AT&T at the turn of the century and their kids all live in the Hamptons with their servants.

This could be you! Don't you know?

14:05 Posted in Politics | Permalink | Comments (11) | Trackbacks (0) | Email this | Tags: Politics

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Well, the administration is not trying to impose individual accounts. The 25% of the money that may be invested in private investment accounts is a completely voluntary program. So long as you buy into a diversified plan instead of the boiler-plate ones government corporations like Haliburton offer, the risk of you losing your money is incredibly low- the odds are probably about as good as that of Social Security payouts being cut, so its even square.

The problem with inflation adjustment is that it results in higher taxes. I work in a blue-collar job, and although I plan to open a retirement account after I graduate, right now the money being taken out of my paycheck makes it difficult to pay all my bills. It would be a lot better if I could decide for myself, on an individual basis, where my own money created from my own work would be best spent in my life.

The private accounts plan eases the burden because instead of the money coming from future workers, it comes from the investment in the stock market. Think of it like this- right now your SS money is spent as soon as the government gets it, and when you retire the government will (hopefully) pay you back with the garnished wages of younger workers. With a private account, the government takes your money, locks it in a safe where it can get interest, and gives it back to you when you retire. Obviously neither of these are ideal, but it should be obvious which one is the better fiscal policy.

I don't like that the government is adjusting SS when we have a deficit instead of years ago when we had a surplus. And I don't like that instead of actually letting Americans control their own labor, we have only the option of sticking it in a 401k. But its better than the system now, and its better than any other idea I've heard considered.

Posted by: Adam | 29/04/2005

I generally agree with Adam, with one addition.

Social Security right now is a Defined Benefit system. Bush's system of personal accounts would add a Defined Contribution component to it. The Economist (an economics-oriented middle-of-the-road British newspaper that endorsed Clinton in 92, Dole in 96, Bush in 00, and Kerry in 04) has been writing articles on the differences for years, in case you are interested.

Posted by: Dan | 29/04/2005

Dan and Adam,

Please explain to me what the difference is between the proposed individual accounts and the IRA or 401K programs we already have. I don't see the point of a third plan.

Posted by: Dr. Forbush | 29/04/2005

The most significant differences are the availability and control of the money before retirement. It is possible to cash out IRAs or 401Ks (often at a significant penalty) for other expenses that would come up. The Bush plan's personal accounts would not be available until a minimum age of retirement (say, 62 or 65 or 66).

Likewise, IRAs and 401Ks can be set up in a myriad of ways. A individual can have a Roth IRA exclusively in bubble-gum stocks, for example. Bush's proposed plan would limit the SS personal accounts to a small-number of carefully chosen broad-based categories.

Bush has repeatedly compared his plan to the Thrift Savings Accounts, so you may want to look those up.

So the in-SS personal accounts have less pre-retirement individual control than 401Ks or IRAs, but more than the current SS regime.

Question answered?

Posted by: Dan | 30/04/2005

So, it seems like you made my point for me. Why do we need another system that allows less control? Everyone in favor of this plan argues that the accounts are voluntary. So, why are we choosing to voluntarily contribute to a plan where yopu have less control over the assets?

Posted by: Dr. Forbush | 01/05/2005

I'm not sure how I made your point. "Why do we need another system that allows less control?" is a question, not a statement, for example. So is "why are we choosing to voluntarily contribute to a plan where yopu have less control over the assets?"

To answer these as best I can

The Bush plan allows more control than currently exists. Saying it allows less control is at best rhetorically sloppy (because you are comparing a Bush's proposal to a pure market proposal no one is supporting, instead of the current regime) and at worst dishonest.

FDR's original plan, and GWB's current plan, both envision social security as a publicly supported mandatory old-age anti-poverty insurance plan. Bush's modifications are to partially shift it from a DB to a DC plan (to make it more sustainable) and allow the public more control over their DC portion than they now have over the DB portion.

Posted by: Dan | 01/05/2005

Dan,

Your focus is too narrow. We need to look at retirement, not one aspect of it.

There are several ways to save for retirement. One system is mandatory, Social Security. The reason for that is to give security to all the idiots that don't save money. That is why they call it social security.

Another way is just putting money in the bank or stock market. Of course this money has tax liability - you pay taxes on it now and you pay taxes at a higher rate if you are making a higher salary now than you expect after you retire.

Fortunately there are two more plans that allow you to avoid taxes until you take the money out and spend it. These plans are voluntary and allow you freedom to invest the money in quite a diverse array of ways. IRAs are available to anyone, and 401K programs are available to a large number of people.

George W Bush is taking money that people would have contributed to the security plan and adding more risk to it. However, he doesn't reward that risk with the freedom to do what you want with it. Instead of allowing the freedom to take a winfall out of the market and pay down credit card debt, for example he says you can't touch the money until you are old enough to retire. Why not just increase the amount of money allowed to be invested under the IRA or 401K programs? Or, perhaps make it manditory that you either invest the money in an IRA or 401K or Social Security? Instead he is creating more buracracy. And, he is a Republican... go figure.

Posted by: Dr. Forbush | 01/05/2005

One system is mandatory, Social Security. The reason for that is to give security to all the idiots that don't save money. That is why they call it social security.

That's a pretty cruel attitude. Social Security is an old-age anti-poverty insurance program. It protects those who saved but lost it because of a mistake, as well as those who lived longer than they anticipated too.

But I think we both agree a DB portion should not be a retirement plan.

Another way is just putting money in the bank or stock market. Of course this money has tax liability - you pay taxes on it now and you pay taxes at a higher rate if you are making a higher salary now than you expect after you retire.

Social security payments also face tax liability.

George W Bush is taking money that people would have contributed to the security plan and adding more risk to it. However, he doesn't reward that risk with the freedom to do what you want with it.

Well, on the safe end one savings account would be composed of US Treasury Bonds. Those are much less risky than promised SS payments, as they are property backed by the US government.

If an individual chooses a riskier savings plan for his DC portion, the "reward" would be higher anticipated returns.

Instead of allowing the freedom to take a winfall out of the market and pay down credit card debt, for example he says you can't touch the money until you are old enough to retire.

That's like criticizing pensions, because they are not touchable until retirement.

It is a different form of long-term savings.

Why not just increase the amount of money allowed to be invested under the IRA or 401K programs?

We should completely remove those limits. That is part of a "wide focus."

Or, perhaps make it manditory that you either invest the money in an IRA or 401K or Social Security?

I'm unsure what you mean here. Are you proposing people be allowed to opt out of Social Security entirely? What about those "idiots" you spoke of?

Posted by: Dan | 01/05/2005

Dan:

Or, perhaps make it mandatory that you either invest the money in an IRA or 401K or Social Security?

I'm unsure what you mean here. Are you proposing people be allowed to opt out of Social Security entirely? What about those "idiots" you spoke of?

This was a rhetorical question. I'll go back to my point.

Since George W Bush actually wants to destroy social security he has proposed a two step process. First, get people to put their money in the stock market instead of a social security insurance plan. Then tell the people that it is stupid for the government to take your money and invest it for you, hence you should be free to invest it yourself. In fact, George's new details recently explained at the press conference show that he is trying to erode political support for the program by means testing. This will result in turning the Social Security program into another welfare program and make it even easier to destroy in the future.

Posted by: Dr. Forbush | 02/05/2005

I'll try to address your specific points later tonight. I addressed the political meaning of means testing at

http://tdaxp.blogspirit.com/archive/2005/05/02/social_security_breakthrough_4gps2_attack_on_2gp_network.html

Posted by: Dan | 02/05/2005

I guess I addressed them all! :)

Posted by: Dan | 02/05/2005