6 replies to this topic

[TTHQ Staff]

Wednesday, February 2, 2005
A renewed vision for Social Security

In his State of the Union address tonight, President Bush is expected to call for reform of Social Security, the retirement insurance system that's been part of our social fabric since 1935. And in the coming weeks, Bush likely will flesh out a proposal to give younger workers the option of investing a portion of their Social Security taxes in private accounts.

Reform has been in the air for more than 20 years, and many top political figures - including some of Social Security's traditional supporters - have offered specific plans during the past decade.

Ronald Reagan briefly suggested reform in the early 1980s, was pilloried, then dropped the subject. Bill Clinton was ridiculed for proposing benefit cuts on taking office in 1993; the Senate's Social Security maven, the late Daniel Patrick Moynihan, D-N.Y., called Clinton's idea a political "death wish."

Yet five years later, Moynihan stunned Washington by calling for partial privatization. He drafted a bill that would divert 2 percent of workers' salaries from Social Security tax into private accounts, and would reduce the average retiree's benefits by 11 percent. For a Democrat to even slightly back off a New Deal program seemed heretical, but Moynihan made serious discussion of privatization possible - and gave Clinton political cover to begin the push toward reform.

Why reform?

Because in 2018, the Social Security Trust Fund will pay out in benefits more than it collects in payroll taxes.

By 2042, the fund will be technically dry.

Technically. The truth is, there is no money in the Social Security Trust Fund, only IOUs for money the government has long since spent. It's not a Trust fund, it's not a "lockbox". It's more like a funnel.

When you retire, your children and other younger workers pay the money that goes into your Social Security check. That makes it a "pay as you go" system - and a big problem.

When Ida May Fuller of Ludlow, Vt., received the first Social Security payment, a check for $22.54 in 1940, America had 42 workers to support each retiree. Now, there are only 3.3 workers per retiree, and as Baby Boomers swell the ranks of recipients in the coming years, that ratio will drop to 2:1.

"The current system cannot continue to exist," Sen. John Breaux, D-La., said in 1998 while introducing his own bipartisan privatization plan. How to fix it is a difficult issue that divides the public between those who believe government should provide Americans' retirement income and those who believe it should be more a matter of personal responsibility.

The divide also is generational. Older workers and retirees want the traditional system unchanged, while younger workers, polls say, overwhelmingly mistrust Social Security. Young Americans favor privatization, and they want the freedom to make investment decisions - partly because our culture already has primed the pump for that mind-set through innovations such as 401(k) accounts.

Insurance, not entitlement

Despite the recent reverses of the dot-com bust and corporate scandals, Americans have become more accustomed to investing for their own retirement - and more familiar with the mechanisms of the market. The 1990s saw the rise of "worker capitalism": About half of Americans now own stock investments, compared to the historical average of 20 percent.

They also see that Social Security does not help American families build wealth. A partially privatized system would allow a single, low-income woman in her 30s to leave an extra $25,000 to her heirs, according to the conservative Heritage Foundation, which advocates reform.

Reformers also will have to overcome another pervasive misconception about Social Security. When he proposed the system, President Franklin D. Roosevelt saw it as a safety net, not as retired Americans' main source of income. He considered it one leg of a three-legged stool that would also include a company pension and - yes - private accounts. As Moynihan said in 1993, Social Security is not an entitlement, but insurance.

But today, Social Security is only retirement plan that many Americans - some say close to 50 percent - have. Consequently, it has been pushed to become something it wasn't designed to be. The payroll tax has soared from 1 percent in 1935 to 12.4 percent today, and the system is feeling the strain.

Many Americans still fear they don't know enough about investing, and worry about the risks of putting even a portion of their Social Security taxes into the stock market. But Social Security already is a bad investment. Today, a 25-year-old male will get a negative 0.82 percent return on his Social Security taxes, according to the Heritage Foundation.

Long-term bargain

Forget playing the stock market. Just put money in a passbook savings account and you could do better. At any rate, most reforms propose that private accounts be guided into certain approved funds, and be insured to yield at least the equivalent of Social Security's return - making them a can't-lose proposition.

But Bush faces a huge problem: Diverting even a portion of workers' payroll taxes into private accounts could cost the government as much as $2 trillion in revenue over the next decade. That's one reason why it's a shame reform wasn't enacted during Clinton's term, when the federal budget enjoyed a surplus.

Still, that $2 trillion may be a bargain long-term. It is estimated that if the system isn't changed, the government will have to tax Americans at least an extra $5 trillion anyway between 2018 and 2042 to cover the trust fund gap.

Besides, private accounts also could boost the economy as a whole. Workers investing extra billions in the private sector would spur investment, creating jobs, building the economy - and ultimately generate more tax revenue to fund Social Security and other programs.

Perhaps most important is the societal change a revamped Social Security/retirement/investment strategy could help spur - Americans' greater sense of control over their futures and financial legacies, a renewed confidence and a heightened ethic of personal responsibility.

Ultimately, this debate should be about "reform" in a literal sense: re-forming Social Security closer to the original vision that guided FDR in the 1930s. It is time to act, and we applaud President Bush for attempting to jump-start the process.

[salsabob]

As an investor, I strongly recommend reading Michael Alexander's piece at Safehaven or in his book, "Cycles in American Politics."

http://safehaven.com/article-2357.htm

Its not a political discourse, but rather the only critique that I know of that explores the assumption of "all things being equal, blah, blah blah." In other words, many have provided lots of scenarios of where the average investor, playing the markets, may beat the SS return; but very little analysis on what happens when all those investors enter the market in aggregate, and how that changes the picture for the individual. Also, inter-generational impacts are discussed.

[Not Too Swift]

I am surprised. I thought the social security money was invested in treasuries.

[Chart Guru Doug]

First I get my pension taken away and now they tell me I wo'nt get ss. After all the years that I have supported the generations before me. gggggggggggggrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr

[TraderDen]

sad to see politics made this venture essentially dead in the water. seems like the pols think the best idea now is just to continue on with the current plan until it actually is fubar'd.

[Not Too Swift]

I had at least one problem with it. For all else you can say about SS, the admin costs have been near zero. And how much should it cost to administer the index investments for SS? Again, I would think near zero. There would be no active management. But the government was planning to turn it over to Wall Street. I seriously doubt the admin costs would have been near zero then. More like 1-1.5%, a big haircut over time. I get so tired of both parties taking a reasonably good idea and turning it into pork for their buddies. It is no wonder nothing can get done.

[PorkLoin]

First I get my pension taken away, and now they tell me I won't get SS. After all the years that I have supported the generations before me.
gggggggggggggrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr           

Well heck yes -- talk about changing the rules of the game after the game's begun....

There seems to be a substantial amount of feeling that at some given date Social Security "will be out of money." Well, for years the government has been taking the money and spending the money, and when there isn't enough income from SS taxes to cover everything, then it will be just one more expenditure the gov't has.

Doug