The SanityPrompt

This blog represents some small and occasional efforts to add a note of sanity to discussions of politics and policy. This blog best viewed with Internet Explorer @ 1024x768

Tuesday, February 22, 2005

George Bush as Chicken Little

To hear George Bush tell it, in 2018 the Social Security system is headed for catastrophe because the revenues it takes in will be exceeded by the money it pays out in benefits. Not only is this completely disingenuous, it's not even the first time in history that this will have happened. In fact, this has happened 11 times previously. When it happened, the Social Security Administration (SSA) paid the extra benefits out of the Turst Fund that had accumulated by cashing in the special bonds that the SSA holds -- assets which currently amount to over $1 trillion (see Brad DeLong for more on this & Matthew Yglesias).

Bush's emerging proposal is structured on the assumption that Social Security is and always has been a defined contribution plan. In fact, it never was and never was intended to be. Let's face it, Social Security is a welfare program designed to look like an insurance plan, a social insurance plan. Quoting from the SSA's own website:

"Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits."

Sure people pay into the program based on a set proportion of their income, and benefits are calculated on the basis of what a person paid in. But the set COLAs in Social Security and the way the pay outs are calculated mean that most people of low income do quite nicely from the current arrangements. You can go to the SSA website and try these set of calculations for yourself. But a 55 yr old person who has always earned above the income limit for Social Security (the amount of money subject to SS or FICA tax) can expect a monthly benefit payment of $1,911.00 which is about 22% of that person's wage this year. Another 55 year old who has always earned income at around the poverty level but has always worked can expect a monthly payment of $570.00. You can see that the high earner makes more. But the high earner gets a payment of only 22% of the 2005 salary while the low earner gets a monthly payment that is 65% of the 2005 salary. That's a pretty progressive retirement program and certainly nothing like what would happen if the program were a defined contribution plan and each person paid in the same fraction of income and earned the same financial return on investment. In fact, if each worker died today and had a surviving spouse and dependent children, the wealthy person's payout would be 42% of the the 2005 income while the poor person's family would get a payout that was 103% of the 2005 salary. His family would be better off killing him and drawing down the Social Security benefits. But under the Bush plan, this generous program would be thrown out.

Bush's plan, according to reports in the Washington Post and discussed on Brad DeLong's website, would allow individuals to hold back their contributions into the Fund and invest those on their own. However, when they retired, they would owe the Trust Fund an amount equal to what they would have paid in over their working lives assuming that it was deposited in a bank and earned 3% interest per year. Now most people have been able to beat this rate of return because of the stock market's performance over the last 20 years. But if the concept of regression to the mean teaches us anything, we should probably expect that the rate of return is likely to be lower than this rate of the last 20 years, and in fact, there is no reason that it couldn't be, in fact, very low. If people can't earn 3%, or like the workers at Enron, they lose everything because they make a poor set of bets, they will owe a tidy amount of money, just when they come upon a phase in their lives when they are unlikely to have much earning potential left, leaving the taxpayers with the bill and the likely probablity that we will have to support these individuals anyway.

One thing that is interesting to note is that even the administration's own experts admit that the plan is unlikely to solve the dilemma of the Trust Fund running out of money and having to borrow against future payments from the US government -- in effect, SSA will be selling bonds to the US Treasury, the reverse of what is happening today. With a prospective shortfall of 3.5 trillion over 75 years, Bush's plan would require 2 trillion extra in funding the first ten years and another couple trillion for the decade after that.


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