Tuesday, March 15, 2005

More Social Security action

Anonymous said: "So...I'm no expert on this. I'm barely conversant, probably, but if I make more from my privately-invested retirement money than I do from whatever the gov't gives me, shouldn't I go with private accounts? I mean, for each individual, isn't investing better than having more taken out of your paycheck? As far as SS in general, I know that it is supposedly 'running out of money', but if we assume that the government will cover its debt, then how will my private investment cut anyone's benefits? I mean.... I can only take out what I put in (plus interest), right? I don't get it."

That's just it: it neither cuts anyone else's benefits nor fixes the problem in the system. Here's my deal. What I object to is not the accounts themselves, but the spin that's put on them that says they will fix the problem. I'm not against private accounts. There is a real chance to innovate here. Imagine people investing all of this money into American businesses, supporting them, and generating more wealth and work. That's great, and as long as the government guarantees the same return that SS has traditionally had, it's a win-win situation. Right now you get 3% on your money because of inflation. Pretend I get a 5% return on my private account and lose 0.5% of that as a fee to the person managing it. I'm still up 1.5%, and I've contributed to the livelihood of American business. So we're set. All I want to know is that it's guaranteed.

What ticks me off is when people push for the private accounts without a plan for adapting to the fact that we're an aging society. In my mind, it's disingenuous for Republicans to make a serious distinction between raising taxes and cutting benefits: the bottom line is less money somewhere. That's what's wrong with Barnes's claim. Let's break this down. We'll run numbers here pretending that we have two people in this system and that the system only covers their one check. Johnny Private made $100 this week. He invested the max that he could, 4%, in his account. He still paid 2.2% into the trust fund, and his employer paid 6.2%. Sally Public also made $100 this week. She invested 0% in her account, putting 6.2% into the trust fund, and her employer invested their 6.2%. Barnes says, correctly, that the 4% Johnny Private invested in his account does NOT need to be paid back to him by other SS trust fund money when he retires. But that' s $4 that's not in the trust fund to be paid to someone else! Effect on solvency: absolutely zero. Affect on Johnny Private's own personal benefits: slight increase. Problem in system not solved.

So I say raise the cap. Someone making $10,000 a year pays $620 a year in SS tax, or 6.2% of their income. Someone making $200,000 a year pays $5580 a year in SS tax, or 2.7% of their income. That's not even a flat tax--that's REGRESSIVE, because the cap is set so that only your first $90,000 of income is taxed every year. Raise the cap and bring in government-guaranteed private accounts. Problem solved.


At 12:30 PM, Anonymous Anonymous said...

Fair enough...I did not correctly divine your attitude toward this subject. I echo your sentiments regarding the 'added value' of private accounts.

Government guaranteed private accounts? Sounds like there's potential for abuse in the system. If Johnny Private can put his 4% anywhere he wants, then what's to stop him from being incredibly risky with his money, knowing that the worst he can do is match what Sally Public does? I think that the private investors should do so at their own risk, or (alternatively) be restricted to certain 'reasonable' outlets for investment in exchange for the federal guarantee.

At 4:08 PM, Blogger J. Morgan Caler said...

I am struck by how much of the debate surrounding SS is focused on the specific implementation of a proposed private account system and how little is focused on the idea and goal of SS itself. If SS is “a poor man’s 401k,” that is, a complete retirement system – one that competes with and emulates private investment firms - that constitutes the meat of American’s income in their twilight, then the President may be onto something (at least in principal). If, however, SS is a zero-risk government subsidy, never intended to make up the bulk of a retiree’s income, but as a cushion in times of financial crisis or unusual expenses, then we have a problem. The fact is, Americans have misunderstood and overestimated the SS system ever since its inception. The current “crisis” is the result of perceived underperformance and the ensuing panic (fomented by everyone from the White House to the AARP) more than some actual failing of the system. Private accounts are a red herring because it furthers the misconception about the nature of SS and further dissuades otherwise responsible citizens from being fiscally responsible concerning their own retirement. The President’s private accounts are an attempt at a via media so that the hard truth doesn’t have to be told (at least not by the White House) nor do Americans have to manage in their last years with the current payout. Echoing Peirce, (but probably with a different rationale and aim) I think this proposal fails to fix the system. Rather than guaranteeing investments in a private account (an idea which runs counter to the whole concept of investment), the fix should probably come in the form of a mass information campaign and tax benefits for investment in private retirement plans that work for all Americans, not just the wealthy. That way, SS can begin to function the way it was supposed to from the beginning. Problem solved.


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