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Private accounts don't make Social Security solvent

3-4-10socsec-rev8-24-10-f1.jpgWe're seeing some fresh debate on Social Security reform lately, though not much in the way of fresh ideas for what to do about Social Security. If you're worried about the program's finances, you can really only do one of two things: lower the amount of money the program sends out or increase the amount of money it brings in.

But those things are sort of a bummer. So in a National Review article, Cato's Michael Tanner tried to offer up another option: personal accounts, which he suggests are an alternative to cutting benefits or raising taxes. Andrew Biggs, an AEI scholar who served on George W. Bush's Social Security commission, explains why that won't work.

Here’s the problem: Personal accounts are a valid choice, and one I’ve supported in the past and continue to support. But accounts aren’t exclusive to tax increases or benefit cuts; they don’t, as I’ll explain, reduce the need for these other choices. One problem for the Bush administration’s reform drive in 2005 was that many congressional Republicans had bought into the idea that accounts reduce or eliminate the need fortax increases or benefit cuts. Finding out they don’t may have taken some wind out of their sails. Because of this, combined with some pretty shameless demagoguery from the left, Bush’s reform ideas didn’t even come up for a vote.

With personal accounts, we face the same choices, only sooner. If workers invest part of their Social Security taxes in personal accounts, they could indeed earn higher returns and generate higher benefits without taking more risk. But diverting taxes to accounts leaves the program short of what is needed to pay benefits to today’s retirees. To cover these “transition costs,” we would need to generate new revenues for the program, either by raising taxes, cutting other programs, or borrowing. But once transition costs are accounted for, the total rate of return on a personal-accounts-based program would be about the same as the current system. (If you’re willing to wade through some math, this paper by Olivia Mitchell, Stephen Zeldes, and John Geanakoplos is pretty much the canonical treatment.)

In other words, there's no free lunch. But if you still want to make some changes to Social Security, here are five reforms that would actually work.

By Ezra Klein  |  August 30, 2010; 11:29 AM ET
Categories:  Social Security  
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Next: The case against reforming Social Security

Comments

What about an option of allowing retirees to defer the collection of benefits to their children or grandchildren. For example, retiree A is set to collect $1500/mo. in benefits, but doesn't need it thanks to personal savings or a pension. He could elect to defer the $1500/mo. to his two children (to be split equally between them) or three existing grandchildren (again, split equally). When they retire, they have to collect the deferred benefit (the amount doesn't increase from what retiree A would have collected), but have the option of deferring their own benefits.

Posted by: srm4m | August 30, 2010 11:47 AM | Report abuse


The fact that social security / entitlement reform is even brought up is a good sign. Not only are the government debts unsustainable (nobody here, especially the young people, should be surprised if the US government overpromises medical and retirement benefits, yet underdelivers), but also this is a moral issue. We can't keep rewarding failure (auto industry, reckless behavior from Wall Street, etc.) with more taxpayer money.

Posted by: RandomWalk1 | August 30, 2010 11:53 AM | Report abuse

"lower the amount of money the program sends out or increase the amount of money it brings in."

Ezra, maybe I'm wrong, but I thought there was all sorts of wonkish policy stuff and tinkering and restructuring and magical stuff we could do to make it so healthcare improved, covered everybody, and actually cost less.

How come there's no magical wonking that can be done to make it so Social Security pays us more, pays us sooner, and does it with less money?

:)

That being said, I agree there's no free lunch. Additional revenues to fund Social Security (including private accounts) should come from rising the cap on wages taxed for Social Security to infinity, but with lower effective tax rates, so folks who make millions are not paying a full 7.5% for social security on all of their income, but 3.5% then 2% then 1% (and don't get more back from SS as a result; the cap on payout stays in place). And young workers get a percentage of their deductions that go into a private account that is there's for retirement (or disability), and passes on to spouse or children should the worker kick it a year or two before even being able to draw on SS.

Posted by: Kevin_Willis | August 30, 2010 11:58 AM | Report abuse

Simple to me...just give back the money I have put into it...NOW..IT IS MINE...what I do with it is my BIZ...NOT YOURS..

Posted by: rw62827 | August 30, 2010 12:01 PM | Report abuse

"five reforms"

I counted nine. Anyhoo, this one: "Aggressively Invest the Trust Fund: We can diversify the trust fund by investing one percent a year, up to 20 percent in 20 years, in a separate fund managed by trustees who are independent. Overtime the trust fund would probably see higher rates of return."

Now, talk about privatizing Social Security. Specifically, "managed by trustees" is a recipe for disaster. Try managed by formula, and maybe you'll have something. A formula that invested in the top 25 stocks of the top indexes, plus a variety of Triple AAA rated bonds (no derivatives!), maybe. But if the government decides to invest SS funds, they should abide by the same rules (no investing it all in Enron) that individual accounts would impose.

Posted by: Kevin_Willis | August 30, 2010 12:04 PM | Report abuse

Social security has never been a dinner table topic of discussion, in fact it’s not a subject we like to talk about very much at all, but those of us who depend on it, do love having that monthly check deposited into our bank accounts. With the issues surrounding this 75 year old plan, and election season once again upon us, it seems an appropriate time to engage in meaningful intra-generational conversation. Although most of my peer group (me included) feels like we’re entitled, any meaningful dialogue can’t begin with I’m entitled. It must begin with I’m interested, interested in exploring the possibilities of working together with those who fund our monthly checks, our children and grandchildren. No longer can we avoid this conversation out of fear of losing something, but rather we should welcome it, motivated by imagining how we might be a catalyst for saving something.

Over a period of years social security that began with the best of intentions, has morphed into a precision political instrument, with both major parties taking their turns at wielding the scalpel. It’s become divisive, with one side preferring privatization, and the other expanding it far beyond its original intent. Collectively we’ve chosen to publicly ignore the issue, in effect treating it like the crazy aunt, who is locked up in our basement. Politicians have taken our vigil of silence, as a green light to mismanage those funds now so desperately needed to fund current retirees, and the newly retiring 78 million baby boomers. With timely precision they’ve wheeled us into surgery, and systematically cut another inch off of our financial legs, and as our financial legs were shortened, our welfare arms grew longer.

Consequently millions of average working Americans end up walking on financial stubs in their golden years, and have no choice but to reach out to the very political surgeons who amputated their legs in the first place. For the sake of this and future generations, that plan needs to be changed. a real solution by real people www.socialsecuritysolution.org


We’ve arrived at a fork in the road, and unlike politicians, we can’t take it; it’s time to choose which path we go down. Members of the current custodial generation have a wonderful opportunity to ensure the generational chain of trust is not broken on our watch. Social Security and those who receive it are part of the solution. All we have to do is begin the dialogue.
Social Security has played a significant role in the life’s of millions of average Americans, their families and the communities they call home, and Social Security has a significant role in a comprehensive, community based solution going forward.

Posted by: pappyg | August 30, 2010 12:08 PM | Report abuse

How about we make Social Security into an actual insurance program?

If you are above a certain threshold, you simply don't get payouts. That has to significantly reduce the amount of liabilities the program has.

We all pay in because nobody knows if they will need it or not. Then, only those who need it get the payouts.

Exactly the same as term life insurance; pay for the time you need the coverage and if you don't need it, you don't get your money back. You paid for the peace of mind that you are covered in case something terrible/unexpected happens.

Why isn't this seemingly basic idea not being talked about at all?

Posted by: rpixley220 | August 30, 2010 12:17 PM | Report abuse

Problem with that paper is that it doesn't account for the "mass of idiots" problem. The returns for this group won't look like it does for the rest of the market because these are small-time un-savvy investors. Even if people didn't take advantage of them with rigged inestments, they wouldn't do too great because markets are complicated places.

Not to mention, people will take advantage of them. There's tens of millions of Americans who think rent-to-own is a good deal. They are doomed.

If we wanted to give everyone some EXTRA money and let them play the market, I could see my way to supporting that. But you're doing the policy equivalent of encouraging people to take their rent check to the casino. In the aggregate, we'll be worse off than under the current circumstances, and some people will be flat bust. The only guaranteed winner is the house--the Wall Streeters.

Terrible, terrible idea.

Posted by: theorajones1 | August 30, 2010 12:45 PM | Report abuse

Replace Social Security, unemployment, food stamps, EITC, etc. with a $1,000 monthly check to each adult citizen. Let's stop being too cute. Let adults use that basic income support to plan their own lives - when to retire, how much to save for a rainy day, to augment their earnings if they work at low paying jobs, etc.

Right now we worry about Social Security's shortfall, and we're talking about raising the retirement age - all fine and well for the office worker (unless they are unemployed at 55 and have no job prospects lined up), less so for the manual laborer. We worry about the employment disincentive of unemployment benefits, but also worry about those who have been unemployed for longer than 99 weeks.

If we're going to redistribute, let's just do a blanket redistribution and be done with it, and give ourselves a flat tax on everything for which most people won't have to even bother filing.

Posted by: justin84 | August 30, 2010 1:32 PM | Report abuse

Biggs' argument is that the pyramid scheme unwinds sooner if people are paying in less. The transition costs would eventually go away. I guess I don't feel as bad as he does about punishing the generation that paid in so much less than they received and failed to increase immigration to compensate for the drop in the birth rate. They should just take all of the money coming in from the tax and divide it up.

Phase out all defined benefit plans. They assume the course of the economy in the future far too much. Means testing should be phased in for current defined benefits. Age should rise according to a formula like:
Let LE = life expectancy, RA = retirement age, RA = LE - ((LE-20) * 0.8)

Overall, I like having a pension insurance plan, but can't understand why it isn't run like one. We needed that lockbox 40 years ago.

Posted by: staticvars | August 30, 2010 1:37 PM | Report abuse

rpixley220, the problem with that is that it creates a disincentive for people to save for their own retirement. Sure, you'd recoup money from millionaires who will be so far above the SS payout that they never consider going for it, but you'd get lots of people would could conceivably save enough money to payout at or near the SS payout that will decide spending the money and getting SS is a better deal than saving.

Another idea would be to not allow people to draw SS while they're employed with a slight increase in the benefit for every year beyond 65 that they work. The slight increase would be something less than they would have drawn out of the system had they retired at 65.

Of course, as has been said numerous times, a tweak of the cap in taxable income solves this "problem" rather easily.

Posted by: MosBen | August 30, 2010 1:39 PM | Report abuse

rpixley220, the problem with that is that it creates a disincentive for people to save for their own retirement. Sure, you'd recoup money from millionaires who will be so far above the SS payout that they never consider going for it, but you'd get lots of people would could conceivably save enough money to payout at or near the SS payout that will decide spending the money and getting SS is a better deal than saving.

Another idea would be to not allow people to draw SS while they're employed with a slight increase in the benefit for every year beyond 65 that they work. The slight increase would be something less than they would have drawn out of the system had they retired at 65.

Of course, as has been said numerous times, a tweak of the cap in taxable income solves this "problem" rather easily.

Posted by: MosBen | August 30, 2010 1:41 PM | Report abuse

Don't private accounts increase the solvency problem? I believe that currently if you die before you are eligible to collect Social Security, the money you paid in to the system is forfeited to the government to pay out benefits to other recipients. Isn't one of the purposes of private accounts to establish a property right to the account that can then be inherited?

Posted by: jnc4p | August 30, 2010 1:57 PM | Report abuse

jnc4p,

actually I believe it goes to your dependents (as my wife was a beneficiary as her father died when she was 10) although if you don't have beneficiaries I'd expect it would go back to the Treasury. That being said I err on the side of:

First stop stealing from it to pay other pet projects on either side of the aisle and second let people invest in them but give it as an option. If people are too stupid to realize that they can't invest their life savings in a risky instrument why exactly am I paying because the rest of the country is dumb?

Alright I get theorajones' argument so why not put a income requirement on it. If you can show that you're not jeopardizing your lifestyle then let me invest it how I want.

Posted by: visionbrkr | August 30, 2010 2:24 PM | Report abuse

Social Security is a Ponzi scheme because the government is making commitments it can't afford. Privatizing social security is like arresting Madhoff - It doesn't solve all his victims' problems, but it does stop him making bogus promises to new victims.

Posted by: MrDo64 | August 30, 2010 4:00 PM | Report abuse

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Posted by: martincruz31 | August 31, 2010 2:22 AM | Report abuse

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