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February 04, 2005

Well, Well, Well... We May Have a Press Corps... UPDATE: We May Not After All...

Jonathan Weisman reports on how Bush administration personal accounts would work. Think of it this way: the government is not contributing to a 401(k) for you, the government is letting you borrow some of your future regular Social Security benefits so that you can try to earn higher returns. But it's a loan--you have to pay it back:

washingtonpost.com: Participants Would Forfeit Part of Accounts' Profits: Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately get to keep only the investment returns that exceed the rate of return that the money would have accrued in the traditional system.... [This] could come as a surprise to lawmakers and voters who have thought of these accounts as akin to an individual retirement account or a 401(k) that they could use fully upon retirement. "You'll be able to pass along the money that accumulates in your personal account, if you wish, to your children . . . or grandchildren," Bush said last night. "And best of all, the money in the account is yours, and the government can never take it away."...

"I believe you should be able to set aside part of that money in your own retirement account so you can build a nest egg for your own future," Bush said in his speech.

Orszag retorted: "It's not a nest egg. It's a loan."...

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's....

If instead, workers decide to stay in the traditional system, they would receive the benefit that Social Security could pay out of payroll taxes still flowing into the system.... "In return for the opportunity to get the benefits from the personal account, the person forgoes a certain amount of benefits from the traditional system," the official told reporters. "Basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase."...

But critics of the Bush plan said the proposed "claw back" renders the whole idea of "personal retirement accounts" virtually meaningless. Indeed, the system would ultimately look something like a proposal made by President Bill Clinton, in which the government would have invested Social Security taxes in the stock market.... Individuals would get a limited choice, and the government would still keep most of the returns.

"They hope people will think they will take on these accounts and after 40 years, they'll have this huge windfall, but that won't happen," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "I think they're trying to confuse people."...

Weisman is, however, wrong, in his claim that the Bush plan looks like the Clinton administration idea to invest the Trust Fund in the stock market. Under the Clinton plan, the government insures individuals against the possibility that the assets in their private account will tank. Under the Bush plan, that risk lies on individual beneficiaries--which is a profoundly stupid place for the risk to lie, and something that will in all likelihood make the Bush plan a bad idea.


UPDATE: Ah. It seems that the White House has squawked and the Post has buckled. A key paragraph has been edited:

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's... All of that money would be the worker's upon retirement. But guaranteed benefits over the worker's lifetime would be reduced by approximately $78,700 -- the amount the worker would have contributed to Social Security but instead contributed to his private account, plus 3 percent interest above inflation. The remainder, $21,100, would be the increase in benefit the worker would receive over his lifetime above the level he would have received if he stayed in the traditional system.

The point the White House is claiming, you see, is that the government isn't recapturing $78,700 of your private account, the government is giving you the entire private account and just incidentally reducing another pool of money that pays you benefits by $78,700. You say, "Huh?" Yes, you're right, there's no difference--it's just that the rewritten paragraph is confusing enough that a bunch of readers won't understand it.

Glad to see such spine...


UPDATE: Paul Krugman tries to clearly explain the clawback:

Free usage for anyone who wants to post it.... This may be a better explanation of how the clawback works:

Suppose you invested $1000 a year (constant dollars) in a fund that pays 3 percent real interest. Then after 40 years you would have about $77,000. Suppose that your life expectancy is 20 years at retirement, and that you can buy an annuity with present value equal to that lump sum. Then you would get about $5,000 annually.

The Bush plan, as far as we can tell, is that if you elect to take the private account, your conventional benefits are cut by $5,000 per year. So investing in bonds gets you right back where you started. If you buy risky assets, and do better than 3 percent, you may end up with, say, $7,000 per year; in that case you have a net gain of $2,000. But if you do worse, and end up with a lump sum only large enough to buy, say, a $3,000 annuity, your benefits are still cut by $5,000, and you're $2,000 a year worse off.

So what's really happening with the private accounts is that people will be encouraged to take a mortgage on their Social Security benefits, and to speculate in the stock market.

And, of course, all of this has zero bearing, at best, on long-term government finances. In practice, whoever is running America in 2050 will probably end up bailing out the unlucky, so it's a major net negative....

One thing I haven't seen pointed out about the apparent Bush plan is that they have inverted Feldstein-Samwick.... The F-S plan was that the government would guarantee the scheduled benefits, while [clawing back] 75 percent of any return in the private accounts over and above that level. So the government would, in effect, be doing the speculating. But the new plan says that the government deducts [with interest] what you put into private accounts [from your scheduled benefits]. So the risk is all passed on to retirees.

Posted by DeLong at February 4, 2005 10:34 AM