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February 04, 2005
Daniel Froomkin Writes About Social Security
In his morning White House briefing:
Avoiding the Tough Questions (washingtonpost.com): One overarching issue is that the White House is talking about Social Security as if it were one big underperforming 401(k) program. In other words, they're implying that workers right now get back what they put in plus interest -- and that the interest rate they're getting is not so hot.
But it's not that way, not by a long shot. Social Security is a complex social insurance program that uses payroll taxes from current workers to pay benefits to the elderly, the disabled and their families in a progressive manner that guarantees an income floor below which the least fortunate are not allowed to sink.
Where this becomes really important is in trying to make sense of the brief and somewhat enigmatic comments that a senior administration official made on Wednesday (here's the transcript) about how the government would reduce guaranteed benefits for the people who opt for personal accounts.
The official said, in essence, that Social Security would:
A) Calculate what the contributions to the private account would have earned if the money had been invested at 3 percent on top of inflation,
B) Estimate what that amount would provide monthly if annuitized, and then
C) Subtract that amount from what the monthly benefit they otherwise would have gotten.
Therefore, the official said, if your investment makes more than 3 percent after inflation (minus administrative fees) you'll come out ahead (not including whatever additional across-the-board benefit reductions are approved.)
That's pretty complicated.
But even worse, the formula is based on two very misleading premises.
One is that people's payroll taxes are now being invested at 3 percent. They aren't. Most of the money people pay in today is going right back out again. Only a small amount is, temporarily, being invested in federal bonds, and even that won't be the case in a little over a decade.
The other is that Social Security benefits are a direct function of how much people put in through their payroll taxes. The way Social Security is now set up, for instance, a single wealthy person gets a vastly lower "rate of return" upon retirement than a poor person with a stay-at-home spouse. Someone who lives to 100 gets a much better rate of return than someone who dies at 65. Those are just some of the progressive, insurance-like aspects of Social Security that are really at the program's heart -- and that are being downplayed in the current debate.
And I'm afraid that any hypothetical case that tries to simplify this should be considered highly suspect.
Another issue that Bush is not necessarily being up front about is the "nest egg" he says private accounts will provide. In a nutshell, that may only be the case for the rich. Many lower-income people would be forced by the government to purchase annuities with their accounts, to keep themselves out of destitution as long as they live.
But annuities expire upon death.
In fact, if survivor benefits -- which now are pegged to the worker's benefit amount -- are reduced because of the private accounts, survivors would be considerably worse off.
Furthermore, when Bush uses the much-admired Thrift Savings Plan as an example of how personal accounts would work, it is worth noting that the TSP is an "add-on" on top of Social Security for federal workers. It's not a replacement; it doesn't divert payroll taxes from Social Security....
Posted by DeLong at February 4, 2005 11:06 AM
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» Back in the Day from TwentyFirstCentury
Barry Goldwater, a real conservative who said what he meant, wanted to make Social Security 100% voluntary.
George Bush, used car salesman, figures he'll try making one-third of Social Security sort of voluntary. [Read More]
Tracked on February 4, 2005 05:55 PM
» THE REAL RAW DEAL from MaxSpeak, You Listen!
Some days ago, I had a notion contrary to the White House claim that a three percent rate of return on your private investment account (PRA) would be a wash with your benefit offset Unsure of it, I left comments... [Read More]
Tracked on February 9, 2005 09:41 AM
Comments
We should open a book on how long it is over at National Review Online before someone says "OK, these personal accounts are complicated, but Hillarycare was soooo much more complicated." Extra points if they call it "Hitlerycare."
Posted by: P O'Neill at February 4, 2005 11:13 AM
"In fact, if survivor benefits -- which now are pegged to the worker's benefit amount -- are reduced because of the private accounts, survivors would be considerably worse off."
Bush has apparently said survivor benefits won't be reduced, but the above quote suggests otherwise. Same question holds for disability benefits. And if they're really not going to be reduced, while a big chunk of the money used to pay for them is being privatized, then where's Bush getting the extra money?
Posted by: Brian S. at February 4, 2005 11:30 AM
Froomkin is somewhat confused or misleading when he talks about investing the money for Social Security. The money is in a sense invested in that people are promised returns based upon economic growt of the nation through increase in payroll taxes. So even though the money isn't invested the return is there.
Posted by: Rob at February 4, 2005 11:33 AM
Where do these estimates of 3% real returns on bonds come from. Aren't the highest yielding 30yr Treasury Inflation Indexed securities yielding around 1.90%?
Posted by: JB at February 4, 2005 12:20 PM
The ROR credited to bonds in the Trust Fund is one thing. The internal rate of return on actual contributions, in terms of actual retirement benefits, is another, and according to the lit I've read, much lower than 3 in the future (e.g., 1.2). So in the Bush schemata, isn't the difference between 3 and the IRR in and of itself a tax on benefits? If you make 3% in your PRA, you are credited with that in your SS account and it is offset accordingly, even if your own IRR in terms of SS benefits proper is below 3%. You would need a ROR of 4.8 in the PRA (add 3-1.2 = 1.8 to 3) to just break even on the carve-out.
Posted by: Max at February 4, 2005 12:23 PM
I too am concerned about what the president said about social security. But, I am just as concerned about a very important issue he did not address at all...global warming. One day last week I saw on the BBC news (which I get at 6 PM nightly on my local PBS station) Tony Blair giving a speech on global warming. He announced a report of a study recently released which indicates that the British Isles will be tropical in just three (3) generations. This is very alarming. Blair also said in the same speech that the US will not participate in programs to help halt or show down this process as Mr. Bush will do nothing that even hints at threatening his economic policy. All well and good for the next few years...but what about when those generations (our great grandchildren) reach retirement and find their planet too hot to live comfortably on! I am very concerned about Mr. Bush's shortsightedness.
For more infomation, see the BBC web site:
http://www.bbc.co.uk/dna/ican/C1797
Marilyn
Posted by: Marilyn at February 4, 2005 12:41 PM
Not all annuities expire upon death; you can get "death or 20 years whichever is later". Of course, the amount disbursed every period must be reduced to account for the annuity provider's increased risk.
Posted by: Andrew J. Lazarus at February 4, 2005 01:05 PM
The other is that Social Security benefits are [not] a direct function of how much people put in through their payroll taxes. The way Social Security is now set up, for instance, a single wealthy person gets a vastly lower "rate of return" upon retirement than a poor person with a stay-at-home spouse.
This is something that bothers me hugely about the proposed system -- all the discussion appears to be of the average recipient, with no discussion of what happens to the lower earning recipient. If the new combined guaranteed benefit and private account is a simple function of benefits, lower income recipients are in for a world of hurt.
Posted by: LizardBreath at February 4, 2005 01:46 PM
Sorry, that should read "...is a simple function of money put in through payroll taxes...".
Posted by: LizardBreath at February 4, 2005 01:50 PM