There was an interesting table in the Washington Post last week comparing the basic elements of five different approaches to Social Security. Notes on Bush's positions are included, but since he really hasn't proposed anything yet, there is not much there.
The main point the table drives home is that all we are talking about is money: every approach to the issue involves some combination of increased taxes and/or increased borrowing and/or decreased benefits. The only differences are how much of each.
The plan I tend to like the most is the second one on the chart from the Cato Institute. Here is the full text of that proposal. Here are the basic elements:
1. No changes at all for people 55 and older.
2. No increase in FICA rates or in the cap (currently $90,000) in wages subject to FICA
3. A guaranteed minimum pension for all at 120% of the poverty level.
4. Workers between 18 and 55 would technically have the "option" of staying in "traditional" social security. If they did, they would be entitled to receive whatever benefits would be payable (not promised) under current law. The catch: under current law, once the "trust fund" is exhausted, the SSA is required to reduce benefits to the levels payable with then-current FICA receipts. And, since the Cato plan involves a 50% cut in FICA receipts from any worker who opts out of traditional SS, the trust fund would probably be exhausted well before the 2042 current projections. In fact, therefore, most people below 45 or maybe even 50 would be foolish to stay with traditional social security.
5. People between 18 and 55 who opted out of SS would immediately receive a zero coupon bond with a value that, at maturity (i.e. age 62), would buy an annuity paying benefits equal to the benefits social security would have paid that worker under today's rules if that worker had quit working at the age at which he/she received the zero coupon bond.
6. All workers and employers would continue to pay 6.2% (each, for a total of 12.4%) into the government pension program just as they do today. However, half of that money would be invested by the government at money market interest rates during any given year and then, at year end, that half would be deposited automatically (with interest) into a closely controlled private account owned by the individual but offering a severely limited range of investment options (index funds, broad based bond funds, money market funds, etc.)
7. Once such a worker reached retirement age he would be required to use the assets of this account to by a lifetime annuity paying at least 120% of the poverty level. If his account was insufficient to do this, the government would make up the difference out of general revenues. After that, any assets remaining in the account would be treated much like a Roth IRA, with the worker having substantial discretion as to frequency and manner of withdrawals. Any remaining balance at death would become part of his estate.
8. The remaining 6.2% of FICA payments would be used to defray the transition costs. Eventually, these transition costs would start to decline and eventually to zero. Once that happens, the required payments would drop a well until (eventually) the required pension payments would drop to 6.2%.
What I like most about this is that it separates the "welfare" component of SS from its "investment" component. On the welfare side, everyone is treated equally. It answers the question: "Why should the government pay Bill Gates more than it pays Joe Lunchbox. Moreover, 120% of the poverty level seems to me to be a fair level for the government to guarantee. The remainder of the benefits which an individual receives will come from "true" investment. As such, the invested assets should, I think, belong to him. Finally, it begins to address America's miserable savings rate, essentially requiring every worker to save 6.2% of income for his retirement. This will create a huge new pool of capital for investment, and by spurring growth, this investment may actually increase both national wealth and tax receipts, thereby helping to defray the transition costs.
The problem, of course is the transition costs. They will be huge. Cato doesn't even try to estimate them, but the Post attributes an estimate of $7 trillion dollars over 75 years, which the Post says that this is roughly double the current SS deficit of $3.7 trillion over the same period. Estimates of this sort are almost meaningless, since there are way too many assumptions buried in a 75-year estimate of anything to allow reliable forecasting. But, in a larger sense, my answer is that if this is what it will cost, so be it. Getting to the end point Cato describes seems to me to be worth it. And, since $7 trillion divided by 75 years is "only" $93 billion/year, we could get most of the way there simply by rolling back the Bush tax cuts.
Tuesday, March 01, 2005
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2 comments:
Bill
This "plan" and all the rest really are not plans. They all involved huge infusions of cash with no real ideas on how to get the money (raising taxes is not a plan.)
The real issue is not addressed. It is simply economics. They have to find away to get fewer American workers to produce enough goods for society and find away to keep the growth in production. The rest is just an inevitable funding gap that I ( and you)will have to pay.
The key to this is technology. We have to find ways for fewer workers to produce more. We need technology to crate new industries. Grow our way out is the only option.
We need to teach people to not be dependent on the government. Point number 7 does just the opposite. If you are going to give the people a safety net so they all have atleast the minimum, then you might as well just keep funding the same pathetic system we have now.
Jesse
Jesse:
Spoken like a man who hates how much he pays in taxes. I feel the same way. But . . .
When you say "raising taxes is not a plan", I assume you mean it is not an option you support. It certainly is a "plan", though, maybe even a plot.
On SS, there are two debates going on. One is the explicit debate over how to fix the cash flow problems with the current system. Raising taxes is obviously one way to do this. Cutting benefits another. Increasing ROI is a third. Eliminating the system altogether is a fourth.
But the real debate is the implicit one (that you make explicit) about the appropriate role of government: Does the government have a duty to guarantee some minimal level of income to all retirees? One can marshall all kinds of intellectual and/or moral arguments on either side of this debate, but in the end, an individual's position on this question almost always has more to do with self-interest than either reason or morality.
My own self-interest, and that of my children, would probably be best served by scrapping the whole system, since we will all almost certainly pay far more into the system than we will ever get out of it, especially if you assume that we would have/will save and wisely invest what we were/will be required to pay the government. But, I have mellowed a bit over time and I find (somewhat to my chagrin) that my fervor on these kinds of issues has been dampened by a small dose of something like compassion and a very large does of political realism.
I'll leave the moralizing about being "our brother's keeper" aside here, since I doubt if it would have much resonance. But political realism might, and the political reality is that (a) we live in a democracy and (b) there are a lot more people out there whose self-interest favors government support than there are people like me (and you). As a result, Social Security taxes are not going to go away, at least not within any time frame that is relevant to me or my children. So, given that I and my children are going to be forced to pay money into the system for the foreseeable future, how do I want that money to be used? And, more important (to me, at least), given that the system is not going to go away, what do I think it should look like 20 or 30 years hence?
Taking the latter question first, I want the welfare component of social security to be separated from the investment component and explicitly acknowledged as such. The Cato plan does this by including a guaranteed level of income (120% of the poverty level in that plan) to each retiree. Whatever part of this comes from the government rather than from the person's own savings is pure welfare. Beyond that, whatever any individual gets for retirement comes from money he/she saved/invested out of their own income. That, frankly is how it should be.
One can can argue, of course, that the government shouldn't be in the business of forcing people to save for their retirements. In principal, I agree. Freedom involves the freedom to make bad decisions, and the government should not be providing people with "foolishness insurance", especially when the insurers who have to pick up the bill are other citizens who have not been so foolish. But again, political realism intervenes. Entirely apart from what the government should do, the political reality is such that it is not going to let old people starve or freeze to death simply becuase they have not had the wisdom or discipline to save for themselves. Whether it should or not, the government is going to guarantee old folks some minimum level of income. And, if those people can't provide that level of income out of their own "savings" then the money is ultimately going to come from -- guess who? Me and my kids and you and your kids. Given that, I want the government to force some minimal level of retirement savings and I want it to ensure that those savings are invested conservatively.
Now for the second question: how do we get there? Well, since it is a zero sum game, we get there by some combination of benefit cuts and increased revenues (ultimately tax revenues, but probably with a stop at the bond market along the way). The magnitude of the needed revenue increases/benefit decreases depends on a variety of factors. One of the most important is the one you mention: increased productivity. To the extent GDP rises despite a delining working population, tax revenues will rise without an increase in tax rates, and less in the way of new taxes/borrowing and/or benefit cuts will be required to get where we want to go. If we can get there solely through growth, that would be ideal, and I agree that we need to encourage growth as much as we can. But it seems very unlikely that we will get where I think we should be through productivity or GDP growth alone, especially since the extent to which government policy and action can be pro growth is limited by the same political realities mentioned above. So, there is almost certainly going to be some difference that we "rich white guys" are going to have to make up if we are ever going to get out from under the "the same pathetic system we have now." You may disagree, but as I indictate in the post, I have decided that the benefits to my children of an end-state like that described in the Cato plan are sufficiently great that I am willing to pay (either in taxes or benefits cuts) to get there.
You raise a related but far broader issue when you argue that "We need to teach people to not be dependent on the government." If what you are saying is that we need to encourage people to take responsibility for their financial well-being, I couldn't agree more. But on the question of "dependency" on government, we who live in glass houses should be reluctant to start a stone fight.
We are all dependent on the government. True, the poor get are more dependent on direct cash payments from the government tahn we are. But, in the end, the degree to which one is "dependent" on government is directly, rather than inversely, related to wealth.
Lawyers are a particularly obvious example of this. But for government, there would be no lawyers. And, lawyers like me who specialize in government regulation are doubly dependent. Accountants are not much better. Where would they be without taxes and government regulation of finance? And bond traders? Know any of them? And stock traders? I know you know a few of them! Where would all of them be without orderly, well-regulated market supported by a vast infrastructure built and/or subsidized by the government? The point applies even to such mundane government services as police, fire, highways, schools etc. Who do you think is more "dependent" on and obtains more benefit from such services: the rich or the poor?
And then there is the big kahuna of government services: national defense. To the extent that America's military power serves to protect political rights, it does so equally for all. But, when it comes to protecting lives and property, to extending American influence overseas, and to battling America's enemies, cui bono? The rich or the poor? The poor do the fighting, the rich enjoy the benefits.
Make no mistake. I am no fan of government. I think we would all be a lot better off with a lot less of it. But, I also think it would be somewhat hypocritical for me, of all people, to argue that it is the poor who need to learn to be less dependent.
Bill
BTW: Thanks for the comment.
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