Friday, April 08, 2005
How Personal Accounts Improve Social Security - An Update
It's time to look at Social Security (SS) again. The President is continuing his grass roots campaign. Recently, he made a show of visiting a fle drawer, the bottom one in a cabinet, that contains the 270 pieces of paper that are the legal embodiment of the Social Security Trust Fund. These special non-negotiable bonds are it. These bonds are promises by the Government to itself; quite different from negotiable bonds that are issued to US and Foriegn buyers. For one thing, if you write a bond, or IOU, to yourself, you can change the terms of the agreement by youself --- decide to pay later or with less cost of living adjustments, etc.. And that is exactly what the government can do with the bonds in the trust fund and has done several times already.
His point is obvious to those of us who understand the simple facts - there are no assets backing up the SS Trust Fund. Once the income from the FICA Tax cannot pay the full bill for SS retirees, the Government must borrow or tax to find the money - just as it would if there were no fund. Or, unilaterally change the terms of the deal; e.g. by paying less or paying it later.
The New SS Trustees report is out and it tells us of the 3 critical dates for SS : 2041, when the fund will be exhausted; 2017, when the FICA will take in less than needed and new money must be found; and 2008, when the FICA surplus revenues start to decline towards Zero in 2017. The 2041 date only means that then by law SS payments to retirees must be cut by over 27%. It's important because of the wording of the law; but the other two dates are the economically important ones. Something must happen by 2017 to get more money, since there is none in the trust fund. The 2008 date is when we can see surplus revenue dwindle and with it the opportunity dwindles for using those surplus revenues to help fix the SS problem. These numbers tell us we need to act now to fix the problem before it becomes increasingly expensive.
But the news media and the polls they report tell us that no one listens to the President and that Americans don't believe there is a problem. Polls are funny things; so much depends on how you ask the question and what population sample you ask. I find much of this about as credible as all the exit polls that said Bush lost on election day. So let's look at another view for balance.
Patrick Ruffini's blog has consistently good commentary on Social Security issues including the latest poll that shows 60% of Americans Support Personal Accounts . More importantly, the younger you are , the more you're likely to want personal accounts; Under 30 folks prefer them by 76% to 16% ( almost 5-1) and all under 55 folks prefer them by 64% to 26% ( about 2.5-1). Even the over 55 folks, who would not be affected by any of the proposals, favor letting people choose these account by 56% to 31% (almost 2-1). You can check the full raw data on this link to the FOX - Opinion Dynamics Poll . These results strike me as common sense; most people can see the advantage of personal accounts; and the younger you are the greater the advantage for your own retirement. It's hard to reconcile these poll numbers with most of the stories coming out of the mainstream media - but then those same media "experts" had Bush losing badly to Kerry in their polls and commentary last year.
This poll does seem like good news; and it was conducted without the media recognizing or reporting on the upcoming legislation proposed by the House and Senate Republicans. Already 4 plans, with personal accounts, have undergone SS Actuarial scrutiny and have come out as sustainable solutions. I think it will be increasingly harder for the Democrats and big media press to spin this issue in the absence of a real factual argument much less a counterplan. Meanwhile let's look at a lead SS Reform contender that will soon be joint Senate - House proposed legislation.
In this interview, Senator John Sununu discusses how his forthcoming legislative package would use Personal Accounts to Improve Social Security . The Sununu senate bill is matched by the Ryan bill in the house; these bills will not cut benefits and will guarantee everyone a minimum payment equal to what they would get under current Social Security.
Per Senator Sununu : "We took our plan as I've described it to you--10% of the first $10,000 and 5% after that up to the Social Security earnings limit--and we still guarantee a minimum benefit for retirees equal to today's benefit structure. We don't change benefits at all. We submitted that plan to the Social Security actuary and asked: What's the impact on the Social Security trust fund balances? And does this system establish solvency in perpetuity--forever? The answer to the second question was, yes, it makes the system solvent forever, in perpetuity. And the answer to the first is, we maintain positive balances in the Social Security trust fund over the next 75 years.
It does make the system solvent, and it makes the system solvent because the accounts are of a significant size to enable a worker earning $30,000 per year to build enough in their account to give them a benefit at or above what Social Security otherwise would have given them. Therefore, they do not have to draw a check directly from the general fund or the Social Security trust fund. They will be provided that benefit over their Social Security benefit, out of their own personal account."
Of course there is a substantial transistion cash flow cost, but this is handled in a novel way - by forcing a cut in the rate of increased government spending. This is not cut in spending, only in how fast the spending increases each year. As Senator Sununu says : "The plan is evaluated by the Social Security actuary as a whole. The reduction in the growth of government spending from 4.6% per year to 3.6% per year over the first eight years of the plan gives you resources to finance the transition. And then after the first eight years, we assume we go back to the 4.6% growth. But because the baseline is lower, it will be lower for decades to come and continue to provide resources that aren't anticipated today. We have transition financing required for a shortfall in the current system over the next 30 years. That shortfall is going to remain almost under any plan. We cover that shortfall by doing a better job of controlling government spending."
Somehow this plan strikes me as win-win for the taxpayer and the retiree. (For more details, see my earlier post on Social Security Reform - Fears and Prospects ). Keeping Federal government spending growth down to only a little more than cost of living growth seems a good thing in itself. And look what it buys us - workers keep low taxes and get a real personal wealth building account for their FICA taxes and retirees get at least as much as currently promised. Most future retirees should get a lot more from their personal accounts than just that, and they can leave the funds to their heirs. As an extra benefit, the SS Actuaries estimate that the SS System should become fiscally solvent and stable enough to reduce the FICA tax.
So why isn't this proposal a clear winner ? Well, as Newt Gingrich has written in HUMAN EVENTS ONLINE : "Personal accounts offer workers far greater personal choice, ownership and control than the current system. .... Personal accounts that are large enough (around 6%) will also eliminate the long-term deficits of Social Security by shifting so much of those program’s promised future benefit obligations to the accounts that the program will be left in permanent surplus. .... the bill sponsored by Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.), which was designed to maximize the net gain for workers, so it would have enormous populist grassroots appeal.It brilliantly maintains the social safety net by guaranteeing that all workers would get at least the benefits promised by Social Security under current law.
Ryan-Sununu also includes a federal spending-limitation measure and budget process reform to help finance the transition, and that would require Washington to make the tough choices instead of shifting the burden to the worker."
AH Yes! It's that last sentence that is most likely the fatal flaw in this scheme. It would mean that both Democrats and Republicans would have to commit to cut back on their mutual spending spree and and make the tough choices to balance the budget with only moderate annual increases. Perhaps, it will never happen because of that; then again, Senator Sununu thinks there are 5-10 Democrat senators "who are very interested" in this reform idea and who would "prefer their own leadership wasn't being so heavy-handed on this". Wouldn't we all! Let's see how this plays out.
His point is obvious to those of us who understand the simple facts - there are no assets backing up the SS Trust Fund. Once the income from the FICA Tax cannot pay the full bill for SS retirees, the Government must borrow or tax to find the money - just as it would if there were no fund. Or, unilaterally change the terms of the deal; e.g. by paying less or paying it later.
The New SS Trustees report is out and it tells us of the 3 critical dates for SS : 2041, when the fund will be exhausted; 2017, when the FICA will take in less than needed and new money must be found; and 2008, when the FICA surplus revenues start to decline towards Zero in 2017. The 2041 date only means that then by law SS payments to retirees must be cut by over 27%. It's important because of the wording of the law; but the other two dates are the economically important ones. Something must happen by 2017 to get more money, since there is none in the trust fund. The 2008 date is when we can see surplus revenue dwindle and with it the opportunity dwindles for using those surplus revenues to help fix the SS problem. These numbers tell us we need to act now to fix the problem before it becomes increasingly expensive.
But the news media and the polls they report tell us that no one listens to the President and that Americans don't believe there is a problem. Polls are funny things; so much depends on how you ask the question and what population sample you ask. I find much of this about as credible as all the exit polls that said Bush lost on election day. So let's look at another view for balance.
Patrick Ruffini's blog has consistently good commentary on Social Security issues including the latest poll that shows 60% of Americans Support Personal Accounts . More importantly, the younger you are , the more you're likely to want personal accounts; Under 30 folks prefer them by 76% to 16% ( almost 5-1) and all under 55 folks prefer them by 64% to 26% ( about 2.5-1). Even the over 55 folks, who would not be affected by any of the proposals, favor letting people choose these account by 56% to 31% (almost 2-1). You can check the full raw data on this link to the FOX - Opinion Dynamics Poll . These results strike me as common sense; most people can see the advantage of personal accounts; and the younger you are the greater the advantage for your own retirement. It's hard to reconcile these poll numbers with most of the stories coming out of the mainstream media - but then those same media "experts" had Bush losing badly to Kerry in their polls and commentary last year.
This poll does seem like good news; and it was conducted without the media recognizing or reporting on the upcoming legislation proposed by the House and Senate Republicans. Already 4 plans, with personal accounts, have undergone SS Actuarial scrutiny and have come out as sustainable solutions. I think it will be increasingly harder for the Democrats and big media press to spin this issue in the absence of a real factual argument much less a counterplan. Meanwhile let's look at a lead SS Reform contender that will soon be joint Senate - House proposed legislation.
In this interview, Senator John Sununu discusses how his forthcoming legislative package would use Personal Accounts to Improve Social Security . The Sununu senate bill is matched by the Ryan bill in the house; these bills will not cut benefits and will guarantee everyone a minimum payment equal to what they would get under current Social Security.
Per Senator Sununu : "We took our plan as I've described it to you--10% of the first $10,000 and 5% after that up to the Social Security earnings limit--and we still guarantee a minimum benefit for retirees equal to today's benefit structure. We don't change benefits at all. We submitted that plan to the Social Security actuary and asked: What's the impact on the Social Security trust fund balances? And does this system establish solvency in perpetuity--forever? The answer to the second question was, yes, it makes the system solvent forever, in perpetuity. And the answer to the first is, we maintain positive balances in the Social Security trust fund over the next 75 years.
It does make the system solvent, and it makes the system solvent because the accounts are of a significant size to enable a worker earning $30,000 per year to build enough in their account to give them a benefit at or above what Social Security otherwise would have given them. Therefore, they do not have to draw a check directly from the general fund or the Social Security trust fund. They will be provided that benefit over their Social Security benefit, out of their own personal account."
Of course there is a substantial transistion cash flow cost, but this is handled in a novel way - by forcing a cut in the rate of increased government spending. This is not cut in spending, only in how fast the spending increases each year. As Senator Sununu says : "The plan is evaluated by the Social Security actuary as a whole. The reduction in the growth of government spending from 4.6% per year to 3.6% per year over the first eight years of the plan gives you resources to finance the transition. And then after the first eight years, we assume we go back to the 4.6% growth. But because the baseline is lower, it will be lower for decades to come and continue to provide resources that aren't anticipated today. We have transition financing required for a shortfall in the current system over the next 30 years. That shortfall is going to remain almost under any plan. We cover that shortfall by doing a better job of controlling government spending."
Somehow this plan strikes me as win-win for the taxpayer and the retiree. (For more details, see my earlier post on Social Security Reform - Fears and Prospects ). Keeping Federal government spending growth down to only a little more than cost of living growth seems a good thing in itself. And look what it buys us - workers keep low taxes and get a real personal wealth building account for their FICA taxes and retirees get at least as much as currently promised. Most future retirees should get a lot more from their personal accounts than just that, and they can leave the funds to their heirs. As an extra benefit, the SS Actuaries estimate that the SS System should become fiscally solvent and stable enough to reduce the FICA tax.
So why isn't this proposal a clear winner ? Well, as Newt Gingrich has written in HUMAN EVENTS ONLINE : "Personal accounts offer workers far greater personal choice, ownership and control than the current system. .... Personal accounts that are large enough (around 6%) will also eliminate the long-term deficits of Social Security by shifting so much of those program’s promised future benefit obligations to the accounts that the program will be left in permanent surplus. .... the bill sponsored by Rep. Paul Ryan (R.-Wis.) and Sen. John Sununu (R.-N.H.), which was designed to maximize the net gain for workers, so it would have enormous populist grassroots appeal.It brilliantly maintains the social safety net by guaranteeing that all workers would get at least the benefits promised by Social Security under current law.
Ryan-Sununu also includes a federal spending-limitation measure and budget process reform to help finance the transition, and that would require Washington to make the tough choices instead of shifting the burden to the worker."
AH Yes! It's that last sentence that is most likely the fatal flaw in this scheme. It would mean that both Democrats and Republicans would have to commit to cut back on their mutual spending spree and and make the tough choices to balance the budget with only moderate annual increases. Perhaps, it will never happen because of that; then again, Senator Sununu thinks there are 5-10 Democrat senators "who are very interested" in this reform idea and who would "prefer their own leadership wasn't being so heavy-handed on this". Wouldn't we all! Let's see how this plays out.
