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Tuesday, February 15, 2005

More on personal accounts

Rep. Paul Ryan attempts to make the case for private accounts being the key to successful Social Security reform in USATODAY.:

By giving younger workers the option of putting a significant part of their wages - say, 6% on average - into personal accounts they own and investing in a secure, government-approved retirement fund, we can eliminate long-term Social Security deficits. In fact, personal accounts help reduce the need to cut future benefits or raise taxes to restore solvency to Social Security. And the larger the personal accounts, the less Washington will have to resort to such steps. This is because, over time, sizable accounts cover more of the program's benefit obligations, as future retirees draw on the savings and interest that have accumulated in their personal accounts for their retirement. (Contrast this with the current system, where retirees rely on current workers' payroll taxes.) Evaluating legislation I introduced last year, the chief actuary of Social Security determined that large accounts would even erase Social Security's $10.4 trillion unfunded liability - what the program promises today's workers but cannot pay. To deal with the 'transition costs' of diverting money into private accounts, we should make offsetting cuts in other government spending.
I am pretty well convinced already. I do have a few questions however. First, Social Security covers many people who never contribute noticably to the program. This includes disabled individuals and others who cannot work. How will these people be covered in the future and what is the source of funding for that expense? My guess is that they will remain in the current system, and the funding for that system will be from the portion of payroll taxes that cannot be invested in private accounts. I am unclear though about how well the expected expense for these people matches the expected funding. It does seem, if that funding isn't there that the Bush plan will have far more expense than is advertised. It is also equally possible that if it is unfunded now, it will become more politically viable to simply greatly reduce benefits for these people, not something I am willing to quickly support. Secondly, I would be interested in some good economic analysis of what effect this infusion of cash will have on the market in general. My assumption is that this will initially increase the price of those funds that are a part of this program. I would expect that this would then have the effect over time of reducing the profitability of those funds as long term investments (by how much I am uncertain.) This could impact desirability of this as a method to fix social security, however I expect that a secondary effect of this infusion will cancel that out. As the long term gains of these 'safe' stocks lowers I would expect that 'riskier' stocks would be more appealing to investors than they are currently. This would of course be a sort of domino effect. The net effect of this, would be more money (resources) in venture capital and entrepenurial activity. While many, most in fact, on the edge investments like this don't pan out, some do and some do spectacularly. This success in turn bouys up core economic activity (which our personal account funds will be tightly tied to) and increases economic growth overall. It would be interesting though to see a better economist than myself look at this though. Of course these interacting events are what makes prediction so difficult. Changing one variable (the amount of money invested in certain safe stocks) ends up changing all the others making you increasingly rely on assumptions, with any errors in them growing in effect over the time span of your prediction. That is a problem even without factoring in the unpredictable, like when or if feasible fission power will be developed or if in 15 years medical science will add 10 years to our lifespans.

6 Comments:

Blogger Greg said...

If I remember what I read correctly, the disability portion of Social Security is funded appropriately, and not facing the problems of the retirement portion.

Now, if we go to personal accounts, then each person now on disability would receive, in essence, a higher benefit, as presumably they would get some monthly donation to their account while receiving disability.

2/15/2005 06:41:00 PM  
Blogger Dave Justus said...

You could be right. I thought that the entire system only had a single 'account' which it drew benefits from.

I don't think though that someone who recieves SS payments presently has to contribute part of those payments back into the system, so I would assume that they would not be contributing to a personal account either.

2/16/2005 06:19:00 AM  
Blogger Cubicle said...

I am with dave, their is one general account.

though that would be intresting to see if i could get one disablity and still pay into the system (though i think that should be stopped).

I also think that by moving to personal accounts, that more and more fraud will be exposed in the disablity portion of the program (it is so small compared to the rest of the sytem that no one cares about it).

Dave,
I am with you, i think that more wise investment will increase econmic activity over time.

2/16/2005 09:51:00 AM  
Blogger Greg said...

Someone who currently receives SS disability payments doesn't have to pay SS taxes, since they don't pay for their own future benefits. However, I believe they get some credit towards their Social Security retirement benefits for their time disabled.

If Social Security were replaced with personal accounts, and if I'm correct above, then when disabled, you would need a virtual contribution to your personal account to make the situation equivalent.

2/16/2005 10:59:00 AM  
Blogger Dave Justus said...

There is one account that you 'pay into' currently, but it isn't yours.

There are in addition some arcane formulas that determine what benefits you recieve when, including how much retirement and disability benefits you are eligible for and I believe there are also minimums on those. As I said, the calculations for the current system are pretty arcane and although I have looked some, I can't find a simple explanation of them.

Obviously any future scheme will need to have some provision for those who have never worked, particullarly those who through disability could never work or had to quit working at a very young age.

Of course this is a very small peice of the social security pie.

2/16/2005 12:46:00 PM  
Blogger tsykoduk said...

However, I believe they get some credit towards their Social Security retirement benefits for their time disabled.I was on SSDI years ago, and I was not given any credit towards my retirement SSI benifits. One of the reasons that I never expect to see a dime out of the system.

If you are on SSDI - and reach retirement age, what changes? You are still disabled, and (under current law) would still get the SSDI benifits.

;)

2/16/2005 02:07:00 PM  

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