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Monday, June 20, 2005


John Fund writes about a Social Security compromise in the OpinionJournal.:

Politically, their proposal does disarm some of the most oft-used arguments against reform. It would create no new debt for the government because, unlike President Bush's proposal, the personal accounts would use only the surplus payroll taxes now flowing into the Treasury. That surplus will hit some $85 billion next year, and grow in succeeding years to the point that it could provide every worker who wanted one with a personal account of some $1,200. The surpluses will total some $2.5 billion until 2017, when Social Security starts running a deficit as baby boomers begin to retire. Preventing that money from being 'raided' by a spendthrift Congress and White House could be enormously popular with a cynical public. In addition, if the personal accounts were limited to no-risk, but marketable, Treasury bills, the argument about the 'scary and risky' stock market investment of payroll taxes would be neutralized. Converting the nonmarketable IOUs the government now holds into marketable Treasury bills issued to taxpayers would create an asset that individuals would own and be able to pass on to their heirs. If history is a guide, such risk-free Treasurys would earn an annual rate of return of between 2.5% and 3%--much better than Social Security will deliver. The surpluses would become real assets owned by citizens rather than government IOUs (or, more accurately, 'I owe me's') piling up in a filing cabinet in West Virginia.
Politically, this seems like a tough plan to beat. Obviously, we would need either an immediate reduction in government spending, or increased revenue or an increase in out dept to replace the SS money that is currently being spent on government activities. The sooner we do that, the better however. If we don't do that now, we have have to do it in a decade in any event. Of course this plan does nothing to address the long term solvency of the system, but it does make it more likely that any changes made to reform the solvency problems will actually have the desired effect. The reforms in the 80s had little effect because the Government simply spent the money anyway. There are of course reasons for liberals to oppose this plan. First off, people will probably like these accounts, and as such they will likely be expanded upon, additionally there will be a desire for people to have investment options beyond treasury bills with their personal accounts. Those reasons for opposition will not be popular however. The biggest reason that liberals won't like this, in my opinion, is that they are emotionally and ideologically invested in a collectivist solution, one that gives the appearance anyway that we are all in this together. Even though Social Security benefits are related to how much you pay into the system over your lifetime, the arcane formulas involved in determining this provide the appearance that everyone is in the same boat. In addition, the pay as you go system lets each succeeding generation get more out of it than they put into it, keeping the program as a whole popular. Individual account do attack the very premise of the system, as well as causing people to compare their financial performance with other investment options, something that cannot really be done currently. That is why liberals will hate this propossal, because they fear that the people will like it too much.


Blogger honestpartisan said...

Speculating on why liberals will hate this proposal is a little bit premature. It seems to me that the proposal actually undermines two of the main arguments for privatization/personal accounts.

The first argument, made energetically by people like David Frum, is that the real crisis time is 2017, when Social Security outlays will start to exceed Social Security revenues. At that point, benefits were supposed to have been paid from the "surplus" that should have been built up all these years that the FICA tax has been higher than necessary to pay benefits. If you divert these revenues into private/personal accounts, you'll only get a few years of surplus, which I don't think will be enough to insure against destitution in retirement for recipients, and where will you get the money for benefits for people who retire in 2017?

The second argument is that the magic of compound interest and investment in the stock market was supposed to be superior to the low-risk investments of the trust fund. Now the plan would be to invest in the lowest-risk lowest-return investment there is out there.

So if the plan won't make Social Security more solvent and won't provide higher investment returns, what's the point?

6/20/2005 03:03:00 PM  

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