As You Were

We've been promised an Iraq War-style blitz from the Bush Administration regarding their plan for Social Security. I guess that means we can expect a bunch of bad data and shifting rationales. They haven't really told us what President Bush's plan to remake Social Security is, but at least they've finally released some details.

This has to be the supidest plan ever.

But first some facts about Social Security:

• Social Security payouts to current retirees are paid for by current workers — This is, in effect, a Ponzi scheme. But not too much of one, however, because of population growth and increased productivity. The bulge in the population pyramid caused by the Baby Boom was a real problem for social security but was solved in 1983 by the creation of the Social Security Trust fund.
• Payroll taxes are currently too high. — We pay more in payroll taxes, currently, than is needed to pay out current benefits. In the 1980s, facing the the impending doom of Social Security, Congress raised payroll taxes. The surplus is "deposited" in the so-called Social Security Trust Fund. Really what happens is that the money goes in the general fund and the government promises to pay it back later in the form of special Treasury bonds. We've paid higher payroll taxes for twenty years, which has subsidized cuts in income taxes and capital gains taxes for the rich, with the promise that in the future, when Social Security calls in its IOUs, we raise income taxes and captial gains in order to cough up the cash.
• Social Security is not an entitlement program — Even though Social Security benefits aren't paid for by the people who get them, Social Security isn't welfare. The amount of money you get out, in your first retirement year, is based on the amount of money you put in over the 35 years you put in the most. An average person would start with benefits equivalent to about 40% of their income. After the first year, benefits increase with the Consumer Price Index (CPI), which is one measure of how much it costs to buy things.
• The rich don't pay their share of payroll taxes — What makes the surplus in payroll taxes more than a little bit disgusting is that they transfer the tax burden from the rich to the poor. The income subject to payroll taxes is currently capped at about $90,000. So you only pay payroll taxes on the first 90 grand you make a year. The rich also make a lot more of their income from non-payroll sources like capital gains.
• Some numbers and dates — we currently have a surplus in payroll taxes and will have one until about 2018, when we will have to start drawing out from the trust fund to supplement payroll taxes. The trust fund will run out of money in either 2042 or 2052, depending on whether you believe the Administration or the non-partisan Congressional Budget office. At this point, we will only be able to pay out about 75% of promised benefits but will continue be able to do so for the foreseeable future. President Bush skillfully calls this "bankrupt," which implies Social Security will be completely gone. It will not. It is also worth noting that since benefits are currently tied to wages, and wages increase faster than prices, that the purchasing power of 75% of benefits in 2042 will be greater than than the purchasing power of 100% today. Thus if we did absolutely nothing we would, in some sense, still be better off than we are today.

These are the current realities. There really is no crisis, and anyone who says there is is either lying or doesn't know what they're talking about. Still, though, there are things that could be done to shore up Social Security. Some of these make more sense than others.

1. Raising the FICA cap — Social Security payroll taxes apply to only the first $90,000 you make. This means the poor pay proportionally more and that only 84% of total wages are taxed. If we raised the cap but left benefits alone this would erase 88% of the social security deficit. This means rich people would pay more than their fair share of payroll taxes, which is ideologically unappealing to some people, but the poor have been paying more than their share for twenty years now. This would, in essence, convert some of Social Security to an entitlement program. But unless you make more than $90,000 your benefits would still be proportional to your contributions. In 1993, Congress did this for Medicare. It would not be unreasonable to extend it to Social Security.
   
   One problem with this scheme is that the richer you are the more likely you are to get income in non-payroll— forms (stock options, low-interest loans, lear jets, etc.). As more of wages are taxed, it is likely that companies will elect to pay their employees in alternative forms. Nonetheless, this reform alone would almost solve the Social Security problem. Anyone who is not seriously thinking about this isn't serious about fixing Social Security.
2. Raising payroll taxes — Raising payroll taxes by 2% (1% employee contribution, 1% employer contribution) right now would eliminate all of the deficit. This would continue the practice of screwing the poor to support lowering income and capital gains taxes on the rich, but would at least guarantee a safety net.
3. Raising the retirement age — starting in 2027 the retirement age will rise from 65 to 67. Raising it further would help reduce the social security deficit, but not all that much. As people live longer, it is reasonable to expect them to work longer, but they will also spend more time retired, drawing benefits.
4. Private Accounts — Subsidizing personal savings in the form of private accounts in addition to Social Security make a lot of sense. Most economists say that Americans don't, in general, save enough. The government could either force people to save some part of their income in a personal savings account or provide incentives to do so. One idea would be to use the private accounts to pay for the first five years of your retirement and then rely on Social Security for the rest. That way if you got screwed by the market you could either work longer, or retire on less, knowing that after five years you would be guaranteed Social Security income.
   
   There are two important caveats, here. First, it doesn't make sense for the government to borrow money and put it in the stock market. There would not actually be any increase in savings, so the economic growth we would expect from increased investing in the market would not materialize. Second, we have to be realistic about the risks and returns from private accounts. The risks of private accounts allow for the possibility of greater returns, but also raise the risk of lower returns. It doesn't make too much sense to have private accounts if we have to bail out everyone who loses money in the scheme. Any projection of stock market gains greater than 5% above inflation is pure fiction. Investors with a low risk tolerance would also want to invest in bonds, increasing safety but reducing returns.
5. Changing COLA — The Cost-of-Living Adjustment determines how much a retiree's benefits go up each year after retirement. This is currently based on the consumer price index, which some economists think may overstate inflation. Lowering the COLA would decrease benefits, but the argument could be made that they grow too quickly anyway. One important consideration is that the mix of goods costs for seniors (food, housing, medicine) is very different than the mix for others classes of people. Any COLA that doesn't take into account the high costs of (and growth in) medicine and housing doesn't make sense.
6. Supplements from the General Fund — Another solution to the Social Security problem would be to supplement the Social Security deficit with revenue from the General Fund. This money would have to come from tax increases, probably income and capital gains on the rich. The amount of money needed is only slightly more than President Bush's recent round of tax cuts. I'm going to say that again: We could solve the Social Security Problem almost entirely simply by rescinding President Bush's recent round of tax cuts. This is ideologically unappealing to some because it uses money from rich people to support poor people.

Bush has proposed a plan to "save" Social Security that 1) reduces benefits so that in the future benefits will match incoming payroll taxes (so-called pay-as-you-go) and 2) allows workers to divert up to a third of their payroll taxes into private accounts (the current White House focus-group— approved term is now "Personal Accounts"). His plan would lower benefits and tie them to prices rather than to wages. Younger workers (those under fifty) would be able to invest a third of their benefits in certain limited ways and the government would borrow $1.8 trillion to make up the lost revenue to Social Security in order to pay current recipients. Workers with private accounts would assume a greater risk in the hopes of getting a return greater than that provided by Social Security. Notice this second part of the plan just moves money around; it doesn't actually do anything for Social Security's long term finances.

The President has said the he hopes his plan to partially privatize Social Security will promote what he calls the "Ownership Society." His hope is to get more people's wealth tied up in corparate profits rather than worker's wages.For reasons that should be obvious to any observer, the President's plan is total crap. He's refusing to explain the details (he says it's Congress' job to come up with them, but that is bullshit. He's afraid that releasing hard numbers will make it easier for opponents to poke holes in the plan. That's what happens when you have a crappy plan).

• What if we ignored the problem? — We know that if we literally do absolutely nothing we will be able to maintain between current benefits up until the 2040s, and provide between 70% and 80% of current benefits in perpetuity thereafter. If the President's plan cuts benefits to around these levels (or to lower) you have to ask: Is it worth it? I'd imagine this is one reason they're refusing to release actual numbers.
• Clawback — Under Bush's privatization plan, when you retire you get a lump sump of the money you invested and buy an annuity, based on your life expectancy, with that lump sum. You also get your regular (now-reduced) benefits. But they subtract the inflation + 3% they would have gotten if you'd opted to stick with the regular reduced benefits Social Security and payed all of your payroll taxes into the system. Or think of it this way: they let you take a third of your payroll taxes out, but you have to pay them back with interest. What if your investments, minus brokers' and managers' fees, of course, made less than inflation + 3%? Well, you're screwed. You get a smaller lump sum and they still raid your regular benefits to make up the difference. Under Bush's plan you get reduced benefits and even then, only two thirds of them are guaranteed. Nice safety net, eh?
• Limited investment opportunities — Perhaps to assuage fears about the clawback problem, it appears that you will only be able to invest in certain broadly distributed funds. That's right, you don't get to choose what you invest in. This limits your risk, as your diverse investment is likely to grow at the rate as the market, but is a serious waste of capital. Increasing investment in the stock market is desirable only because it makes capital available for research into risky new ideas that create growth. Hoping to grow the economy by injecting a large amount of money into risk averse ventures is stupid, stupid, stupid.
• The REAL Ownership Society — The immediate effect of adding a bunch of new money to the stock market is to increase volume and prices. Fund managers and brokers will get rich because they get to collect yearly and per-transaction fees and percentages. Also, as more money gets pumped in, current investors will make a killing because there will be more money chasing around the same extant shares. The real winners are the current owners — not the future ones. This is, of course, not a big surprise.
• What about the Trust Fund? — Conveniently, defaulting on the Trust Fund will allow the government to make the Bush Tax Cuts (again, targetted towards those who pay income taxes — the rich) permanent. Remember, the Trust Fund was created as a promise to workers. Taxes were raised on workers with the promise that starting in 2018 they would be raised on the rich to pay off the Treasury bonds. Now that it's time to start thinking about paying off the bonds, we've decided not to. Yet another fuck-you to the American worker.
• Assumptions about wage and stock growth — In order to make their plan more attractive, the Bush Administration has assumed that over the next fifty years stocks will grow much faster than wages. It is pretty hard to imagine a realignment in market forces that could make this happen, especially given our current stance regarding immigration. This violates rule number one for making big changes: if you have to lie to convince people to do it, it's probably not a good idea.

The take home message is this: under the Bush Plan you will get reduced benefits and only two thirds of those benefits will be guaranteed. In return, you'll get the chance to invest one third of your Social Security payroll tax in lukewarm investment funds run by the President's campaign contributors. It's no wonder even Republicans won't touch the plan with a ten foot stick.