July 29, 2004
EMPOWER THE PEOPLE:
Outside the (Lock) Box (PAUL RYAN, July 19, 2004, Wall Street Journal)
This week I am introducing new legislation that empowers workers with the freedom to choose a large personal account option for Social Security, with no benefit cuts or tax increases of any sort, now or in the future. Through these large personal accounts, the bill would increase future retirement benefits and cut future taxes for all workers. This bill has already been scored by the chief actuary of Social Security as achieving full and permanent solvency for the program.The bill would allow workers to shift to their personal accounts 10 percentage points of the current 12.4% Social Security payroll tax on the first $10,000 of wages each year, and five percentage points on all taxable wages above that. With this progressive account structure, on average, workers would be shifting 6.4 percentage points of the 12.4% tax to their accounts.
Workers choose investments by picking funds managed by major private investment firms, from a list officially approved for this purpose and regulated for safety and soundness, similar to how the Thrift Savings Plan for federal employees operates.
Benefits payable from the tax-free accounts would substitute for a portion of Social Security benefits based on the degree to which workers exercised the account option over their careers. Workers exercising the personal accounts would receive traditional Social Security benefits based on the past taxes they have already paid into the program, in addition to the money from their personal accounts.
The plan maintains a strong safety net, as the accounts are backed by a federal guarantee that workers would receive at least as much as Social Security promises under current law. The plan is voluntary. Anyone who chooses to stay in traditional Social Security would receive the benefits promised under current law. Survivors and disability benefits would continue as under the current system.
The proposal achieves solvency without benefit cuts or tax increases because so much of Social Security's benefit obligations are ultimately shifted to the accounts. In fact, the official score of the chief actuary shows that ultimately, instead of increasing the payroll tax to over 20%, as would be needed to pay promised benefits under the current system, the tax would be reduced to 4.2%, enough to pay for all of the continuing disability and survivors benefits. This would be the largest tax cut in U.S. history.
Moreover, at standard, long-term, market-investment returns, the accounts would produce substantially more in benefits for working people across the board than Social Security now promises, let alone what it can pay.
It shouldn't be voluntary for younger workers. Posted by Orrin Judd at July 29, 2004 9:47 AM
One of the main reasons I am hoping for a large Bush win (besides the WOT) is that I think Bush would have the political capital/standing to push for something like this. If so he should do it first after the election while he has the momentum. I can't see something like this happening under a small Bush win or a Kerry win.
Posted by: AWW at July 29, 2004 11:01 AMI dunno about making it mandatory for younger workers. They're the ones who most need a high take-home from their usually pitiful paychecks.
Possibly, making it mandatory beginning on each person's thirtieth birthday would work better in terms of career arc and earning power.
Posted by: Michael Herdegen at July 29, 2004 11:35 AMMichael:
Putting it away earlier pays huge dividends later. I think the example they use is that if you put $10,000 away in your thirties and someone else puts $5,000 in their twenties and $5,000 in their 30s they have twice as much as you when you both hit 40.
Unless you invest in Enron.
In which case, each has nothing.
'Adam Smith' in one of his underrated books pointed out that you cannot manage $3 billion (how long ago that was!) to beat the market.
The numbers change, but that will always be true.
Harry:
Try reading. Investing in just one instrument is not an option in any such plan for exactly that reason. All you do is mirror the market and you can't help but make tremendous money over the seventy years before you'll retire.
Posted by: oj at July 29, 2004 2:34 PMHarry:
The savviest (and most perseverant) investors typically do not come from NY. They come from the small towns of America. Why can't you be one?
Posted by: jim hamlen at July 29, 2004 2:37 PMoj:
Yes, that's true, investing early pays off handsomely, but one must balance the needs of one's current existence against the desire for a golden retirement that one might not live to see.
Otherwise, why not invest all income, after the expense of beans & rice and a flophouse, in retirement accounts ?
Posted by: Michael Herdegen at July 29, 2004 3:00 PMThey should when they're young. Thewy have no family or serious expenses. What they don't sock away they'll drink. Make them save.
Posted by: oj at July 29, 2004 3:04 PMI had a family when I was young. I'm 22 years older than my oldest. I invested in them. Paid off to my satisfaction. Never had even a down quarter.
One of my side jobs is editing investment books. LIke religions, they all claim to have the Truth, but no two the same Truth.
One truth is Lt. Milo Minderbinder's. If everybody has a share then one of two things must happen:
A. As Orrin suggests, everybody buys index funds and everybody shares alike -- but nobody does better than the average; or
B: People try to beat the market, and while some do, some end up with their retirement invested in Enron.
The market is a hard taskmistress. There is no C.
Posted by: Harry Eagar at July 29, 2004 9:41 PMEditing investment books!?! Now I understand. Ye gods, what a nightmare. The only book about money I ever really liked reading was PJ O'Rourke ("Eat the Rich").
Posted by: jim hamlen at July 29, 2004 10:15 PMHarry:
The average return of the market makes you a very wealthy old man if you've been investing in it your whole life.
Posted by: oj at July 30, 2004 12:27 AMCertainly better than SS, even if the average rate of return shrinks to 5% or so, as some believe it will.
Posted by: Michael Herdegen at July 30, 2004 1:54 PM