January 20, 2005

SCREW THE GRANDKIDS--GIMME MY MONEY:

Social Security: Are private accounts a good idea? (1/24/05, Business Week)

To give America's struggling seniors a lifeline out of poverty, Franklin D. Roosevelt 70 years ago established the Social Security system. The program was never intended to be particularly generous -- and even after increases over the decades, the average check totals just $14,000 a year. Yet Social Security remains a mainstay for America's 36 million seniors; two out of three of them count on it for half their income. [...]

Still, private accounts have their appeal. They could be a way to encourage savings. They could partially prefund a system that is now pay-as-you-go. Another plus: the nest egg that builds up, something older Americans may be able to pass on to their heirs.

The details of the plan that the President will ultimately ask the country to consider are very much in flux. Now that Bush has put fixing Social Security at the top of his domestic agenda, there's a profusion of proposals across the political spectrum, and horse-trading between Republicans and Democrats over the coming year will certainly influence the shape of the final program. For now, Social Security reform is a moving target.

Even so, the President has pointed repeatedly to the suggestions of his 2001 Commission to Strengthen Social Security. Because that group's blueprint contains the rudiments of just about any of the private-account schemes out there, it's a good starting point to assess how a partially privatized system might play out over the long haul. Its primary plan calls for allowing workers under 55 to divert four percentage points of their 12.4% annual Social Security payroll tax into private accounts, up to a maximum of $1,000 a year. It also slashes the future growth of Social Security benefits to wipe out the shortfall -- relying on the accounts to make up what amounts to only a portion of the difference. Indeed, today's 20-year-olds would see their promised benefit cut nearly in half, leaving them a check equal to just 15% of their annual income when they retire.

Of course, no politician wants to be the first to deliver bad news, so Bush hasn't yet indicated that his plan might involve reducing benefits from today's promised levels. But now, some Administration officials are starting to concede that private accounts can't earn enough to fix all of Social Security's ills. White House adviser Peter H. Wehner made the point explicitly in a memo widely circulated in early January.

If Americans go for private accounts, then, it won't be so they themselves receive the retirement Social Security currently promises. Instead, those working today would be accepting smaller benefits, as would their children when they join the workforce, so that their grandchildren could count on a fully funded system. Says David C. John, a research fellow at the conservative Heritage Foundation who is a leading advocate of private accounts: "It's wrong to say that private accounts can fill Social Security's shortfall. They're not a magic bullet. But do you want to leave the world better for your grandchildren or just tell them to make do?"


As a threshhold issue, it seems germane that only about 50 countries have a higher GDP per capita than we hand to retirees, suggesting just how over-generous the program is. As to the latter point, one assumes Mr. John is just asking that question rhetorically.

Posted by Orrin Judd at January 20, 2005 9:58 AM
Comments

Just read a WSJ article, except I didn't save it, Britain and 2 other countries just instituted private accounts, so what's the big deal?

Posted by: Sandy P at January 20, 2005 10:04 AM

Here's a modest proposal. Let young people put the entire 12.4% into private account and receive no SS benefits.

(if they should lose it all in the stock market then guarantee them enough food stamps to cover the Alpo)

Posted by: h-man at January 20, 2005 10:44 AM

SS was meant as a social insurance program, not as the primary means to plan for retirement. The two functions need to be separated.

Posted by: Chris Durnell at January 20, 2005 10:45 AM

At the risk of shameless self-promotion, Whistling Past the Graveyard is a post that is at least peripherally relevant.

Posted by: Jeff Guinn at January 20, 2005 12:20 PM
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