GOP Social Security Proposal: Upside Gain and Downside Protection
Republican strategists call for this change in tactics:
To pass Social Security reform this year, top Republican strategists say, President Bush and the GOP-led Congress must redirect the debate by stressing that their plan includes a crucial safety-net protection…That guarantee, which is included in certain Social Security reform bills, could be used as an effective rebuttal to comparisons that liken private accounts to playing the slots, GOP officials say. “It would take away one of the [Democratic] arguments,” said former House Speaker Newt Gingrich (R-Ga.), while former House Majority Leader Dick Armey (R-Texas) said a guarantee “would reassure seniors and the nearly retired.” Stephen Moore, president of the Free Enterprise Fund, said the safety net would ensure that “Grandma and Grandpa don’t get thrown out of their home” if their investments go sour.
Stephen should call Andrew Biggs of the Cato Institute. The new GOP idea is actually an old one that Biggs suggested would lead to something akin to the S&L crisis. The proposal would insulate day traders from the downside of risk so they can only benefit from the upside of market swings. There are two problems with this idea. The Social Security Trust Fund will bear any such downside losses, which would make it less solvent. The point raised by Mr. Biggs is that households will have an incentive to undertaken additional risk since the household would gain if the market performed better than expectations, while the Trust Fund would lose if the market performed poorly. This “heads I win, tails you lose” system would suffer from the moral hazard problem of households taking substantial risk. If the GOP really wants to destroy Social Security, this strategy would do the trick.
Addendum: Kevin Hassert and Maya MacGuineas tell us not to fret over silly words like “carve-out” and then write this:
Currently 11 percent of covered wages are devoted to paying benefits. This is projected to climb to over 19 percent.
Lest we miss the importance of this 11% to 19% claim, what Hassert and MacGuineas are trying to slip by us is that the pay-as-you-go claim, which really means all those Trust Fund reserves we are building up and all that interest income does not belong to our retirement after all. Yes, those wishes to steal from the lock box don’t want us to get hung up on the details.