Social Security: Soak the Yuppies

As we congratulate Duncan Black for correctly calling that Bush would endorse the Pozen plan, let’s review how George Bush defined the Social Security problem:

Congress also needs to address the challenges facing Social Security. I’ve traveled the country to talk with the American people. They understand that Social Security is headed for serious financial trouble and they expect their leaders in Washington to address the problem … These changes have put Social Security on the path to bankruptcy. When the baby boomers start retiring in three years, Social Security will start heading toward the red. In 2017, the system will start paying out more in benefits than it collects in payroll taxes. Every year after that, the shortfall will get worse, and by 2041 Social Security will be bankrupt … any reform of Social Security must replace the empty promises being made to younger workers with real assets, real money … I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government … I think if seniors feel like they’re not going to get their check, obviously nothing’s going to happen.

Granny is too smart to think her checks will not be mailed. What makes granny upset is how the White House is flat out lying to her smart granddaughter who is working hard in college. Granny might even be smart enough to know that with no reforms, the kid’s Social Security checks will be only 80% of what is currently promised but that beats the 50% of what is currently promised that would come from the Pozen plan. Let’s also imagine that the kid’s parents are both 45 years sold working hard at jobs paying $45 a hour. The parents have paid a lot into the Trust Fund for 20 years and will continue to pay a lot into it over the next 20 years, but would receive a modest benefit cut relative to what is currently promised if the Pozen plan goes into effect. OK, you conservatives don’t like the term “benefit cut”, so let’s say this plan is a backdoor tax increase on these productive parents but not as large as the backdoor employment tax increase on the kid. Juan Williams this morning on NPR said some conservatives will call this welfare. There are some disincentives to working, but as a liberal – we should not impose the burden of Bush’s fiscal irresponsibility on the poor as much as we should raise taxes on those who Robert Novak call members of the “productive class” – such as Paris Hilton.

Bush also explained why we need privatization:

I feel strongly that there needs to be voluntary personal savings accounts as a part of the Social Security system. I mean, it’s got to be a part of the comprehensive package. And the reason I feel strongly about that is that we got a lot of debt out there, a lot of unfunded liabilities, and our workers need to be able to earn a better rate of return on their money to help deal with that debt. Secondly, I like the idea of giving someone ownership. Why should ownership be confined only to rich people? Why should people, you know, not be allowed to own and manage their own assets, who aren’t the so-called investor class? I think everybody ought to be given that right. Matter of fact, Congress felt so strongly that people ought to be able to own and manage their own accounts, they set one for themselves. And, you know, you’ve heard me say – I like to say this, if it’s good enough for the Congress, it ought to be good enough for the workers to give them that option. The government’s never saying, “You have to set up a personal account.” We’re saying, “You ought to have the right to set a personal savings account so you can earn a better rate of return on your own money than the government can.” And it’s that difference between the rate of return – between what the government gets on your money and what a conservative mix of bonds and stocks can get on your money – that will make an enormous difference in a person being able to build his or her own nest egg that the government cannot spend. Now, it’s very important for our fellow citizens to understand there is not a bank account here in Washington, D.C., where we take your payroll taxes and hold it for you and then give it back to you when you retire. Our system is called pay as you go. You pay into the system through your payroll taxes and the government spends it. It spends the money on the current retirees and with the money left over, it funds other government programs. And all that’s left behind is file cabinets full of IOUs. The reason I believe that this ought to work is not only should a worker get a better rate of return, not only should we encourage ownership, but I want people to have real assets in the system.

So if I own a Treasury bond, that is a real asset but it is not a real asset when a Trust Fund owns a Treasury bond. And suppose I recently purchased a bond paying a 4.8% nominal return. Bush is saying this is somehow a better return than the Trust Fund gets – even though its bond also pays a nominal return equal to 4.8%. That is some kind of fuzzy math akin to Bush’s fuzzy accounting where he claimed that my getting a better return on my 401(K) lowers government liabilities. Incidentally, all individuals currently have the right to open private accounts assuming they have sufficient resources.

But when Bush was suggesting the Trust Fund is pay as you go, David Altig might be surprised to hear that I think Bush had a point with the premise that the Trust Fund surplus funds other government programs. After all, Bush is the one that made sure General Fund revenues were not sufficient to fund all of General Fund expenditures.

Finally Bush explained why we must act now:

Social Security is a big issue, and it’s an issue that we must address now. You see, the longer we wait, the more expensive the solution’s going to be for a younger generation of Americans. The Social Security trustees have estimated that every year we wait to solve the problem, to fix the hole in the safety net for younger Americans, costs about $600 billion.

This canard is bizarre on several fronts as it uses a nominal interest rate applied to cash flow deficits in the future. The Trust Fund is currently earning interest income and the real interest rate is about half the nominal interest rate. Maybe it is true that the real present value of the unfunded liability is rising by about $300 billion a year, but Bush’s proposal insures no additional revenues for the Trust Fund and delays any significant reductions in outlays for another decade. In the meantime, the real interest obligations for the overall Federal debt plus the non-interest deficit for the General Fund are almost $500 billion a year. And the energy part of Bush’s appearance last night promised more pork barrel spending. Maybe my retirement plan should have included buying this stock a few years ago.