A Positive Program for Social Security

I'm writing a piece for Berkeley's GSPP's magazine, Policy Matters. It's trying to be a positive piece. Basically, I'm advocating Diamond-Orszag plus, where the "plus" includes automatic savings from your tax refund and a stronger Social Security Commission so that the Congress doesn't have to be too brave all at once.

---

A Genuinely Good Deal for Social Security

J. Bradford DeLong
U.C. Berkeley
March, 2005

Draft 1.2

Suppose that we lived in some bizarre parallel universe in which everything was topsy-turvy, and that as a result we were having an informed debate about what to do with our Social Security system that made sense. I know that this is total fantasy, but bear with me a minute: there is method to my madness. Suppose that this were so: what questions would we be trying to answer?

1. Roughly what proportion of pre-retirement income should we guarantee people will have after they retire--no matter how well their investments do, no matter how thrifty or feckless they were during their working years? In short, how big--measured as a share of pre-retirement income--should the Social Security system be?

We should guarantee a basic Social Security benefit of roughly half of pre-retirement after-tax income--a replacement rate for the median worker, counting state and local as well as federal taxes, of roughly 30 percent of pre-retirement pre-tax income. Anything less runs a substantial risk of producing a lot of elderly poverty: the feckless and the unlucky will, when they are old, live much worse than is common in the surrounding society. Now as society grows richer this elderly poverty will be a relative phenomenon: people will be much poorer than their neighbors, but few of them will be absolutely poor in the sense of living in boxes or eating catfood. Nevertheless, relative elderly poverty is real elderly poverty, and it is something that a good society should protect against.

2. How progressive should the Social Security system be? Those who make less than the average should probably have a higher replacement rate--receive a higher share of pre-retirement income--than those who make more than the average. But how much more?

The Social Security system should be somewhat but not extremely more progressive than is our current system. I see no case for exempting the top 15% of wage income from the Social Security tax base. I see no case for exempting non-wage income from the Social Security tax base. On the benefits side, we already have substantial progressivity: benefits relative to scaled lifetime taxes paid--the "Primary Insurance Amount"--rise at a rate of 0.9 for roughly the first $600 a month in your Social Security check, at a rate of 0.32 for roughly the next $900 a month, and at a rate of 0.15 thereafter. It would be good if the system were more progressive, covered everyone, and offered a minimum benefit to those whose taxes paid in were zero. But otherwise the system seems in good shape as well as progressivity is concerned.

3. How should this basic Social Security system be financed? Should it be pay-as-you-go, in that each generation of taxpayers pays for the last generation's retirement? Or should it be a funded system, that builds up enormous assets and so owns large chunks of the economy, and uses the returns on those assets to finance large chunks of benefits?

The answer to this question depends on the shape of future economic growth and demographic change. When the economy is growing faster than the interest rate, pay-as-you-go systems are attractive: they offer a low-cost way of moving wealth up the generations from the (richer) future to the (poorer) present, and so raising social welfare. When the economy is growing much more slowly than the interest rate, the burdens placed on workers by a pay-as-you-go system are much harder to justify, and funded systems--those that build up lots of assets to finance part or all of this generation's benefits--become much more attractive. Currently, the Social Security Administration's actuaries have a set of assumptions about economic growth, interest rates, and equity returns that I believe are inappropriate, and make pre-funded systems look artificially good and pay-as-you-go systems look artificially bad. There is definitely a strong case for pre-funding some of the cost of Social Security for the large baby-boom generation. There is not a case for prefunding much else of the basic benefit, and in my view there will not be a strong case for prefunding much of the basic benefit until immigration into the United States begins to decline significantly from its current relatively high levels.

4. What additional steps should the government take to make it easy--or perhaps mandatory--for people to save in their own private accounts, so that they reach retirement with more than their basic Social Security benefit to draw on?

This question is, I think, the most interesting. Americans do not take nearly as much advantage of tax-preferred and other savings vehicles as we economists think that they should. I am one of those who believes that America's national savings rate is dangerously low. The bottom half of America's income distribution has essentially no wealth invested in the stock market, and that cannot be right. It seems to me that these are problems that the government should address them.

How should it address them? The government should address them by making add-on savings out of payroll into individuals' private accounts the default--not mandatory, but the default: you have to fill out a form and check out a box in order not to make your contribution to your private account. The government should sweeten the pot: provide a partial match for funds directed into private accounts. The government should also provide a simple and reasonable default option for investing private accounts: half in a low-fee stock index fund, and half in a low-free bond fund. It should offer little else in the way of investment options: the danger that private account holders will be on the least informed side of trades is great, and the danger that private account holders will degrade their account through fees and transaction costs is great as well.

5. What kind of bureaucracy should govern and administer this system? And how much flexibility should it have--what adjustments should it be able to make on its own without going back to Congress for revised authorizing legislation?

It seems clear that the system needs more flexibility than current law allows. Fertility waxes and wanes, economic growth speeds up and slows down, returns increase and decrease. A pay-as-you-go system thought of as a defined-benefit program will always be sliding into deficit or surging into surplus. Americans' entitlement in retirement to their share of pay-as-you-go Social Security revenues is more equity-like than debt-like. Because there is no residual claimant or debtor (besides the U.S. government), the system should be operated more like a credit union or a mutual association, with payouts that naturally rise and fall with resources. Such a system is, I think, best operated with a Social Security Board of Trustees with a fiduciary duty to maintain the long-run actuarial balance of the system, and the power to alter benefit levels (and, within limits, contribution rates) to achieve that long-run actuarial balance.

As for the add-on system, we already have the bureaucracies to run it. The IRS is a natural place to receive the add-on contributions: a check box on form 1040 to opt in--or, better yet, opt out--to the savings program. And an expanded Thrift Savings Plan to manage the money. If it's a good enough system for members of congress and senior administration officials, it should be good enough for all Americans.

---

Thus the outlines of a potential deal on Social Security--a potential reform--that would be genuinely good for the country are clear:

1. Shift responsibility for maintaining actuarial balance off of the Congress and onto a Social Security Administration that has added discretion.

2. Uncap FICA--increase the Social Security tax base to all wage income and perhaps further--and apply the extra resources to sweeten private add-on accounts, to add a little more progressivity to benefits for the poor, and to serve other purposes (like boosting benefits for widows).

3. Make enrollment in private accounts automatic (it's done automatically on your 1040) but voluntary (you can fill in an extra form to get the money the IRS earmarks for your account back as part of your refund).

4. Use the government's existing Thrift Savings Plan as a vehicle for managing private add-on accounts--and keep its choices restricted: churning and extra administrative costs caused by asset shuffling are not your friend.

Such a plan should satisfy everyone. It would satisfy optimists who believe SSA's projections are much too pessimistic and that no benefit cuts ever are required: if they are right, it would impose no benefit cuts. This would satisfy pessimists who worry that there is no mechanism to finance the existing level of benefits: if they are right, the SSA will have the fiduciary duty and the power to cut benefits. This would satisfy Congress: if there are benefit cuts, their fingerprints aren't anywhere nearby. This would satisfy believers in boosting national savings: the revenues from uncapping FICA and the money flowing into private accounts from people's choosing the default option will boost national savings. This would satisfy those scared that private accounts would be churned and looted by unscrupulous brokers: the TSP is a good operation that provides powerful protections.

What's not to like?

Comments

[Jonathan Goldberg]

Trivia: flubs in these sentences:

It seems to me that these are problems that the government should address them.

half in a low-fee stock index fund, and half in a low-free bond fund.

Thus the outlines of a potential deal on Social Security--a potential reform--that would be genuinely good for the country are thus clear:

Substance:

What's not to like?

You know the answer perfectly well; the libertarian crowd hates the very idea of "government coercion" affecting peoples' saving, and seems willing to see starvation in the streets to prove it. (All the while sublimely sure that *they* will never be the ones doing the dumpster-diving. This certainty is a topic in itself.)

The question is whether to reply on this level. That is, should you be defending the idea of social insurance as well as its implementation?

[a]

Brad writes: Roughly what proportion of pre-retirement income should we guarantee people will have after they retire--no matter how well their investments do, no matter how thrifty or feckless they were during their working years?

What does it have to do with pre-retirement income? If Alice made $50K and Bob $100K how come it is a society's responsibility to pay Bob twice as much in retirement?

[Brian]

This is more or less what I want: something fair and decent as a guarantee and the chance for something greater on top, but no exessive penalty if it doesn't work out. Of course, I'm willing to hear alternative plans, but the overall idea is undoubtedly appealing. And as Brad has said, he's never found a Democrat who opposes private accounts because as add-ons; he's only found those who oppose diverting revenue away from the existing system.

Which brings me to my question. I'm not entirely sure where you stand on this, Brad, and if I could pick your brains for a second, I'd like to. Do you think there's any merit in diverting funds away from the system? At at least one point, I thought you did.

[Allen K.]

"... elderly poverty ... is something that a good society should protect against."
"What's not to like?"

This first statement sounds like the sort that you could get Grover Norquist to go on record opposing, no?

[wml]

1. Could you compare this section to what a "status quo" policy would achieve?

2.
>>>>>>>>>
The Social Security system should be somewhat but not extremely more progressive than is our current system. I see no case for exempting the top 15% of wage income from the Social Security tax base.
>>>>>>>>>>>>>
The bottom half of America's income distribution has essentially no wealth invested in the stock market, and that cannot be right.
>>>>>>>>>>>
The government should sweeten the pot: provide a partial match for funds directed into private accounts. >>>>>>>>>>
The government should also provide a simple and reasonable default option for investing private accounts: half in a low-fee stock index fund, and half in a low-free bond fund.
>>>>>>>>>>>>>>>>>
Because there is no residual claimant or debtor (besides the U.S. government), the system should be operated more like a credit union or a mutual association, with payouts that naturally rise and fall with resources.
<<<<<<<<<<<<<<<<<<
I'm not sure if I understand you. I fear you mean the policy board will yearly-fine tune benefits based on current economic conditions. If so, then I worry about short-term electoral pressures (benefits rise right before an election?) Also part of the whole point of social security is to share risk - have the state absorb all the short-term shocks. Just because someone retires in a bad year should not force that poor individual to recieve a lower benefit; conversely for someone whor retires in a good year. Perhaps if adjustments were made over a 20 year horizon such fine tuning might be acceptable (i.e. a bad year means we lower benefits ever so slightly over the next 20 years.) Perhaps even make the system formulaic (a 1% drop in revenue causes an approximately 0.05% drop in benefits for the next 20 years) to reduce political pressure.

Summary: You still haven't convinced me such a system is better than status-quo with minor adjustments (or no adjustments - not even obvious there is a problem, maybe the trustees are projecting growth rates too low)

[wml]

argh just delete my prior post and this one; came out all wrong

[Kimmitt]

I'm not sure why Social Security should be anything other than mildly progressive; if it becomes such, it changes from a social insurance program into an entitlement, and I'm not certain that's a great idea.

[azurite]

In at least one case, the US S.Ct. stated that the disability benefit (Social Security) is accorded at least some of the same due process requirements as any other property right--suggesting it is an entitlement.

I see no mention of several import features of the current program: (1) survivors' benefits for the deceased wage earner's children, sometimes spouse and/or grandparent; (2) disability benefit (for disabled widows married to deceased wageearner for more than 10 years or at time of WE's death/if widow is between 50 and 60 years and is not remarried, disabled divorced spouse (similar rules, WE need not be disabled, just receiving a SS benefit), for dependents of disabled WE, for disabled adult child (if child not married unless to disabled SSI recipient) if child became disabled prior to 22, WE is deceased, retired or receiving disability benefits. Also: would private account be considered available in event of banktruptcy filing? If so, current month by month benefit is superior as bankruptcy court/creditor cannot take entire fund that benefit is based upon (but I think current "private account" systems, IRAs, SEP-IRAs, etc.. can be considered available to pay debts)--if Prof DeLong's proposal does not take that issue into account all any changed system would do is help people "save" for their creditors under new bankruptcy law if any individual had serious illness, etc.

And you're kidding yourself if you think that Social Security currently prevents people from living in poverty. Quite a few elderly women not only get SS retirement benefit but SSI--because their retirement benefit is so low. In a state that does not "supplement" the federal SSI rate (currently somewhere around $580/month or something like that this year), then someone who is receiving a low retirement benefit plus non-state supplemented SSI is receiving $20/month over whatever the unsupplemented rate is. Say, $600/month this year. That would place that person at well under the "official" federal poverty level. That person would be receiving (until Bush abolishes that too)foodstamps (and anyone whoever's been on foodstamps can tell you that the amount given is never enough to "pay" for a month's supply of food). In addition, the same person (in OR anyway) may very well have to pay a co-pay for her/his meds. That may only amount to $12-20/month--but that's alot when you're trying to live on $600/month and foodstamps. In my opinion, that IS living in poverty. I suggest you get in touch w/SSA and get some current stats on how many elderly people receive SSI as well.

[pgl]

Interesting. But there's one problem. You are a Democrat. We Democrats have no plan. The whole post was a myth. OK - a silly comment but I bet my comment (in jest) will make more sense than the Luskin attack (guaranteed to come).

[Joe Barsugli]

What's to object to?

1. Default=bad idea: The undercurrent of your suggestion is that the government makes it somewhat difficult to "opt out". Filing another form to get back money that was taken from me just perpetuates the idea of needless big government bureaucracy. Even if it is just "checking a box" on the 1040 I still think it adds to the perception that government will do anything to screw the taxpayer. Nobody likes income tax withholding, but at least in that case you owe something. Besides, there is something of a cult around spending the tax refund, so I think most people will opt out anyway. Little benefit, but a moral cost.

2. Subsidizing (matching) moderate-risk, low-fee (presumably tax-deferred, long-term) investment from FICA is an interesting idea, but there are two problems. Many working poor will probably choose to put bread on the table and gas in the car and to pay off credit cards rather than save. The rich will see this as a tax increase for which they get no benefit, either personally or for society. Unless , that is, you can convince them that heavily subsidizing the "ownership society" for the poor is in society's interest :-)

[anne]

A fine carefully crafted essay, but the idea of a board to regulate benefit levels is not to my liking. A reduction in benefits from where we are would severely undermine support for the program. I find no reason to compromise on benefit levels, and wish no independent board for this reason. Our benefit levels should not be decided by administrators who are apart from pressures of elections. Well done.

[richard]

What's not to like, you ask? That my tax rate would go up by about 12 percentage points if FICA is uncapped.

Percentage of personal pre-retirment income does not seem the right test. If the goal is to avoid poverty, then all should have the same guaranteed minimum, perhaps adjusted for regional cost of living differences. Current benefit amounts and formulas seem fine - why change?

>>The bottom half of America's income distribution has essentially no wealth invested in the stock market, and that cannot be right.>>

Why not?

Any serious change in the system will give the anti's a chance to do serious mischief. Minor tinkering (e.g., gradual changes in retirement age) seems a better way to go.

[kharris]

As you have noted more than once, the ability of this (so presumably any future) administration to get the details badly wrong on a routine basis is a huge problem. This administration has also taken the notion of turning legislative intent and public wishes on their head to a new level. To deal with these problems in the context of permanent changes to Social Security, you need to get some inertia behind an appropriate structure for the commission before the idea of a commission moves ahead.

Commissioners need long tenures, and they need to be selected in more than one way - twelve years of the same mugs, as we saw with Reagan/Bush I, could change the complexion of the commission drastically, even if commissioners have long tenures. We can't have commissioners who all owe allegiance to the same political party, or worse, to the same wing of the same political party. Just so we all understand this is not a partisan statement, imagine what commissioners all of whom were appointed by a labor-leaning president might do.

As a matter of simplicity, do we need to link the insurance qualities of Social Security to other forms of preparation for retirement? Is there something to be gained in making this linkage that is worth the risk of opening Social Security up for debate again once we kill off the snake that Bush has unleashed?

[Keith M Ellis]

A quick note to an earlier commenter:

"...and anyone whoever's been on foodstamps can tell you that the amount given is never enough to "pay" for a month's supply of food..."

It's been about nine years since I've been on foodstamps, but slightly before that time, in two different states, I had foodstamps. As a single person. And, at least at that time and place and in my circumstance, the benefit was slightly more than I needed.

I understand that benefits have been cut since then--or has eligibility?

[Bruce Webb]

"What's not to like, you ask? That my tax rate would go up by about 12 percentage points if FICA is uncapped."

I have to say I agree with Richard. The problem with raising the cap is political, it transforms a worker financed system into an entitlement and at the same time declares open war on the successful, particularly if you limit it to wage income. Liberal lawyers and doctors may not have agreed with the Bush tax cuts but that by no means translates into cheerfull willingness to return all of them and much more to bail out a system that in the end benefits them relatively little.

Cap raising may make sense on paper but it is political suicide. The payroll gap is only 1.89% now, and given growth already in the books is going to be revised downward, 74% of promised benefits of a better return than retirees get today is not bad and that number is going to be revised upward.

Defenders of Social Security as currently configured have a strong moral claim: it is all workers money and the wealthy have no right to dictate the terms. Raising the cap just muddies the waters and squanders all of our moral capital.

The rest of Brad's plan makes sense, savings are good. But driving the upper middle class even more strongly into the Republican party than they are today with a cap raise while giving the truly rich a free pass makes no sense at all.

[enfant terrible]

"What's not to like, you ask? That my tax rate would go up by about 12 percentage points if FICA is uncapped."

You earn $1,890,000 per year?

[Robert Bell]

For the add-on investment accounts, most people give the standard CFP type advice of a very limited number of investment choices (e.g. index funds) with some proviso about not churning, staying fully invested etc, and you follow this trend. Rather than have everyone figure this out for themselves, Vanguard and Fidelity offer very low fee "ready to eat" versions of that investment strategy ...

http://flagship2.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0724&FundIntExt=INT

Also there was an article in the WSJ last week about the practical hurdles of implementing private accounts - mostly IT and administrative costs. I.e. effectively the system is creating investment policies/financial plans for 300M individuals. Think of the number of customer service agents, for example. Vanguard does this on a (comparatively smale) though - their fees are in the 30bp or less range. You might want to have at least something to say about the logistical challenges at some point.

[enfant terrible]

Brad:

1. How do you propose to keep the gov't from undoing private savings gains by running even bigger deficits? The ultimate goal must be to increase national savings, right?

2. How would you prevent future Congresses from allowing people to borrow against their account balances? There will be enormous pressure to do so.

3. Regarding progressivity, why doesn't anybody address various ERISA loopholes that have undone much of the progressivity of Social Security. Private pension plans are allowed to have a fairly significant degree of wrap-around benefits, transferring the wealth back from the poor to the rich. Similar can be said about tax laws which make private pension contributions a deduction rather than a credit at a constant rate.

4. Tax refunds are so uneven and hard (for an average person) to predict that your default option would likely result in a rather haphazard allocation of accounts. While there is nothing inherently unfair about it, it would inevitably lead to widespread perception of unfairness after a few years of either unusually good or unusually bad returns.

5. Finally, do we, perhaps, need to rethink the savings and investment paradigm in the post-industrial economy? Isn't the relative importance of human and physical capital changing dramatically? Might not more investment in child care and education, and even in public health, be more important for long-term growth than capital stock? I don't know the answer, but I am afraid this is not being debated seriously enough.

[anne]

http://www.nytimes.com/2005/03/18/opinion/l18lieberman.html

Protecting Social Security

To the Editor:

Paul Krugman ("The $600 Billion Man," column, March 15) claims that when I say that every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities, I am "helping to spread a lie."

Nonsense. Experts we've consulted at the Social Security Administration have confirmed this estimate.

Everyone knows that Social Security is on a path to insolvency. Every year that we wait to make the program solvent will cost us more.

I know that Mr. Krugman opposes the president's carved-out private savings accounts. So do I. But if we stop there, the victims will be tens of millions of seniors who need Social Security to escape poverty.

As a columnist, Mr. Krugman has the right to just say no. As a lawmaker, I have a responsibility to work with other members of Congress in both parties and with the administration to protect this great program.

And as a Democrat, I feel a special responsibility to preserve one of my party's most effective initiatives ever.

Joe Lieberman
U.S. Senator from Connecticut
Washington, March 16, 2005

[anne]

KHarris

As always Brad and you argue cogently and strongly. I do not agree however that any other group than Congress should be able to adjust Social Security benefits. There is a significant majority of people who apparently believe that Social Security is a troubled program. Joe Lieberman claims "everyone knows Social Security is on a path to insolvency." Well, I am to foolish to be everyone. I don not find Social Security on a path to insolvency, nor do you and Brad. We, another sort of everyone, will hold legislators personally responsible for preserving Social Security benits and I believe we are enough to count. Were there an administrative board, benefits would surely be cut for the pressure from the White House would be severe.

[Matt]

What's not to like?

Right now, everyone gets a fairly good deal from Social Security. The system is progressive, but not strongly so. That's a source of its political strength.

If you eliminate the benefit cap--now at roughly $80,000--someone who makes $200,000 a year will pay roughly $15,000 a year in additional taxes, but get no corresponding benefit. (Remember, the employers contribution ultimately falls on labor income, so the total tax rate is about 12.5%.) You will have then created a powerful political class invested in getting rid of Social Security. In that environment, Bush's phase out plan would have gained traction.

[kharris]

Thanks, Anne. It's good to see Joe assert that he isn't spreading a lie by spreading another lie - "Everyone knows that Social Security is on a path to insolvency." Anytime I hear "everybody knows" I start to get uneasy. Knowing that the "low cost" option among Social Security Trustees' forecasts for the Trust does not foresee insolvency and that the low cost option uses assumptions that are closest to historic norms, I get just plain indignant.

Lieberman ran for national office twice, marketing himself as a highly principled public servant. That should have set off alarm bells all by itself. His voting performance on the bankruptcy bill, his rhetoric on Social Security - both very dishonest. Sadly, now that Social Security Administration employees have been warned life will become difficult if they fail to support the party line, Lieberman may well be able to dig up somebody there who actually will agree to the $600 million figure. That doesn't mean it is true.

[Liberal Crhis]

I like your ideas. However, if the SS Board cut benefits, do you have any doubt that some in Congress would raise a stink and try to undo the benefits cuts? Benefit cuts would be so upsetting to so many people, I am skeptical they could successfully be insulated from Congress.

[PW]

I like it too. I wish we could discuss the extent to which Americans can and should be protected from risk.

Anne makes a really good point.

[Dennis]

My biggest problem with your suggestion is that fixing Social Security isn't really worth the time discussing. It is in far better shape than Medicare or the Federal government. Talking about really fixing Social Security justs extends the conversation with those that want to "fix" Social Security by replacing it.

As for your idea of a government match of additional private accounts - that takes money. Until the Federal budget and Medicare are fixed, there isn't any money for such good ideas. I think I would prefer a far simpler system - for every week that you are paid for at least 20 hours or work (or draw a salary of at least 20 times the minimum wage), then you get $10 worth of government bonds put into your personal account. The money would be put in once a year with interest earned from the time that you worked. By doing this, the government recognizes that all work is important to the economy, regardless of how much one is paid for it. However, this idea can't be implemented until the Federal budget and Medicare are put into order.

[enfant terrible]

I am not sure that Lieberman is dishonest. He may really believe in what he is saying and doing. I just don't know which is worse.

[enfant terrible]

Sully:

Our republic is of 18th century origin, implemented in a bloody revolution and modified at more-or-less random times and in more-or-less random ways. Does it make sense to keep any of it, or should we just start from scratch?

[anne]

What I am afraid of is "everyone" coming to believe that a program that has a large and growing surplus for another 15 years, a program that can pay full benefits for another 45 years or more, is moving to insolvency and is hamful generationally. How could we so easily have come to fear for that which most sound? Would I have better begrudged my grandparents and parents their security and well being?

[anne]

The issue is not Social Security or Medicare as such, rather it is the extent to which we wish to lessen a life's insecurities for our parents and for ourselves. Imagine what would not have been were it not for the New Deal. Would we have missed so grand a program as Social Security? There was so much more. Imagine we gave veterans a chance at college educations after World War II, and we becamse a middle class college educated society. College campuses blossomed. Should we be afraid of social benefit programs?

[anne]

http://www.nytimes.com/2005/03/18/business/18thrift.html?pagewanted=all&position=

Retirement, the Federal Way
By LOUIS UCHITELLE and RIVA D. ATLAS

Brenda Barnett, an electronics technician for the Federal Aviation Administration in Oklahoma City, offers one model for how Americans may fare under President Bush's plan for private Social Security accounts.

Her retirement account, part of the pension system for federal employees, has had an average return of just over 6 percent a year since 1997, achieved through a mixed investment in stocks and Treasury securities. "On the whole, I've made money, not a ton of money, but enough," she said.

Jason O'Dell had a much different experience. Mr. O'Dell, 29, went to work for the government in 1999 as a sheet-metal mechanic at Tinker Air Force Base in Oklahoma City. He joined the Thrift Savings Plan for federal employees two years later, put most of his savings in a stock fund, and got caught in the market's steep decline. His account lost nearly 30 percent of its value.

The experiences of Ms. Barnett and Mr. O'Dell, who are among two million civilian employees of the federal government enrolled in the thrift plan, show how giving investors control over their retirement savings can have widely varying results.

"It is all very dynamic, and to take this dynamic thing and translate it into actual average returns is impossible," said Thomas Trabucco, chief spokesman for the Federal Retirement Thrift Investment Board, which administers the accounts. "You have to go case by case." ...

[bakho]

One downside of investment accounts that people don't discuss is the inability to write off bad investments against other gains. If you own a 401K and lose a lot, there is no income tax deduction. If you own stock outside a 401 and it tanks, you get to write off that loss against other income. This makes me wonder are the supposed tax benefits of investing pre-tax and paying taxes on withdrawals as good a deal as it is made to be? The Roth IRA with no tax on withdrawal seems to a better deal if your investments don't tank.

[Nicholas Mycroft]

Economics was once and now ought to be a moral science--keep it up, Brad.

Tangent-

Not content with a piddling and trivial recession call, today Morgan Stanley chief global economist Steve Roach makes an end of empire call:

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

(note this link will only work 'til 3.20.05)

Teaser-

There's far more to this story than economics. As I noted recently, history is replete with examples of leadership tests that pit a nation’s military prowess against its economic base Yale historian Paul Kennedy has long argued that great powers typically fail when military reach outstrips a nation’s economic strength. In that vein, there’s little doubt that America is extending its reach in this post-9/11 world. Wars in Afghanistan and Iraq were the opening salvos. The Bush Administration’s recent nomination of two leading neocons to key global positions -- John Bolton as America’s ambassador to the UN and Paul Wolfowitz to head the World Bank (also announced on March 16) -- are more recent examples of a White House that is upping the ante on its “transformational” projection of global power. In Paul Kennedy’s historical framework, America is extending its reach at precisely the moment when its economic power base is weakening -- a classic warning sign of the fall of a Great Power.

Was March 16, 2005 America’s tipping point?

[anne]

PW and KHarris

We have been and are fragile creatures, but the idea that we might been sheltered to an extent from our fragility was long in coming. Thank you :)

Bakho

I have been thinking of just your point about the nature of tax losses. Clever point.

[Brian]

Pat Sullivan:

I think it's important to think of the design of Social Security in the context of the type of economy we are already in and will go further into as the century progresses. I am pretty sure everyone agrees that people will be a lot less likely to hold one job for many years and that moving around will be more and more frequent. That's one of the reasons supporters of HSAs mention the fact that they are portable: it's a very good feature and will help people who move from job to job. (I'm skeptical of the notion of HSAs as the main form of people getting health care insurance, but even I like the idea of something that is portable.) In that vein, that's a nice feature of Social Security. No matter what sort of job and pension system people have, Social Security will be there.

I'm not the first to make that argument, and I am sure I am not making it as good as other could make it, but I think there's a lot to it.

[anne]

http://www.nytimes.com/2005/03/18/politics/18budget.html?pagewanted=all&position=

In Blow to Bush, Senators Reject Cuts to Medicaid
By SHERYL GAY STOLBERG

WASHINGTON - The House and Senate passed competing versions of a $2.57 trillion budget for 2006 on Thursday night. The two chambers provided tens of billions of dollars to extend President Bush's tax cuts over the next five years, but differed sharply over cuts to Medicaid, the government insurance program for the poor.

The votes, 218 to 214 in the House and 51 to 49 in the Senate, set the two chambers on a collision course. The House budget included steep cuts in Medicaid and other so-called entitlement programs. But in the Senate, President Bush's plans to reduce the explosive growth in Medicaid ran into a roadblock when lawmakers voted 52 to 48 to strip the budget of Medicaid cuts and instead create a one-year commission to recommend changes in the program.

In a surprise move, the Senate also voted to approve a total of $134 billion in tax cuts, $34 billion more than President Bush requested and $64 billion more than the Senate Republican leadership had initially proposed.

In addition to extending the cuts on capital gains taxes and dividend income, the move was intended to repeal an unpopular tax, enacted in 1993, on Social Security benefits for the wealthy....

[anne]

Notice, also, that the will continue to be tax cuts, and we have not gotten to the essential setting aside of the Alternative Minimum Tax.

[anne]

Notice also that there is going to be a continuing and significant difference between interest income taxes and capital gains and dividend income taxes. Bond holders are set at a disadvantage, and we should explore what this means.

[PW]

Meanwhile, All Spin Zone and other blogs have uncovered this bit of chicanery. Maybe the discussion here of Social Security amounts to fiddlin' while we're gettin' burned.

Don't miss it: http://strengtheningsocialsecurity.gov/

Brad: How come your typepad comments don't allow buried links, html?

[AllenM]

So now we come to the corner of the conumdrum- how do we tax the commoners enough to keep the whole system going while the rich skate free? W has been a master at misdirection, but now the end is near and paper assets are themselves being cast into doubt if they bear the Great Seal of the United State...New dollars- for $1,000 Fedreserve notes...

How do we really face the uncontrolled growth of the money supply and keep a straight face that a $600 a month benefit will buy more than some catfood or pay the healthcare costs of getting old. This is ridiculous. We have a ponzi scheme economy that is starting to totter with financial management one month away from collapse.

Brad, the time is now to start talking about the next financial system, as BWII is failing. You know this, and most of the posters here know this, so lets start making something that can work for the next century.

[peBird]

It appears that there is still v. strong sentiment around the "SS is/will be bankrupt" theme (Liberman, etc.). This idea has got to be thoroughly and completely discredited prior to putting any alternatives - regardless of their intelligence - in play.

Here is a great transcript from an on-line chat from Seattle (via Majikthise) where good ol' ordinary folks call in with questions about SS, and some great responses from Professor Doug Orr:

http://www.spokesmanreview.com/chat/transcript.asp?id=61

P.S. Brad, I second the motion to allow for embedded links.

[Maynard Handley]

Brad, I'm going to comment on something others have not, which is the combination of
* you want unearned income to be FICA taxed
* you want only very limited choices (perhaps a bond fund and a stock fund, perhaps even only a single bond/stock fund)
* you want to allow those who (believe they) know better to be able to have the IRS return their money which they will invest elsewhere

The problem is that, with the existing IRA/401k infrastructure this becomes somewhat unfair and starts to smack of industrial policy. Specifically the money from unearned income that the feds would divert into the (US!!!) bond or stock markets, if returned to the individual is not elegible for tax-deferred storing in IRA/401k which can only be fed with earned income. You are thus building in a bias that insists that funds be invested in a particular way. Now, once upon a time, say ten years ago, I would not have objected to that. But given what we have seen in the last ten years, one does not have to be a conspiracy theorist to feel that money in the US bond market is likely to disappear in a puff of inflation, while money in the US stock market is likely to disappear in a puff of CEO salaries and a miasma of accounting chicanery.

I think it would be good for the US to be exposed as aggresively as possible to competition from other financial markets, and that means preventing biases that encourage in-US investing, not strengthening them. After all, isn't competition of this sort what both you and the Republicans support?

[Auros]

A grammar point: "a check box on form 1040 to opt in--or, better yet, opt out--to the savings program"

The parallelism is broken. You need to make it "opt into -- or, better yet, opt out of -- the savings program".

[Auros]

@ Matt, above: The cap is at $90k, not $80k.

[anne]

http://www.nytimes.com/2005/03/18/politics/18budget.html?pagewanted=all&position=

The Senate Medicaid vote is illuminating though not surprising. The bargain for maintaining social benefit programs will almost surely be sustaining tax cuts. There really is no chance tax cuts will not be sustained. There will be a bargain as well over setting aside, year by year if need be, the Alternative Minimum Tax.

[anne]

Given the tax disadvantage of interest income on bonds, it is even more striking the interest rates on long term bonds have stayed so low. Tax brackets have been lowered, yet even tax free bonds do not appear have been effected. The demand for bonds is striking.

[Vache Folle]

I'm not an economist (and I don't even play one on TV), so I may be coming off as a major dunderhead here, but this post and the comments inspire a question. Why not just establish a baseline retirement benefit sufficient to prevent real elderly poverty and fund it out of general revenues like any other welfare program? There would be no need to track individual contributions, etc. Personal savings might be promoted in other ways that do not involve or complicate the retirement income benefit.

[howard]

kharris, you said it all about lieberman's letter. my theory about the man remains that he's an idiot and can't help himself....

as for those who say that the prof's proposal increases their taxes by 12% because the employer's tax isn't really paid by the employer: nonsense. At time zero, the employer will have to find a source for the increased match costs, which may come out of your bonus pool, or out of your next year's raise, or eliminate the possiblity of a new piece of head count. Regardless, it will not come out of your pocket. Going forward, the same things will occur: either your pay will not increase as rapidly as it otherwise would have, or your bonus will be smaller, or someone else won't get hired. The fact that the employer "match" is a myth in an economic sense doesn't directly translate to an increase in your "taxes." You pay the cost in other ways (or someone else does, by not being hired).

The notion that a system developed in the industrial era isn't suitable for our modern era - breathlessly repeated by patrick sullivan, hot off the latest spin points production run - is about as silly a thought as could be imagined, and enfant terrible and brian dismiss it with the disdain it deserves.

Vache Folle, there's a long discussion embedded in your highly sensible (and not at all dunderheadish) question, but the very short aspect of it is: as soon as social security becomes welfare for the elderly indigent, it stops being social security altogether. Personally, i prefer a program that we all participate in....

[anne]

Social Security and Medicare are not in any way welfare programs. They are social insurance programs. We pay for this insurance for our grandparents and parents, and right now ourselves, through our careers.

[Tom]

good piece, as expected. couple of substantive tweaks to consider:

1. if the cap on the payroll tax was removed, and if the value of some fringe benefits (e.g. stock options, cafeteria plans, life insurance, maybe even health insurance above some level) was added to the payroll tax base, you could lower the rate by 2% points or more & still collect the same or a bit more than the current tax.

2. use the 2% FICA reduction as the basis for the opt-out personal accounts you describe - so workers below the current cap would get more savings without seeing any change in their pay check at all. workers above the cap would be facing a 10% marginal rate increase rather than 12% (and would benefit from the 2% reduction on their first $90K in earnings). and the current tax's distortion of different methods of compensation (wages v. benefits) would end.

3. let all of the additional money that will be added to the tax base be counted toward the calculation of people's benefits. don't concede the point that people will pay more & get -nothing- back - but recognize that the -rate of return- on those earnings will be lower, based on the current progressive benefit formula, so the system as a whole should still be strengthened. also recognize that if they really do well in retirement, those added benefits will be subject to income taxes that will also go back into the trust fund.

4. i know you can go overboard w/ "dedicated revenues", but think about reducing or eliminating the tax preference for capital gains & devidends and/or reinstating the estate tax, and dedicating some of those revenues to fund the personal account match. of course those will also be needed to fund fixing or eliminating the AMT, but still, it would serve fairness & long-term economic growth to use some for this as well.

5. when thinking about improvements to the current benefit level, think about the fact that most Medicare premiums are taken out of people's SS checks. that's a huge hidden SS benefit cut, really a cross-subsidy of the Medicare system. when we think about what percentage of pre-retirement income represents an acceptable minimum, we need to account for that as a large & very rapidly growing drain on future retirees' income.

keep up the great work, please!

[anne]

KHarris and Howard

As long as striking points are coming up :) We should also be thinking about the dramatic rise in corporate profit margins as a proportion of GDP. What is driving profits to such an extent when American wages are lagging productivity and price increases? Europe is experiencing the same, though to a lesser extent.

[Keith M Ellis]

I'd like to mention in passing, Anne, that your (what I consider) spamming of long quoted articles is one thing that has put me off from reading DeLong's comments. I'm probably not the only one. There's this thing called a "hyperlink" where you can actually "link" to something you reference, in its original context! Amazing.

[paulo]

If the government provides partial matching funds in private accounts, why shouldn't it just set up investment accounts for everyone? Wouldn't it be unfair to deny such funds to citizens/taxpayers who for whatever reason did not have a private account?

[Jennifer]

Hey, I read the comments and though I rarely post I truly value the additions by all those who bring us ideas. Anne always does precisely this, with others, and there is no cause at all to be impolite. The more ideas the better Anne.

[Keith M Ellis]

Yes, I'm aware that anne has her fans. But I vastly prefer her (less-usual) offerings of her original, intelligent, and informative thoughts than her (more-usual) cut-and-pastes. It's as if we were having a conversation and one of us kept standing up and reading to us long passages that he/she thought important (or merely interesting). It's intrusive and the contribution to the discussion relative to the more usual summarizing or reference is minimal. That is to say, it's self-indulgent.

[anne]

Thomas T. Schweitzer

A stunning comment which helps me understand Gandhi in a more sympathetic way. There are times I am too impatient with Gandhi.

Keith M Ellis

Thank you for both comments. I am however forever quoting others, as you have so well quoted Mr. Sweitzer.

[dogfacegeorge]

Keith,
You're right, anne does have her fans, and her fans look forward to her postings of interesting articles. anne, thank you for doing all this reading and for posting those articles of interest.
I've often thought it would be nice if the name of the poster was listed at the top of the comment rather than the bottom. Then, if there was a long post, we would know who the poster was and decide whether it was worth reading.

[howard]

2 errors in such a brief span, Patrick! First, private accounts will not necessarily always be there - it is possible to invest foolishly, and it's also possible that the entity you buy your annuity from won't continue to exist, and it's also possible that this "personal property" will be seized (at least as far as we know to date) in bankruptcy, and it's also possible (as has been the case with 401Ks the like) that you will be able to borrow against it for a house, or many other eventualities.

So no, private accounts do no have the same status and stability as a us-government provided annuity.

And yes, social security will be there for today's 20-somethings unless bush and the right have their way and begin the process of ending it. That's why this is a non-compromisable struggle on the meta-level.

[anne]

George and Jennifer, thank you for a fine idea :)

A while ago, Microsoft ran an often repeated ad for Encarta. A young boy objected to a Senator who tells him there will always be Social Security, "no there won't." The boy continued, "everyone knows Social Security will soon be gone" or some such phrase. After all, the boy does have Encarta. There was just such an expression in the New York Times this day, from a quote on retirement accounts. Gains that have been made in slowing the move to end Social Security have come from saying over and over "Social Security is fine."

[Richard Hausman]

Keith M Ellis,

"I'd like to mention in passing, Anne, that your (what I consider) spamming of long quoted articles is one thing that has put me off from reading DeLong's comments. I'm probably not the only one. There's this thing called a "hyperlink" where you can actually "link" to something you reference, in its original context!"

The New York Times does not keep its articles available for free for very long so unless you quote the part that you want, future readers will soon not see what you are saying.

Also, I personally do not object to long quotes in blogs, articles or comments. They make it easier to keep one's attention on the current point. If I have had enough of a quote I just page down past it. But I do see how this could be annoying to you and others.

[Robert Waldmann]

I think the case for pre funding is much stronger than you make out. I have two reasons. First, you argue that national saving rate is too low. Other things equal pre funding would help that. Pre funding has made Singapore one of the richest countries in the world.

Now other things are not equal. The strength of this argument for pre-funding depends on how you think pre-fuding would affect the general fund surplus/deficit. I don't agree with Lenin and think "the worse things are the worse things are". I am confident that, Tthe indirect effects of a social security administration surplus on the general fund deficit are less than one for one. Believing in one for one (or more) offset would lead one to imagine that any tax increase is useless because it will just lead to tax cuts elsewhere.

Second, you seem to imagine that n is greater than r "the economy is growing faster than the interest rate". This is certainly not true if "interest rate" is replaced by "return on capital". In that case, capital would be a sink not a source of funds as it clearly is in the USA (as noted by Abel Mankiw Summers and Zeckhauser some time ago). The only way to make the social security administration earn a rate of return less than the growth rate of the wage bill (so prefunding is costly to beneficiaries) is to forse it to invest badly. This is the current approach. Like Ronald Reagan and Bill Clinton, I think the SSA should buy stock and corporate bonds as well as t-bills.

You might argue that this would give the SSA too much power over firms. However, there is no need for the SSA to be allowed to vote its shares. You already want the federal government to direct savings to "half in a low-fee stock index fund, and half in a low-f[r]ee bond fund" so you will have the government deciding which stock gets bought. That means we both have to address the concerns of the renegade Froomkin. I'm off to my blog where I can make links.

[bakho]

The NYT may charge, but the unofficial PK site is always free. Sometimes PK adds notes to his columns.

www.pkarchive.org/

Click on columns.

[Randall]

New York Times articles are often important and written in depth, but the links only last a week. I find have excerpts of Anne's posts of articles exceedingly helpful, and have in a number of instances used Brad's search to call up the articles she posts. The choice is judicious, and there is enough for us to understand the full text. Scroll down when you do not wish to read a post. These conversations with her posts are excellent, and they are preserved for us.

[anne]

Robert Waldmann

The case for pre-funding Social Security is strong. I would prefer to move increasingly to a pre-funded program, maintaining benefits and allowing the Social Security administration to invest in a Total Stock Market Index of non-voting corporate shares as well as in a Total Bond Market Index. We would be able to raise domestic saving and improve returns to the Social Security system.

[Harry Chernoff]

Two overarching questions for Brad:

1. What is your expected stable, long-run Federal spending as a percent of GDP?
2. What is your expected stable, long-run Federal spending on Social Security, Medicare, and Medicaid as a percent of GDP?

[Keith M Ellis]

Okay, I'll try to reconsider based upon the several sincere and well-thought defenses of anne's long quotes. The expiring NYT links are a good point, although it's worth noting that there are ways to generate NYT links that don't expire. All I can say in defense of my complaint is that anyone doing this more than very occasionally has always irked me, probably disproportionately. It's hard to articulate why (and I've thought about it many times and at length) and the best explanation I've ever come up with was my "standing up frequently and quoting stuff in a group discussion" thing. That somehow gets to the heart of it. But, I won't complain about it again, given what appears to be the community consensus favoring it.

[Moe Levine]

Brad suggests:

Uncap FICA--increase the Social Security tax base to all wage income and perhaps further--and apply the extra resources to sweeten private add-on accounts, to add a little more progressivity to benefits for the poor, and to serve other purposes (like boosting benefits for widows).

Brad, you just sent every liberal high income professional packing to the republican party, especially if both spouses work.

[Eleanor Arnason]

Why is it important that the bottom half of the population -- speaking here of income, not worth as human beings -- save money in ways other than paying into SS and buying a home? The return on a house is far higher than the return on other forms of savings here in the Twin Cities metro area. Even if house prices tank, you can still live in the asset, which is more than can be said for stocks and bonds. And what makes anyone think the bottom half can afford to save a significant amount of money after paying for housing, food, clothing and 2+ cars? (Speaking as one who uses mass transit, I can tell you the local bus system is lousy. People need one car per worker in order to work.) I would say the US economy has two serious problems -- ordinary people don't have enough money to invest, and the rich are not investing productively in the US.

[JThomas]

What makes this blog unlike any other I know of is that opinion is mixed so carefully with references. The quotes are especially valuable in giving substance to the post and subsequent conversation. Friends check the Blog and conversations as I do, and use them because the level of conversation is so careful. The quotes are there for everyone to use when we return to a conversation. Anne and Keith, thanks.

[p.lukasiak]

What's not to like....

well, first off, the idea that the funds recovered from "uncapping" should be diverted to funding private accounts, when you really have to plan to ensure that the system remains solvent while paying currently promised benefits.

And if economists think that the reason the bottom 50% don't save enough is that there is a lack of savings incentives, they really need to get their heads out of their asses. They don't save more because they are spending what little they do make -- and if they stopped spending it, demand for goods and services falls.

I mean, I hear complete nonsense from economists talking about how important personal savings is to economic development, but the fact is that we've had ridiculously cheap money for the last four years despite "insufficient" personal savings, and despite the availability of low interest rates economic growth has been anemic at best, and the people in the bottom half have seen a decrease in their standard of living.

So yeah, it would be a nice idea if the bottom 50% saved more --- and if would be an even nicer idea if the economists who are positioned toward the top of the other 50% recognized that isn't gonna happen until the top half isn't holding a grossly disproportionate percentage of assets, and "earning" a grossly disproportionate percentage of income.

In other words, stop trying to get blood from a stone -- and recognize that the problem is inequitable distribution of assets and income --- and the fact that (relatively) well-off economists are far more concerned with maintaining their own economic status than they are with economic and social justice.

[Bruce Webb]

Just a heads up. I was just reading a WaPo article on the Galveston plan, which no doubt we will be hearing about endlessly. And on page two ran into the money quote:
"By then, the Galveston plan was well underway. Under the program, workers contribute 6.13 percent of their pay to private accounts, while the participating counties add 7.8 percent -- making for an overall contribution slightly larger than the 12.4 percent required by Social Security."
http://www.washingtonpost.com/wp-dyn/articles/A48305-2005Mar18.html

Slightly larger? I see a combined rate of 13.93 percent or 1.53 points higher than Social Security. I don't know when that rate went into effect, but even going forward it would erase most of the 1.89 point payroll gap projected under Intermediate Cost in the 2004 report.

Combine this with the admission that the privatized Galveston plan provides better benefits for higher income employees but that low income employees come out ahead on Social Security and I am just seeing another straw man.

If we immediately raised payroll tax by 1.53% and put that in a private account would people get a better benefit than keeping the rate at 12.4%? Almost certainly, unless you did something really stupid like playing the options markets on margin. But the news that a better funded plan has a better result for most but not all participants does not take my breath away.

[anne]

Bruce Webb

What you found is important. The New York Times ran a similar article on the Galvestan public employee retirement plan, with a close phrasing. Notice:

http://www.nytimes.com/2005/03/18/politics/18texas.html?pagewanted=all&position=

"Under the Galveston plan employees put about 6.1 percent of their salaries into their accounts, roughly the same as the 6.2 percent withdrawn from most workers' paychecks for Social Security. In addition, the three county governments then pay about 7.7 percent of employees' salaries, slightly higher than the 6.2 percent deposited in Social Security by most employers."

Obviously the White House is directing reporters to the Galvestan plan and all but dictating the phrasing of stories. I thought to post more of the aritcle yesterday, but hesitated. The plan seems thoroughly unattracted, especially so for workers below median income. The investment returns from the annuities employees were given strike me as far too low.

[anne]

http://www.nytimes.com/2005/03/18/politics/18texas.html?pagewanted=all&position=

On Texas' Coast, a Laboratory for Private Accounts
By SIMON ROMERO

[Notice that the the contribution to retirement in Galvestan is significantly larger than for Scoial Security, and the annuity investment returns to employees surprisingly low for an investment period from 1981 till the present.]

[Jennifer]

Bruce Webb and Anne

There is a perfect example of how the Administration can project a story. Perfect comparison.

[howard]

oh for goodness sake, Patrick: do you even bother to read the trustees report? have you familiarized yourself with the Low Cost model? Exactly what laws of arithmetic are you summoning into this discussion?

Now, it is certainly possible that the benefits today's 20-somethings receive in four and more decades will not quite be what we anticipate them to be today; it is certainly possible that today's 20-somethings may see their payroll tax go up or the income to which it is charged go up or be uncapped altogether; it is certainly possible that the age of first eligiblity for social security will go up; it is certainly even possible that means testing will ultimately find its way into the mix and some of today's 20-somethings will be means-tested out. I do not say that social security will never, ever change, as it has many times over the past 70 years.

But none of that changes the basic point: social security will be there unless bush and the right have their way. Do you have any actual evidence to the contrary? Thus far, you're 0-2 on evidentiary points: the Trustees report most assuredly does not say what you claim, and the laws of arithmetic do not suddenly make social security go away.

[Bill]

Attacking Bush’s points directly:

** The Social Security Trust Fund only holds IOU’s (US Treasuries), so it goes bust in 2018 when it has to redeem them.
== Stop investing new inflows in Treasuries. Invest in a global index fund of stocks and bonds. Gradually begin dumping the current Treasury holdings as well.

** Investment returns are higher elsewhere than Treasuries
== This is not a free lunch, but we’ll try it anyway (see the first point)

** We will only offer a couple of index options so that we won’t have any big losers
== Well, if we’re going to offer only a couple of options, there’s no reason to have over 100 million private accounts. Using Vanguard’s fee structure as a yardstick, the Social Security Trust Fund should be able to achieve returns 15 bps higher than individual accounts (18 vs 3 bps on its individual S&P 500 accounts vs. large institutional funds).

Some Other Points:
++ One role investors play is that of capital allocator, but if we all get the same index choices, then that benefit is gone (good allocators end up rich, bad ones end up poor, and the most recent plan no longer wants anyone to end up poor).
++ Whether as an investment board for the Social Security Trust Fund, or as an investment board that designs the index options for 130 million private accounts, the investment board will have a huge role in allocating capital to business.
++ Should the funds only be invested in American companies or foreign ones too? How about Wal-Mart (who buys so much Chinese manufacturing goods)? Or Coca-Cola, who produces and sells so much overseas, it’s hard to say it’s really American? Personally, I’d invest in a global index and this point is moot.
++ Do not eliminate the $90,000 tax threshold. If we do, we significantly reduce the connection between tax paid and benefit received. Eventually, Social Security will be viewed as welfare and then a future President will try to eliminate “welfare as we know it”.

A Real Solution:
Starting in 2010, each year, whenever the Social Security actuaries project that the Social Security Trust Fund will be empty within 30 years or less, add a month to the full retirement age. If the Trust Fund won’t be empty for 31 to 75 years, leave the age unchanged and if the Trust Fund’s projected life exceeds 75 years, reduce the retirement age by a month.

[Bernard Kelly]

It appears that Singapore has adopted the best social security system.

In brief, every worker contributes 20% of the income from their first day in a job.

However they control their own fund - subject to various investment rules - and they are allowed to use their savings to purchase a family home.

Then, upon retirement, they have sufficent funds to draw on to give them quite close to their final salary for 20 years of retirement.

[Bernard Kelly]

How the concept of minimum Social Security struggles to keep up with reality!

When these comments were written in March 2005, it all seemed an academic exercise.

Now reality has bitten - USA Today, Dec 4, 2006 is now reporting that Americans now need 65% to 85% of pre-retirement income after they stop working to maintain the same standard of living.