Private Accounts: Add-on, Not Carve-Out

Pandagon is unhappy with Richard Cohen:

Pandagon: Splendiferous: Richard Cohen writes one of those delightfully ignorant faux-centrist pieces on Social Security today, even as Bush's support on Social Security divebombs. Cohen's problem isn't the idea that we should raise the payroll cap.... Cohen's problem is that he tries to be 'reasonable' (read: six of one, half a dozen of the other, even if one is flowers and the other is industrial runoff) by saying that there should be a compromise where we go with the whimsically good idea of private accounts coupled with a plan that acutally does anything to help Social Security.

Moreover, I kind of like the idea of personal investment accounts if funding them does not weaken the overall program or add to the nation's incredible debt. After all, there is something to be said for expanding the number of American worker-capitalists and having a nest egg an heir could inherit, or one that would not be eliminated by death. The idea is not all that radical, after all. It's being done in other countries -- Australia, Sweden, Chile, Britain.... A deal can be made on Social Security. If Bush raised the cap, the Democrats could permit some sort of move toward private accounts. Both objectives make sense.

Note Cohen's logic: raising the cap makes sense because it would stay true to the nature of American taxation and Social Security, make the program solvent, and insure it stays more than a simple bare-minimum welfare program that pays for high-earner tax cuts. Private accounts make sense because they exist and because if we can do it in a way that is actually impossible, they would be super sweet.

From my view, Cohen's major problem is that his message gets lost in the verbiage. A call for "personal investment accounts... [that do] not weaken the overall program or add to the nation's incredible debt" is a convoluted and somewhat obscure way of calling for private accounts that are an add-on to, not a carve-out from Social Security.

Private accounts competently implemented would be very nice to have. They aren't essential. There are four essentials of a good Social Security reform:

1. It must raise national savings--hence private accounts need to be an add-on, not a carve-out.
2. It must preserve the valuable defined-benefit nature of the current program.
3. It must restore long-run balance, and put in place mechanisms for automatic adjustment should the system fall further out of balance.
4. It must be competently implemented--which means implemented by a group very different from the deranged monkeys who have brought us the 2004 Corporate Hogs Bill, the 2003 Pharmaceutical Profits Boost Bill, our current deficits, and the claim that Saddam Hussein could strike the U.S. with weapons of mass destruction any day now.

Richard Cohen could be a positive influence if he would recognize these four essentials.

Comments

[KC]

Prof. Delong,

Send Cohen these essentials. It's tough for me to see how he'd ignore you.

[Ron]

Isn't the "defined-benefit nature of the current program" ultimately the biggest problem with Social Security?

Congress defines the benefit, and are elected by the people who get the benefits. Kind of brings to mind a quote I believe was attributed to Marx when he was asked about democratic capitialist systems: something like "It will never work. As soon as people realize they can vote themselves from the treasury, the system will go bankrupt".

[kharris]

The problem with any discussion that starts out sounding good is that it will get worse, but the political logic is that, if once you stood up and said "good idea" you are a low-life obstructionist if you don't vote for the eventual package, no matter how bad. Bush panagerists think his dogged refusal to give up on goals that almost nobody want is admirable, the thing that sets him apart. Others have been willing to move on to other issues or compromise because in the end, it is how you build confidence that you are a good negotiating partner because he doesn't like compromise. Democrats should understand that by now.

The other thing that the GOP seems very eager to do, and that Democrats have had the smarts to sniff out, is that Republicans want to sit down and negotiate this thing because its a stinker. If the GOP walks away from the SS issue, they wasted a whole legislative session on the way to what is shaping up to be a tough midterm election. If they stick to it, in the face of strong public disapproval.... So the only thing to do is get a bunch of Democrats in the room to suffer with them. Bush, meanwhile, "doesn't have a plan" so it isn't his fault. Democrats have to do a good job of staying away from this nonsense, but stay away they must. Otherwise, they'll be giving George an opportunity to pass more bad law, and risk paying the price for a bad bunch of ideas, right along with the pack of Bush enablers.

[kharris]

Wow, that first paragraph didn't come out like I planned.

[Peter Summers]

I'd like to second Brad's point about private accounts being an add-on, rather than a carve-out.

By my reading of the excerpt that Pandagon cites, Cohen makes it sound as if the Australian system is similar to the sort of idea that Bush is floating. Having just returned to the US from 11 years there, I can assure you that's not the case. In the Australian system, "private accounts" are basically defined-contribution pension systems (hardly any defined-benefit systems remain there, at least ones that are open to new entrants). There is also, however, a means-tested, government-provided "aged pension". Maybe not quite an "add-on", but certainly not a "carve-out".

This actually raises another set of issues, which no one has really started to address (with the possible exception of Krugman). It's fine for Bush to say that individual accounts would be restricted in the sort of investment options available. Soon, however, people will a) want more choice (it's their money, after all), and b) need reliable sources of information about such options as they become available.

The Aussie system's been in place for 12 years or so, and they've got things set up pretty well for the most part. But they're just coming to grips with how to manage (a) and (b).

[anne]

Peter Summers

Then there is no Social Security program as such in Australia, if I understand. Please do add more about the Austrailian public retirement plan.

KHarris

What is missing from your opening paragraph, next to last sentence?

[pdq]

Ummm, don't we _already_ have tax-deferred add-on optional retirement savings vehicles? IRA's (of several flavors), keogh/401's, SEP's and so on.

To me, this was always one of the big holes in the rhetoric pushing private retirement accounts as a replacement for Social Security- these kind of accounts already exist in many forms, but have the (not-insignificant) advantage of not causing the end of one of the most successful poverty-reducing programs ever. Would you tell me again why we need yet another retirement account option?

(The other big rhetorical hole, BTW, is the reality disconnect between those who promise 4 or 6 or 9% real returns from such accounts and a real-world equities market which is _down 13%_ (in NON-inflation adjusted dollars, based on the S+P 500) since this administration took office.)

i thought our economy was strong and getting stronger...

[Peter Summers]

KHarris,

You're right in the sense that Australia doesn't have a system like SS here. The gov't pension isn't universal -- I don't recall what the asset threshold is to qualify (it varies by marital status), but I do know that one's primary residence doesn't count towards that.

The "superannuation" system, as it's called, is pay-as-you-earn; current workers fund their own retirements, rather than those of current retirees. There's a mandatory contribution level of 9% (of gross salary, I think) that in many cases is matched to some degree by employers. So in that respect it's much more like a 401(k) or IRA.

There's nothing actually missing from my earlier post, though I obviously didn't explain myself completely. I guess the point I was trying to make was that this is a system that certainly promotes "ownership" and gives people control (and also responsibility!!) for their own retirement. But it doesn't replace the existing safety net (the gov't pension). If you or your fund manager make some rotten decisions (or have rotten luck), you won't starve or have to sell your house to live in retirement.

Now, the Australian system is far from perfect (the bloody taxes are too high, for a start!). But for my money it's a lot more sensible than anything coming out of the White House.

PS -- they've also got a great national health system, but don't get me started on that!

[Barkley Rosser]

Brad,
Send Cohen this whole blog. His email is cohenr@washpost.com. It is getting very frustrating, this idiot-centrist "there is a problem, we must do something about it" mentality that has infected much of the Washington Post and some other "liberal" outlets. All too reminiscent of their willingness to back Bush on the Iraq War before it started, including Cohen.

[anne]

Peter Summers

Sorry to be confuing, and thank you for the broadening response. I referred to you and KHarris in the same comment, but I am not K but Anne :) K wrote a passage I do not fully understand, while I understand you well. Now, are you thoroughly confused?

Time for us to look more closely to Australian public-private pension and health care systems. A kind start, Peter.

[anne]

Good grief, "confusing...." If you are going to spell poorly, at least try to be creative.

[pat]

Kharris says: "Democrats have to do a good job of staying away from this nonsense, but stay away they must. Otherwise, they'll be giving George an opportunity to pass more bad law, and risk paying the price for a bad bunch of ideas, right along with the pack of Bush enablers."

I wholeheartedly agree.

By the way, I really don't understand this admiration for "add-ons". As pdg pointed out above, we already have private accounts, they are called 401k/IRA accounts. Currently, the annual contribution limit for 401k account is $14,000 (even higher if you are above the age of 50). Given that average wage is less than $30,000, how many people really need another private account on top of the 401k? Besides, wouldn't raise the contribution limit on 401k much easier, simpler, with no additional administrative costs? Please don't fall into the trap, don't argue about add-on or carve-out. The Democrats' response should be simple: we are not going to touch SS which is not broken before we fix the geneal budget which is already broken.

[anne]

http://money.guardian.co.uk/pensions/story/0,6453,1325200,00.html

October 12, 2004

Australia may hold key to pensions
Patrick Collinson - Guardian

The publication today of the Adair Turner report on pensions will prompt an orgy of headlines about how millions of Britons face pension misery. Yet one country grasped the nettle of pension reform a decade ago and pension misery is no longer part of the national psyche.

In the 1980s Australia faced the same dilemma as Britain - an ageing population, too few people saving and a state pension withering on the vine. Less than half the population, especially women and minorities, were part of a company pension scheme.

Today 95% of full-time employees in Australia have a company pension, compared with half in Britain. Approaching three-quarters of part-time workers have a pension, compared with less than 15% in the UK. And since the mid-1980s, Australia's nine million workers have seen the value of their pension assets soar from A$30bn (£12.2bn) to nearly A$600bn today.

At the heart of Australia's pension system are compulsory employer contributions, brought in by a Labor government in 1992 and backed by unions, but strongly opposed at the time by small business groups.

In 1992, every business in Australia was ordered to put aside 3% of each employee's salary into a superannuation scheme. The contribution rate was started at a low level then increased to hit its target of 9% in 2002, where it remains today. Employees were encouraged through tax incentives to pay into the schemes, known as "the super".

Employers have to pay the 9% contribution for anybody between 18 and 70 who earns above A$450 a month. The self-employed are outside the scheme but are offered a raft of tax concessions to encourage them to join. On average, workers have chipped in an extra 2-3% of salary, meaning that the typical employee now has 12% of their earnings going into a private pension pot, usually made up of a mix of shares, bonds and property.

The Australian government estimates that by saving 12% a year over a 40-year working life, each Australian will now retire on an income of about 40% of their pre-retirement salary. Somebody earning a typical salary of $50,000 a year will retire on $20,000 a year company pension plus an entitlement to a means-tested state pension....

[anne]

http://www.drs.org.au/new_doctor/75/fact_sheet_6.html

Winter 2001

How Australia's Health Service Compares Internationally
New Doctor

Four indicators are often used to compare health services in different countries. These are: universal coverage; level of satisfaction among the population with the health system; health status and overall cost to the economy. On each of these Australia rates well....

[Peter Summers]

Anne,

First off, sorry for confusing you with KHarris (sorry to you too, KH). I'm rather a neophyte, blog-wise.

Second and more importantly, many thanks for posting the further info about the Australian superannuation system, and the teaser about the health care system (coincidentally called 'Medicare'). Not to open that door too wide, but don't ever let anyone tell you that having a national health care system means giving up freedom to choose your doctor...

ps

[RT]

I'd say it's also essential that Social Security remain a broad-based social-insurance program, rather than be turned into welfare for old people.

[Doctor Biobrain]

PDG's got a point. Why do we need "add-on" accounts, if we already have these other retirement funds? Aren't they add-on accounts?

And what's up with NMG's "serious" question? You click on his link and it looks to be a Social Security scam. And he clearly states in his FAQ what he believes the purpose of Social Security to be, which he says is definitely not insurance. His offer is horrible, so if you're incredibly gulliable you shouldn't click on his link; in fact, you shouldn't click because he's most likely a spammer here. But my only real question was whether he was joking or not. It doesn't look like a joke, but with just the right amount of tweaking, it could be a good one.