Recent Social Security Proposal

[lehighguy]

Recently a bipartisan group introduced a new social security reform. It is essenially the same as the "lockbox" program Al Gore desribed in his 2000 campaign. Here are the take-aways:

1) Benefits are not cut, the retirement age is not raised.
2) There are no private accounts involved at all.
3) The SS trust fund would remain invested in tresuary bonds, no stock market.
4) The real change is that instead of using the SS trust fund to finance current spending, it would be used to purchase treasury bonds on the open-market. These treasury bonds would have real value, as opposed to the "special" treasury bonds that are currently issued and have no value. Essentially, the trust fund would be a real trust fund (sort-of).

To explain the above statement, I need to give a brief review in SS accounting. Essentially, the government takes in $X in SS tax revenue and pays out $Y in benefits. For the moment X > Y.

Now how does this effect the budget? We run a deficiet of $400Bln according to the treasury department. In reality, we run a deficiet of $600Bln, but use the extra $200Bln ($X-$Y) to bring down the debt. However, this is a false accounting entry. That $200Bln was supposed to go into the SS trust fund. We have to pay it of in 2017 when people retire. Why are we reporting a deficiet of $400Bln when the real deficiet is $600Bln? Because politicians want to mask the true cost of SS for political gain.

If spending isn't reduced the plan will do nothing for solvency. We would need to adopt the change and then reduce spending to the old deficiet level. In other words, all the plan really does is show the American people the true cost of SS. I have no doubt they will have no clue wether $400Bln versus $600Bln means anything, nor do I think it will change thier spending habits. But at least we will have been honest with them about what is going on. After all of the corporate scandals of the last few years its amazing that we allow the government to blantently cook the books right in front of our eyes.

So why am I all wrapped up over this. Because I was reading the paper today and there was a full page add from the AARP regarding the plan. It used the words PRIVATE is giant bold 100 size font to explain why people should oppose it. It criticized it for increasing the debt and not solving solvency. This is puzzling. First of all, no private accounts are in the proposal AT ALL. Second, it doesn't really increase the debt. The debt is already $600Bln, we just lie about it and say its $400Bln. Lying doesn't reduce the debt, and being honest about it doesn't increase it. It's also amazing the AARP can afford to take out full page adds in national newspapers considering the plan has NO effect on current or future retirees. All it really proposes is more honest accounting practices.

Dems also dissapoint me. This is Al Gore's plan from 2000. Why are they opposing it? Do Dems even think about issues anymore or do they inflexively oppose everything?

[[censored]]

The AARP is only concerned with the redistribution of income to the current elderly population. This isn't even a bad thing. However I would not look to them for solutions for SS.

I'm not sure why you would ever believe the Democratic party as a whole would want to solve the Social Security crisis, it is a huge issue of them in every election. You need only to look at their refusal even acknowledge the full extent of the looming problem to see that.

good post

[Matty]

[ QUOTE ]
Why are we reporting a deficiet of $400Bln when the real deficiet is $600Bln? Because politicians want to mask the true cost of SS for political gain.

[/ QUOTE ]This is where your post goes horribly wrong. Provide some evidence for this claim. What gain is to be made?

The overwhelming disapproval cutting SS benefits would bring far outweighs the public's attention to the exact numbers in our budget deficit.

[lehighguy]

What evidence? It's a fact. Read the US budget if you don't believe me. Try the CBO or White House websites. SS surpluses are recorded as a debit, but no approriate credit it made to reflect the fact that obligations are being made to the SS trust fund.

Debits without credits.

[Matty]

This part:

[ QUOTE ]
Because politicians want to mask the true cost of SS for political gain.

[/ QUOTE ]

I didn't do more than skim past that point. What gain is to be made?

Also would you mind linking to something that better explains this proposal, and also AARP's ad?

[lehighguy]

Kinduv like how the president bush said his perscription drug benefit would cost $X and it actually costs alot more. It is easier to sell something if you tell them they will get certain benefits for very little money. That's basic political theory.

[Matty]

Social security doesn't need to be sold. It is here to stay.

[lehighguy]

Until its bankrupt.

Moreover, you posts illustrate the current Dem/AARP attitude on everything. Oppose it. It doesn't matter what it is. It doesn't even matter if its your own proposal form four years ago. Just oppose it. Change is always bad.

[LaggyLou]

[ QUOTE ]
4) The real change is that instead of using the SS trust fund to finance current spending, it would be used to purchase treasury bonds on the open-market. These treasury bonds would have real value, as opposed to the "special" treasury bonds that are currently issued and have no value. Essentially, the trust fund would be a real trust fund (sort-of).

[/ QUOTE ]

Anyone who can make this statement clearly has NO idea what he is talking about.

[lehighguy]

How do you think the SS trust fund works.

[natedogg]

This is a terrible proposal, worse than doing nothing because it may give the illusion of being a "reform".

There's no difference to the solvency if the trust fund is held in open-market T-Bills or if it is held in special issue bonds. Either way, the trust fund is nothing more than a future promise to supplement the SSA with general revenues.

Only a politician could come up with such a stupid proposal.

natedogg

[BadBoyBenny]

[ QUOTE ]
[ QUOTE ]



Because politicians want to mask the true cost of SS for political gain.


[/ QUOTE ]


I didn't do more than skim past that point. What gain is to be made?


[/ QUOTE ]

There is political gain in making the deficit appear smaller, or making a surplus appear larger, or making a deficit look like a surplus. The gain doesn't revolve around social security but around the perception of fiscal responsibility and a stronger economy.

[slamdunkpro]

[ QUOTE ]
How do you think the SS trust fund works.

[/ QUOTE ]

Like this - THERE IS NO SS TRUST FUND. Every year the SS tax money is put in the Federal Government general operating fund.

This is why Gore's "lock box" was so laughable. There is no money. The congress has spent every last penny of it. There's just a big box with a bunch of I.O.U.'s in it.

[lehighguy]

Did you read my whole post. I think your just confused. You'll find I agree with you.

[lehighguy]

It doesn't do anything. It's just slightly more honest with the American public about what's going on.

That's why I found opposistion to it, especially opposistion that spread lies an misinformation about it, so hilarious.

[LaggyLou]

Compare and contrast:

[ QUOTE ]
It doesn't do anything. It's just slightly more honest with the American public about what's going on.

[/ QUOTE ]

Which is, as natedogg pointed out, what is actually going on,

with:

[ QUOTE ]
The real change is that instead of using the SS trust fund to finance current spending, it would be used to purchase treasury bonds on the open-market. These treasury bonds would have real value, as opposed to the "special" treasury bonds that are currently issued and have no value. Essentially, the trust fund would be a real trust fund (sort-of).

[/ QUOTE ]

[lehighguy]

I put sort-of at the end because you have to read the much longer explanation after it. If congress cut spending by $200Bln today then we would have less debt in the future and be in a better posistion to pay of SS obligations.

The hope is that the larger budget deficiet figures would make people ask congress to spend less. This will never happen of course, but at least 20 years from now people won't be able to use ignorance as a defense.

[Zeno]

I am disappointed, but not surprised. I was honestly hoping something positive or intelligent could be squeezed out of the Yahoos in Congress. But alas, no.

Perhaps a push could come later on. At least groundwork was established to get people thinking and talking about this issue. I suppose that is something. The Republicans wilted - and the Democrats should be hung for being the vicious lying and conniving buffoons that we already knew they were. This just confirms it all the more.

-Zeno

[adios]

Here's an editorial from the WSJ that explains the proposal you're referring too:


A Surplus Idea
June 23, 2005; Page A12

The conventional Beltway wisdom says Social Security reform is dead, thanks to near-unanimous Democratic opposition. Well, not so fast. Republican reformers are introducing a new plan to invest Social Security surplus funds into personal accounts that has the potential to shake up the debate.

Wisconsin Congressman Paul Ryan and South Carolina Senator Jim DeMint are calling for legislation to bring an immediate halt to the ongoing political raid on the surplus payroll taxes collected by Social Security. Congress now spends that cash on current programs -- from cotton subsidies, to defense, to the Dr. Seuss Museum. Every day that Congress fails to act, another $200 million is spent rather than being saved for future retirement. Daniel Patrick Moynihan once called this "thievery," and if corporate America were engaged in this type of accounting fraud Eliot Spitzer would be hauling CEOs to jail.

Instead of spending this retirement money, the reformers would allow individual workers to divert every surplus Social Security dollar -- from now until the extra cash runs out in 2016 -- into personal retirement accounts. For the record, we endorsed this idea some months ago, so we're glad to see it gaining steam. Here's how it would work:

For the past 20 or so years, the federal government has collected $1.67 trillion more in payroll taxes (and accumulated interest) than it has paid out in retirement benefits to senior citizens. But not a penny of this money has been saved for any worker's retirement. The surplus dollars get spent by Congress, and the Social Security system is credited with an IOU from the right hand of the government, the Treasury Department.
[People Power]

This is the point President Bush made earlier this year when he went to West Virginia, opened up the Social Security "vault" as it were, and pulled out stacks of these government IOUs. These are essentially a debt the government owes to itself, and where the money will come from to pay these debts is anyone's guess -- though if history is any guide it will be higher taxes. Wherever the money comes from, it can't be from the Social Security "trust fund" because those dollars have already been spent.

DeMint-Ryan would allow workers to create individual personal retirement accounts and place marketable government bonds worth their portion of the Social Security surplus into these accounts. Think of this as creating 140 million "lock box" accounts for every American worker. After three years, workers could trade these Treasury bonds and invest instead in higher-return mutual funds containing a combination of corporate stocks and bonds.

We're talking big dollars for most families. The federal government will continue to run surpluses of about $1.2 trillion through 2016 on a cash basis, and some $3 trillion through 2026 if interest on that cash is also counted. The nearby table shows the scale of the annual surplus cash payments, and how much larger they'd be if interest on them were included. The DeMint-Ryan proposal doesn't currently include interest, though we think it would be improved by doing so.

Workers deserve this interest since it is being paid on money that they earned. And if interest were included, workers would get payments into their accounts for 20 years instead of 10. A worker with a $40,000 salary would get an average of 3% of his paycheck deposited in a personal account, or roughly $1,200 a year. A 25-year-old making a median wage, and earning 4% interest, would have an account worth nearly $100,000 by age 67.

The virtues of this proposal are both economic and political. By investing the surplus, rather than letting Congress spend it, the money would be put to better economic use and add to net national saving. The latter ought to please the deficit scolds in particular.

Another benefit is that Congress wouldn't be able to keep using the Social Security surplus to disguise its other spending habits. This means more honest federal budgeting, and we hope more pressure for spending discipline. Members can check out a list released this week by the Free Enterprise Fund of $80 billion in corporate welfare and pork barrel projects that could be extinguished to make up the difference.

As for the politics, this calls the bluff of Democrats who claim to be the sole protectors of the Social Security trust fund but have done nothing to stop depleting it. Do they want to protect it or not? And by investing only surplus payroll taxes into private accounts, the proposal blunts the (specious but politically potent) attacks from AARP and the left that personal accounts will endanger the program's solvency. The DeMint-Ryan plan enhances solvency by preventing raids on the trust fund, which is a practice that has long infuriated senior citizens.

The other political benefit is that this idea positions reformers for a longer run debate if the Social Security effort fails during this Congress. In order to succeed, reform was always going to require bipartisan cooperation, and at least five Senate Democratic votes. Yet Democratic leaders have made opposition to reform a party obligation and not one has budged.

Republicans are under no obligation to commit suicide by voting for benefit cuts in the House and Senate if reform has no chance of succeeding. The invest-the-surplus idea gives Democrats one more chance to join the reform party, while putting reformers in a stronger position going into 2006 if Democrats refuse.

As a thought experiment, say Congrees passed a law that distributed the non marketable securities into individual accounts. Would anyone like to trade my non marketable securities for their marketable ones in equal $ amounts? I highly doubt a rational person would do such a thing but if marketable and non marketable securities are essentially the same why wouldn't one be willing to do so? Simple they're far from being the same.