Thursday, January 27, 2005

The problem with Social Security

In a nutshell - there is no problem with it for the most part - the demographic trends that are being used by the Bush administration to push their goal of privatization are, in effect, a series of worst-case scenarios that assume several things continue or worsen for the next 40+ years:

- The population will continue to skew older
- Life expectancies will climb rapidly
- There are no other population bulges coming down the pike
- Baby boomers will live a long, long time.

I suspect most of those tendencies will not be as bad as assumed by the SSA, but it's their job to assume the worst. That's what actuaries do.

See, here's the reality behind it, and why some folks (mainly the ones who think FDR was a pinko) want desperately to see the existing Social Security system blown up: Social Security was designed to provide a modest guaranteed income to retirees and the disabled, and is mainly funded by the ongoing revenues paid into it. That money is then used to buy government bonds, in turn providing a small, guaranteed rate of return. Back in the 1980s, SSA actuaries saw the baby boomers coming of age, and realized that they would be retiring eventually and would be making huge demands on the system - demands that could not be met as things stood.

So congress and Reagan actually agreed on something: they raised the Social Security tax. By doing this, they began building up a cushion (the "trust fund") that would build and eventually be drawn down as the boomers retired. As things stand right now, that cushion will stop growing in about 15 years, and depending on whether you believe the SSA or the CBO, sometime between 2045 and 2052 the reserve will be exhausted, so to keep things as they are either benefits would have to be cut or the payroll tax that funds Social Security would have to be increased.

Part of the catch here is that the SSA buys Treasury bonds, which basically fund our deficit spending. As they come due, it effectively increases the total debt, but moves it into a different ledger. The Bush administration would love to write that off, and make the deficits look smaller as a result. So they'd like to "privatize" Social Security - having participants assign a certain amount of their money to play the market. Their ultimate goal is to eliminate Social Security entirely, and shift all the money into private accounts. The problem here is that taking that money out of the pool to go to stocks does a couple of things. First, it reduces the pool - and that actually moves up the date of reckoning. Second, it adds an extra dose of risk to the retirement process - that sum that Grandma is counting on? It may not be there for her. Stocks are inherently risky, though they do have a good history. Of course, stocks are much more expensive as a multiple of earnings than they once were, and our economy is in peril of losing it's place as the "standard" of the world economic system, but why spoil the party?

Choice is good, but that's why we have other retirement vehicles available to us as individuals. All privatizing Social Security does is increase the risk associated with that basic pension, and gives a bunch of money to the people on Wall Street who are safe Republican votes anyway (do you thing that they'll handle your Social Security account for free, out of the goodness of their little hearts?) Wrong.

Now are there things we can do to increase the rate of return on Social Security? Absolutely. With minimal risk, we could allow the SSA to invest in vehicles other than Treasuries (but very low-risk), or we could raise the exemption (right now, I believe the line is around $95,000 - any income over that does not get taxes for Social Security purposes), or we could means-test the recipients (perhaps if you make over, say, $200k per year you get a reduced benefit). Or some combination of all those. The important point is that Social Security is not so broken that the fix is difficult. But George Bush would like you to think otherwise.

Remember, Social Security was not designed to be yet another investment vehicle for you, the eventual retiree. It was designed to be a simple, "pay as you go" system that would ultimately pay you a modest stipend upon retirement in exchange for your paying for the retirees before you. It's worked fairly well for two full generations, and with minor tweaking will work for many more to come.

If I were designing my own retirement system, would I set up the SSA? No - it's not bad, but it could be better. And as structured, the SSA payroll tax is pretty regressive. But it's worked well so far, despite the flaws. As for privatization? Look up what's happened in Chile and in Britain - two countries that have tried privatization to any degree. And then tell me you still favor it.

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