Privatizing Social Security – Part II

Thanks for all your thoughtful comments, a sampling of which follows:David Maymudes: ‘I know you probably just said it so you could look like a moderate while criticizing the ‘invest 2% in the stock market’ silliness, but do you really think that raising the IRA/401k limits is a good idea? The 401k change only helps people who earn at least $65,000 and were hitting the old limit. The IRA change only helps people who have an extra $3000 at the end of the year that they weren’t spending before. OK, perhaps it’s better than the rest of the Bush tax cut, but how about something like ‘match IRA contributions dollar for dollar up to $1000,’ which would push some of the benefits to lower-income people and cost about the same amount?’

☞ Good points. Friday, I said that raising the limits made sense, meaning that, yes, it would increase the pool of retirement savings, as intended – whereas the privatization idea would not. What I didn’t address, and should have, was whether raising the limits this way would be worth the cost. Or would it be better to use our resources to provide ‘matching funds’ as you describe, and Vice President Gore proposed . . . or perhaps some combination of the two. Ideally, I’d like to see both. I’m a big believer in saving for tomorrow; and I’d love to see families earning $44,000 a year live as if they were earning $39,000 – it can be done! some people do get by on $39,000 a year! (well, a great many people do, actually) – with the $5,000 difference going into their IRAs. At the same time, it would be great to start lower-income families saving as well by providing all-but-irresistible matching funds. (Who can turn down free money?)

As expensive as it would be to do both, I would surely do both before I cut the top income tax bracket.

But I haven’t costed any of this out, and that wasn’t the focus of Friday’s column.

John Seiffer: ‘I think we got into trouble because social security is called retirement funds and there is some connection between what I put in and what I get out. This naturally leads me to ask whether I’m getting enough out, or whether I could have done better for my retirement with what I put in had it been put somewhere else. Yet this is actually the wrong way to describe social security. Social Security [isn’t an investment fund for our retirement, it is a taxpayer-financed safety net] – it keeps penniless people who can no longer work out of the gutter and keeps them from being a burden to their children or to strangers. This, by the way, is a benefit to EVERY individual. Aside from the moral issue, my life is much better off if I don’t have to step over old people in the gutter when I get in and out of taxis, and if I don’t have to buy a house with an extra room for my aging parents.’

☞ Yes, and yes.

Brooks Hilliard: ‘I have heard that the effective ‘return’ we citizens get on our FICA ‘investment’ is in the range of 2% or 3%. Is that true? Isn’t some sort of equity component of the social security funds a solution to this?’

☞ No. Our FICA money is, for the most part, not invested for our future retirement. As fast as we pay it in, most of it is paid right back out to our parents and grandparents – just as the taxes they paid when they were working were paid out in benefits to their parents (and the taxes your kids will pay when they are working will be paid out to you).

Social Security was never intended as an investment program, nor as being sufficient to provide a comfortable middle-class retirement. It was intended as a bare-bones, bare-minimum safety net – a pact between generations to assure that none would starve, each successive generation taking care of the last – and it has served that purpose, and is likely to continue to.

The first generation paid very little in taxes and got, relatively speaking, huge benefits in return. (For one thing, people started living longer than the original draftsmen of Social Security expected they would. Instead of collecting benefits for three years, they might collect for twenty-three.) That first generation made out like bandits. By now, with so many more retirees to support, the ‘return’ you are likely to get on the taxes you pay in will be much smaller. But neither, as John Seiffer points out above, are you as likely to have your grandmother living in your house with you for the next 20 years.

It’s true that in the past decade or so we’ve begun collecting more than we need to pay out right now, hoping to build a cushion for when the baby boomers are retired, with too few workers to support them all. (When Social Security was launched, there were about 40 workers paying into the system for each retiree receiving benefits. Now it’s more like 3 workers – and headed for 2.)

This surplus is invested in a special form of Treasury bond. I forget the exact formula that determines the rate, but it’s a lot more than 2%, at least before allowing for the effect of inflation.

Chris Ficklin: ‘However much I may disagree with you on most things, I’d have to say that I agree with you on privatizing Social Security. I’m disappointed by the fact that it seems Bush is acting like an impulsive teenager; doing and proposing things that look and sound good without fully thinking them through. I know how much you enjoy people from the ‘other side’ agreeing with you. I’m so ashamed! I’m going to go hide in the corner!’

Marissa Hendrickson: ‘Your column left out what I think is one of the most important points in this debate. People who favor privatization frequently complain that the current structure gives taxpayers an abysmal return on ‘their investments,’ but to say this is to miss the point of the program entirely. Social Security was never conceived as an investment program or a personal savings plan; it is a safety net to minimize poverty among the elderly and disabled, funded by a payroll tax on today’s able-bodied workers. So far we as a nation have been able to agree that widespread poverty among the elderly is unacceptable. Will this belief really change if the stock market fails people and their private accounts don’t provide enough income? My prediction is that if that happens, people will still turn to the government to bail them out. Why can’t people accept that one of the most honorable roles of government is to provide such safety nets? Call me crazy, but I think people (like me) who have the means to save for their own retirements should do so, and be glad they won’t need a government check to stave off poverty and hunger when they can’t work anymore. And call me a socialist, but I think it is pure greed to whine about paying payroll taxes to support those who are less fortunate, when any one of us could be forced to rely on that support if we had chosen a different life or if a different life had chosen us.’

David LeFevre: ‘How does transferring money from the working poor to the wealthy retired serve any useful service?’

☞ This is the case for a ‘means test’ to qualify for Social Security benefits. Many would argue, though, that fundamental to the success and widespread acceptance of the program is that – while it is weighted in favor of the less well off – everyone does get a benefit.

A compromise solution is to fully tax Social Security benefits (as we now, at 85%, largely do), so that those in high brackets ‘give back’ in taxes at least a fair portion of what they receive. One might argue that – above a certain income level – the full 100% and not just 85% should be taxable.

Joel Williams: ‘Social Security is a Ponzi scheme, and has been from the beginning, thanks to a bunch of politicians who wanted to promise high benefits for low cost. You cannot take a Ponzi scheme, convert it into a legitimate investment program and still leave the projected benefits intact without adding a bunch of money to the fund. That is simply the nature of a Ponzi scheme. It is high time that somebody just pointed that out.’

☞ Well, it’s not exactly a Ponzi scheme, because, for one thing, the original schemes did not plan to profit from it personally to any great degree, and because, for another, unless our birthrate were to fall below the replacement rate (and if lifespans wouldn’t keep lengthening in the annoying way that they have), the numbers can work out – even if at some point the retirement age for receiving full benefits may have to be extended in recognition of people’s longer life spans and better health.

Tom Wilder: ‘While I am a strong supporter of the Bush tax cut plan (and can’t wait to “get me a Lexus”), the idea of putting part of the FICA taxes into individual savings plans is unsound for all of the reasons you mentioned Friday. As a practicing member of the insurance industry I can only imagine the field day ‘financial planners’ will have ringing up the commissions on this.’

Coming Soon: What’s Wrong with the Missile Shield