Social Security Accounts

[samclem]

Chuck-lyn,

Nobody has been agitating for change to SS as vociferously, or as long, as the guys at the CATO institute. Their plan (see http://www.socialsecurity.org/pubs/ssps/ssp32.pdf) for overhauling the system hinges on the idea you brought up of ofeering everyone a "buyout" bond (what they call a "recognition bond") that will be worth a certain amount at retirement age-- the bond's value is based on the amount he worker has contributed already to SS. If they take the bond, then they can take their half of the social security "contribution" each month (6.2% of their paycheck up to the ceiling) and invest it in their own account for retirement (the accounts would have some limits--you can't bet the farm on 90 day "put" options for "Styrofoam Lawn Ornaments, Inc"). Their employer's "contribution" (also 6.2%) would go intot he pot to pay for benefits to present retirees.
Nobody is forced into the plan--folks can stay with the present ponzi scheme "defined benefit" approach if they want to--and older folks certainly would.
To help answer some of the common objections, CATO has included several adjustments to the overall approach I described above. There are some significant potential pitfalls to this approach--I haven't studied it enough to say whether I think it makes sense overall or not. But, it is interesting, and goes well beyond the 2% approach mentioned by President Bush.
Something's gotta give, and (IMO) it would be best if the govt got out of the income redistribution biz--whether it is inter-generational or otherwise.

Regards,

samclem

 

[retire@40]

On the surface, I am in favor of putting my money in my own account instead of giving it to the government in the hope that I will live long enough to collect a benefit at least equal to the future value of all my contributions.

However, I still need to be convinced that this will benefit me.  When the CATO plan makes statements like "[Individual Accounts] will provide higher retirement benefits than Social Security" (The 6.2% solution, page 6) it makes me ask how they can make such a guarantee.

Also, under this solution, self-employed individuals would still be paying 6.2% into the system but not getting any accrued benefits from the opt-out point.

And finally, this "solution" states that the investment income portion of the annuity received from the individual account will not be subject to any taxes, resembling Roth IRAs (page 8).  I don't know why the CATO Institute would make the assumption that the government would agree to exempt these individual accounts if social security benefits would still be subject to federal income taxes.

 

[John Galt]

I want you all to remember John Galt's 4th Law
of Economics:

If the government is involved
(at any level) there is a 95% probability the results
achieved will be worse than the condition to be improved.

John Galt

 

[samclem]

Retire@40,
- Regarding the promise of "higher benefits than social security", I don't think it should be read as a "gaurantee" (since CATO isn't in a position to "gaurantee" anything regarding SS--and some doubt the feds can, either). It would probably be more accurate to say that there's never been a case in theUS in the past 200 years when a prudently constructed portfiolio wouldn't have topped the return today's younger contributors will get from SS--even if it pays as called for under the present program (which it is not funded to do).

- Self-employed: Yes, they'd continue to pay into the system to support those who stayed in (and to pay for their own disability coverage). But compared to the present system--their overall SS taxes stay the same (12.4%), but half of this (6.2%) is theirs to keep--it goes into an account with their name on it. If this grows at 5% annually (not unreasonable), they'd still be way ahead of the 2% (at best) "ROI" under SS. Somebody has to pay the costs for the folks now on SS and those who'll take the monthly checks in the future, and while I agree that the self-employed should probably not be required to carry much of the burden, even as written it is a better deal than today's program. If an individual doesn't agree--he can stay in the traditional program (and take his chances). I think a lot of self-employed folks would be more comfortable depending in themselves.

Taxes on the accounts: Maybe. I think individuals would still come out ahead if the benefits were taxed. If you are implying that the riules might be changed and these accounts later become taxeable: It could happen. Millions of folks with Roth IRAs are taking the same chance.

- Of course we all consider the personal impact of any changes in SS. Then, we need to discuss the affordability and fiscal impacts on the country (taxpayers). More profound is the message/impact the changes will mean to the relationship between the government and the individual.

samclem

 

[retire@40]

Regarding the promise of "higher benefits than social security", I don't think it should be read as a "gaurantee" (since CATO isn't in a position to "gaurantee" anything regarding SS--and some doubt the feds can, either).  It would probably be more accurate to say that there's never been a case in theUS in the past 200 years when a prudently constructed portfiolio wouldn't have topped the return

I am not a lawyer, but when someone is going to write a serious article for the CATO Institute to try to convince a shmuck like me and says something WILL happen, then I can only interpret that as a guarantee. I'm sure the smart guy that wrote this article and the editors that approved it have the word "may" in their vocabulary.

As insignificant as this may sound in itself, the reason this one word is important to me is because it shows a bias toward favoring these accounts. Like I said, on the surface I am in favor of individual accounts and I wish the whole social security system had been set up like this from the beginning, but I want to know ALL the pros and cons from an independent source before I can convince myself to change the system.

As a self-employed person, I don't want to pay 6.2% of all my earnings into a black whole and not get credit for those payments. Why would I want to pay in $5,000 a year into the social security system and not get a benefit later? Let me put my full 12.4% into my own account and you'll have me hooked.

As far a your "maybe" concerning the taxability of these accounts that the CATO article says won't be taxable, I need a better answer. I don't want to be sold something under a false premise. I would love the accounts not to be taxable, but I can't see this happening if social security benefits will be taxable.

 

[sgeeeee]

I want you all to remember John Galt's 4th Law
of Economics:

If the government is involved
(at any level) there is a 95% probability the results
achieved will be worse than the condition to be improved.

John Galt

Of course if big business is involved (at any level) there is an even higher probability the results achieved will be worse than the condition to be improved.

I guess the generalization of this specific case is:

Organizations tend to screw things up more than they help.

 

[samclem]

Retire@40,
- The CATO folks put proposals like this one out in the hopes of garnering public/legislator support for the basic premise by showing how it might work. Whatever might become law will certainly be different.

- Yes, they do favor these accounts, that's why they published this article. They aren't claiming to be without bias--this organization is libertarian in its philosophy, favoring individual responsibility and minimal government intrusion on personal liberties/property rights. We should expect them to be opposed to large govt programs (and the present SS system is the granddaddy). In all likelihood, most CATO adherents are against any forced payments into either individual or group accounts, but this proposal is an attempt to make progress (from their perspective) from where we are today.

- The details are important, so I agree we should carefully consider them. More fundamentally, you need to decide if you prefer to be dependent on the government or on yourself in your retireemnt. You've said that you favor the later--I agree with you. Right now you (as a self employed person) are locked in to paying 12.4% into a system that gives you only a promise--a promise that we know cannot me met without some pretty drastic changes. If you are happy with that, this proposal would let you stick with it. If you'd prefer to opt out, then you could do that, too. Seems like a fair deal--everyone can choose what is best for them.

If you favor ownership over collectivization (and you've said you do), then it makes sense to not let the "perfect" plan be the enemy of a "good" plan. The folks who want to provide for themselves by taking from others are large in number and have a lot of political muscle--so any change from the present paradigm will come at a price. Paying that price may still be preferable to sticking with the present system.

samclem