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July 29, 2008

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Cheney said that during the transition the government would need to borrow trillions of dollars over the next few decades. Nevertheless, there would be no net long-term cost to the government. The trillions that would go into individual workers' accounts would reduce the government's obligation by a corresponding amount when these workers retire.

If younger workers were allowed to have individual accounts in combination with a cut in benefits or increase in the retirement age, that might be a good way to bring Social Security more into balance. It would give younger workers something in exchange for their reduction of future benefits.

If younger workers were allowed to have individual accounts in combination with a cut in benefits or increase in the retirement age, that might be a good way to bring Social Security more into balance.

Social Security is in balance. It's been running a surplus for decades now and projections show it will run a surplus for decades to come. It's the rest of the economy that's out of balance thanks to a borrow-and-spend budget embraced by most of those who are also pushing the Social Security privatization plan, including John McCain.

Social Security is there to ensure that the elderly and disabled aren't banished to poverty like they had been before it became law. Its an insurance program, not an investment program. Given the recent history of the stock market and the economy in general, I'm surprised anyone is still pushing this privatization scheme.

Jinchi, I'm an actuary, although my specialty is far from Social Security and pensions. The traditional measure of SS solvency is that projections of income and outgo show that they have enough assets to pay statuory benefits with no change in the law for 75 years. (This is a weaker standard than applies to ordinary insurance companies. They're required to have enough assets to satisfy all contractual liabilities if all income immediately ceases.)

Until recent years, SS was maintained at the 75 year standard. However, they have not met that standard for some time. So, according to the SS actuaries' traditional measure. SS is insolvent.

I haven't checked recently, but as I recall, the last projection showed SS unable to pay full benefits in about 30 or 40 years.

You are quite right that the rest of the budget is out of balance. In addition to the items you mentioned, Medicare is dreadfully out of balance. These problems add to each other. Going forward, there won't be enough money for the government to do all the things it has committed to do.

A mufti-faceted, bi-partisan plan to modify social Security seems like the only workable approach. There are lots of steps that can be taken.

If social security is going to "run out of money" that needs to be fixed decades in advance (because the amounts are so large). In that regard it is a "crisis".

Incidentally, in the TNR article referenced by Brendan, Jonathan Chait appears not to understand private accounts. He says, "Look, it's pretty simple. If you let younger workers divert some of their Social Security tax dollars into private accounts, then that money is not available to pay for regular Social Security benefits. So for every dollar of private accounts that would be created, another dollar of benefits has to be cut just to stay even. If the only element of your plan is to create private accounts, which is the case with McCain, then your plan worsens Social Security's finances."

In fact, the way private accounts would work is that money a worker puts into her private account reduces the regular SS benefits she will receive by a corresponding amount. So, private accounts are designed to stay even.

Well, it's not really an insurance plan, at least not as its set up. It is more like a mandatory saving plan. But there are some insurance-like characteristics (disability coverage, survivorship benefits, etc.).

It's only needs based to a limited extent.

A mandatory saving plan? Don't be absurd. When you die, all the money you've paid into that "mandatory saving plan" is lost, whether or not you're ever received a nickel of benefits. Some saving program!

Social Security may be a poorly funded insurance program. It may be an insurance program that treats some of its involuntary participants more generously than it treats others. It may be an insurance program that Senator Obama's proposal would to some degree convert to a welfare program. But a saving program it is not and never has been.

Oh, then individual accounts would be a poor idea.

It would undermine the role that social security plays in providing income insurance to those who suffer from extended life.

I'd say Social Security is a kind of pension plan, except that it treats low earners relatively better than high earners, so it has an element of transfer payment.

I wouldn't call it "poorly funded." It's virtually unfunded. The SS Trust Fund has $47 billion, but the unfunded liability is something over $4 trillion. So, SS is 99% unfunded.

My original thought was a pension or an annuity, but I can see that it is a form of insurance - insurance against having no income.

On an aggregate basis it should work like a savings plan - where the contributions should equal the distributions (for the group, not necessarily for the individual).

Rob's right, it's not a savings plan. The mistake is thinking that the money I put in to the program is the money I get out.

This isn't the way most of us think about money we pay to the government in taxes. I've never been mugged, but I don't complain about tax money going to the police department. My house has never been on fire, yet I still pay to support the fire department. The taxes I pay towards the highway fund don't guarantee that I'll have an interstate passing through my town. All of this money is likewise "lost" when I die, if I assume that a direct benefit should come back to me personally.

Most of my insurance money will likewise be wasted, which is how insurance companies make a profit.

Social Security is a government program and it's designed for the common good, not the individual.

Howard Craft - If SS maintained a fund to cover its full accrued obligations, as private pensions do, then it would act as a kind of group savings plan. However, the actual SS fund is relatively tiny, in comparison to its obligations. Money paid in mostly goes to pay benefits to current retirees. (When private companies do this, it's called a Ponzi Scheme, and it's illegal.) In short, SS isn't a savings plan, because there's hardly any savings.

One nice thing about private accounts is that these accounts would be fully funded. So, SS would covert into somewhat more of a savings vehicle.

"Pay as you go" works to a certain degree with social security.

We don't expect that at some point 100% of the population will be retired and that the system will only be making distributions - there isn't a need to build up large reserves.

A company, like GM, on the other hand, could go out of business but their pension commitments would still exist.

I believe that increasing contributions (or reducing payouts) by about 2.1% would keep the system solvent for about 75 years (as opposed to about 40 years currently).

If that 2.1% became about 3.2% then the system should be solvent "forever".

*****

My original point was that we should applaud making the necessary changes to keep the system solvent. The changes needed are manageable but the "gap" will grow over time.

Encouraging personal savings is positive as well. Yes, the two are different, but if we address them both at the same time we may end up with a better funded system that allows for more choice and more overall savings.

As wrong as Bush may have been about personal accounts saving social security all by themselves, McCain (or Obama) may find that adding personal accounts to the mix may yield a workable political solution.

As wrong as Bush may have been about personal accounts saving social security all by themselves...

See this is where we're having a disagreement. Personal accounts in this conversation refers to individuals taking some or all of the money that they would be paying into SS and putting it instead in a private account. That makes the accounting problem much worse. It's not a way to save social security and it's not intended to be. It's not even a part of the solution any more than a shot of whiskey can be a part of a balanced breakfast.

Jinchi, I presume you're aware that what you call "private accounts" would actually be held by the Social Security Administration. The assets in a worker's account would be her property in some legal sense, but she would have no direct access to them. They would be used to pay out part of her retirement income.

This was the definition of "personal accounts" used by the President in 2005, which McCain supported. (They were also referred to as private or individual accounts by all sides during the debate):

Right now, a set portion of the money you earn is taken out of your paycheck to pay for the Social Security benefits of today's retirees. If you're a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future. - George Bush, SOTU 2005

Bush went on to detail all the reasons that these accounts would be better than the current SS system, primarily that "Your money will grow, over time, at a greater rate than anything the current system can deliver". That's a guarantee that simply can't be made under the proposed plan, and we don't have to look back to 1929 to find people whose pensions, investments or nest eggs were wiped out by market factors completely outside of their control. Anyone who directed a portion of their SS contribution into such a plan runs the risk of losing it all, along with a proportional amount of their future SS benefits. As a nation, we'd also run a larger risk to market downturns, since virtually everyone's retirement money would be tied to the market.

Also, since he repeatedly stated that "the money in the account is yours, and the government can never take it away", it cannot be used to shore up other liabilities in the SS system and any solvency problem becomes more immediate.

Personal accounts are meant to replace Social Security, not to save it.

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