Thursday, April 2, 2009

IBD: Entitlement Crash

Investors Business Daily weighs in on the declining Social Security surplus and argues for reform based on personal accounts. I took issue with some of their reasoning in this older post.


WilliamLarsen said...

Private Accounts will Save Social Security
In general private accounts allow a worker to divert some percentage of their Social Security taxes to a private account. In exchange, the individual's Social Security benefit would be reduced by the value of the equivalent annuity of the diverted tax dollars plus interest at the Treasury rate. This is referred to as the "Offset" condition

The Social Security benefit formula would also change. Currently previous year’s wages are indexed by the change in the US Average Wage Growth, but now would be indexed by inflation. In addition the number of work years averaged would increase from 35 to 40. This would reduce current promised benefits by up to 30%.

All private accounts do is repackage the problem. It reduces the problem by legislating nearly a 40% benefit cut on those who retire in the future. They all fall far short of yielding the promised Social Security benefit under current law. 44% of your benefit comes from an 8.6% Social Security tax while 56% of your benefit comes from your diverted 2%. Theoretically diverting four percentage points could reduce your social security benefit to zero.

One must pay particular attention to the terms "payable benefits" and "promised/scheduled benefits." Payable benefits are generally equal to 60% to 70% of promised benefits. It is important to note what reference base is being used when evaluating private accounts. The only way payable benefits can equal promised benefits is for the combined assets of the trust fund and private accounts to total $13 Trillion by years end. The moral is "You cannot get something from nothing."

Andrew, you are correct about the transition costs. In fact, the transition costs are exactly equal to the do nothing plan. It takes as much to fix the program as to do nothing. Doing nothing means workers pay into SS today for promised benefits that cannot be paid for assuming taxes are not raised. This means the total of future cuts equal the total cost today to transition to. If taxes are raised, then we just increased and passed these costs onto a future generation.

As government controls more of the economy, the more the economy will be restrained, the less disposable income families will have constricting the economy more. Instead of millions making independent decisions, we will have a government choosing for us.

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