Monday, October 3, 2011

Is Galveston the Fix for Social Security?

I had a letter in the Sept. 30 Wall Street Journal regarding Merrill Matthew's piece claiming that Galveston, Texas shows a model for Social Security reform:

To the editor:

Regarding Merrill Matthews's Cross Country: "Perry Is Right: There Is a Texas Model for Fixing Social Security" (Cross Country, Sept. 24): In the 1980s, Galveston, Texas pulled its employees out of Social Security and set up an alternate plan based on individual accounts. As Mr. Matthews points out, this plan has generated higher returns and benefits than Social Security, seemingly pointing to a solution to Social Security's multi-trillion-dollar shortfalls.

But Mr. Matthews's arguments are ultimately a false promise. Social Security pays a low rate of return because it is a pay-as-you-go system, which transfers income from working individuals to beneficiaries. As a result, participants receive a rate of return equal to the growth of the wage base, rather than the higher returns available in the market.

Any given individual who leaves Social Security could likely do better on his own, but the loss of his taxes makes Social Security's funding problems worse. If a small group pulls out, like Galveston's employees, the system can make up the difference. But if everyone pulled out, Social Security instantly would face a $685 billion annual shortfall. Unless a reform plan addresses these transition costs, it won't produce any long-term gains. There's no free lunch.

Policy makers should not shy away from Social Security reform or personal accounts. But President Bush's failed reforms in 2005 showed that too many in Congress and in the country believed that personal accounts could painlessly fix Social Security's deficits, with support dropping once they realized this wasn't the case. Tax increases or benefit cuts are still needed. Those hoping for Social Security reform, including reforms based on individual savings accounts, should not make the same mistake again.

Andrew G. Biggs

American Enterprise Institute



WilliamLarsen said...

Per FDR SS was to be self financing and fully funded. We, the voters elected representatives who had no knowledge of math or economics. The result is SS became a political football. Sufficient taxes were never applied to payroll; the worker to beneficiary ratio of an immature program clearly mislead the public; politicians stating that increased life span is a problem when SS states it is not; politicians in the past loved combining SS revenues with the general budget forming the Unified Budget to mislead and cover up huge deficits.

The problem is there was no design for social security. A politician presented an idea and people bought it, hook, line and sinker. You can call it pay-as-go,but I call it a ponzi. The only difference is our elected representatives control it.

". But if everyone pulled out, Social Security instantly would face a $685 billion annual shortfall. Unless a reform plan addresses these transition costs, it won't produce any long-term gains. There's no free lunch."

Ah the short of it. $2.6 Trillion in assets and present value liabilities of $26 Trillion +. If everyone pulls out, the program fails. As for transition costs, I think the 1984 legislation takes care of this very nicely.

Social Security by law cannot borrow money. It has statutory authority to spend only those funds received from the dedicated social security tax on wages, tax on benefits and funds in the trust fund. Federal Law prohibits transferring general revenues to any trust fund.[4]

By law the trust fund cannot be drawn down to zero. The trustees must submit a report promptly to congress detailing benefit cuts or tax increases when in any given year the trust fund is projected to fall below 20% of that given years expenses. Social Security's ability to pay future promised benefits is dependent solely on the ability to raise social security taxes.[5]

[4] United States Code Title 42, Chapter7, Subchapter VII, Sec. 911 (a),

[5] United States Code Title 42, Chapter7, Subchapter VII, Sec. 910 (a),

There is no requirement there be a transfer. For the 118 million potential voters under age 46, walking away from SS is a great thing, they would do better.

Then the only ones left would be those age 47 and over, but I think the 47 year old's would see they are the last in line and that walking away from SS would at least allow them to save something from their remaining working years. Then we would move to 48 year old's who would think the same way and leave. This would continue to the only ones left are beneficiaries.

I see a clear transition. SS-OASI benefits would be reduced across the board and benefits would be paid to beneficiaries based on what the trust fund could pay under current law.

In simple terms 42 million beneficiaries would probably feel they got hosed while 160 million workers and future workers yet unborn would feel relief and joy.

Arne said...

There is some truth that some young people would be better off investing the money directly for themselves, but calculating age 47 is just bad math. Moving to a fully funded interest earning program may be better for the overall economy because it would require the economy to be quite a bit larger. Nonetheless, I am now even more adamant about doing nothing about SS right now, because during a time of high unemployment we cannot even consider dealing with the transition cost. It would require the nations savings rate to increase, but right now that would cause the economy to grow more slowly rather than create the growth needed to accomplish the transition.

We need to get out of the hole we are in before we can determine whether to tackle a mole-hill or a mountain next.