Friday, August 28, 2015

Republicans Mum on Social Security Privatization?

Sahil Kapur of Bloomberg writes that Republicans have

been mysteriously silent about one issue that many conservatives support: privatization. Instead of calling for private accounts that give seniors the ability to invest their Social Security benefits, with all the potential for reward and risk that implies, many of this year's Republican candidates are calling for maintaining the structure of the popular federally-managed retirement program. Their plans for saving money: Making benefits less generous.

Read Kapur’s whole article here.


WilliamLarsen said...

Private Accounts are they a sum zero change?

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 "could" also change. Currently previous year’s wages are indexed by the change in the US Average Wage Growth, but now "could" be indexed by inflation. In addition the number of work years averaged "could" 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."

Both sides of the equation must be balanced; Revenues = Liabilities. If revenues cannot be increased (tax increase), then liabilities must be reduced (taxes on benefits, increase in retirement age, change in benefit formula).

I myself am not a fan of privatizing OASI while attempting to maintain benefits for all current and near beneficiaries.

WilliamLarsen said...

"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."

This was true in 2003. Today the amount is close to $35 Trillion if not more if the US Treasury Rate does not return to 5% in a few years and only if US average age growth is less than 3% a year compounded.