I’m neither a demographer nor an actuary, and neither (odds are) are you. I have done a fair amount of time-based financial analysis, and discovered early in my career what I call The Miracle Of Compound Interest – the simple fact that projecting growth forward more than a decade is a fool’s game, because in reality what you’re testing are certain key starting assumptions and the relative growth rate of the components of the model.
I got to be pretty good at modeling, and once claimed that, given time and a large enough spreadsheet, I could make a model stand up and sing “The Star Spangled Banner” if I so chose.
So, personally, I’m wary of claims that Social Security will (or won’t) have a deficit of exactly $4,325,368,753.221.75 in 2055. You should be too.
But that doesn’t mean we can’t and shouldn’t look at trends.
There are a few key ones.
Demographically, we’re going to have a problem – not as bad as Europe and Asia – as the retiree/ worker ratios change due to declining birthrates and increased longevity. In our case, immigration – and more important, participation of immigrants in the labor force – will mask a lot of that.
We have a couple of financial issues as well. The trend of wages is slightly down, in real dollars – but my benefits will be pegged to my higher wages, while the numerically fewer new workers who will pay for me will probably have lower wages as well.
There’s also a basic ‘values’ type issue around Social Security. It was sold as ‘social insurance’ – in essence, a welfare plan. Many of us somehow had the impression that we were getting our own money back – that it was a pension plan – but we aren’t, and as far as my cursory reading can find, no one in Social Security ever did. It has always been a welfare program. It looks like a pension plan, and we act like it’s a pension plan, but it’s not.
We middle-class folks have a horrible savings deficit in this country, as we live increasingly on credit (ask me how I know…) and our net worth is increasingly concentrated in our homes.
It’s likely that some adjustments will need to be made in Social Security to pay for my late retirement and for the retirement of the cohorts after me.
Bush has a plan to do two things: convert it into a pension plan, away from a welfare plan, and to try and raise the rate of return (one of the magic growth rates) by allowing some investment in the stock markets.
I’m agin’ it.
But probably not for the reasons you’d assume…
First, I think there is a real issue with Social Security as a welfare program and not a pension program. The benefits are not means-tested – which would make sense if it was my own money that I will get back, but since it’s not, is a tribute to the lobbying power of AARP. The fact that it’s welfare does expose each cohort to demographic risk, which they could be insulated from if it were a true pension plan.
As a welfare program, it’s also somewhat regressive in that only incomes up to approximately $80,000 are taxed.
So there is some logic on transitioning Social Security toward becoming a national pension plan and away from becoming a pure welfare program – as it is constituted today.
But Bush’s plan has some obvious problems.
I’ll skip the macro market effects of pumping a few billion or so a year into the markets, and the obvious windfall this would represent to Wall Street. (we’ll come back to that, though)
The real problem is that he won’t politically be able to get away from the welfare aspects of the program.
Concern about market volatility has prompted some analysts and policy makers to explore the possibility of “guarantees” of pension accumulations. In many cases, the desire for a “guarantee” is premised on the mistaken notion that the current Social Security system provides a guaranteed benefit. This is untrue. While the defined benefit formula does not subject individuals to financial market uncertainty, the formula itself can be changed and has been changed in the US numerous times in the past. This political risk to benefits is all the more real because the Social Security system faces perpetual financing deficits starting in the middle of the next decade, such that currently scheduled benefits cannot be paid.
A different form of guarantee might promise participants they will receive their contributions plus some minimum rate of return. For example, the design might promise participants that they will receive their contributions plus a return on government bonds (e.g., the returns on a 10-year Treasury bond index fund).
Final Report, pp 143-144
So I’ll bet – since politically it’s damn unlikely that we’ll vote to starve the seniors who lose their pension nest eggs – we’re going to wind up with something that looks a lot like what we have now, shifts the nominal accounting over to a pension plan and away from a welfare program, and then layers on some form of a welfare program. The worst of both worlds – continued budget impacts of the welfare model, financial market losses, and overhead from fund management.
But there is some logic in shifting toward a pension plan.
There’s even more logic in rationalizing the welfare aspects of the current plan first.
Should Social Security benefits be means-tested? Absolutely. That’s not your money you’re getting back, it your kid’s money. Actually, as this paper (a PDF by actual actuaries) suggests, taxing Social Security benefits of higher-income retirees more aggressively makes a lot of sense.
Should Social Security wages stop at $80,000? Why? Income taxes don’t stop there. Why cap them at all? Why not lift the cap, and lower the rate for everyone.
I’m guessing that with those two changes (obviously, the numbers depend on the exact percentages) the program could retain solvency and maintain it’s existence as a welfare program.
But that doesn’t do two things, which are valuable in the Bush proposal.
First, we need to up the rate of savings in the society.
My conservative friends will choke, but why not layer on a Federal pension plan to the existing social security plan (particularly since I’d bet that when Congress is done, that’s what we’ll wind with anyway?)
Yeah, yeah, I know, it’s your money. But it’ll still be your money to invest and pull out when you retire – it’s not like they’re giving it to crack babies or buying arms with it or whatever your personal nightmare of government misspending may be. And sadly, looking at the statistics, none of us are doing our part in saving and capital formation.
Am I like Solomon or what?
Welfare and pensions; we can have them both – but why not make them explicit so that we can all understand them? Why come up with a blended program that makes it too complex for the average person to understand what’s being done?