by hilzoy
Today's Washington Post reports on a new Republican Social Security proposal:
"After watching the Social Security debate from the sidelines, House Republican leaders yesterday embraced a new approach to Social Security restructuring that would add individual investment accounts to the program, but on a much smaller scale than the Bush administration favors.
The new accounts would be financed by the Social Security surplus -- the amount of payroll tax revenue not needed to pay current benefits. That money is now used to fund other government activities and is expected to run out after 2016 as the baby-boom generation retires.
By contrast, President Bush's proposed accounts would divert payroll taxes used to fund existing Social Security benefits, which would force the government to borrow to prevent cuts in retirees' monthly checks. Once fully phased in, the Bush plan would allow workers to sock away $3,600 a year in today's dollars. Even in its peak year, the new plan could limit average account contributions to as little as $588.
Still, Republicans hope the new proposal will shift the debate away from future benefit cuts, as Bush envisions, to ending what they call the "raid" on the current Social Security surplus. But the plan, unlike Bush's, would do nothing to remedy the New Deal-era program's long-term fiscal problems. (...)
Under the new proposal, those bonds would go to private investment accounts that would be opened for workers unless they chose not to participate.
After a holding period, holdings could be diversified into other options such as stocks, based on a plan to be submitted to Congress by an administrative board that would manage the accounts. The balance of the accounts, plus interest, would eventually be subtracted from a retiree's traditional Social Security benefit. The system, as proposed, would operate only as long as Social Security ran a cash surplus -- or just more than a decade. The accounts would remain, and they could be inherited.
A nearly identical bill will be introduced in the Senate today. Republican strategists said the new plan is a way to pressure Democrats to negotiate, and to portray movement. The idea was embraced as a palatable step by House leaders, most of whom have been jittery about pursuing a restructuring of Social Security as they head into midterm elections that Republicans believe may be the toughest the party has faced in 10 years.
"We just simply take the surplus that's coming into the Social Security trust fund now, and we convert it to Treasury bills for all the American workers," said Rep. E. Clay Shaw Jr. (R-Fla.), senior member of the Ways and Means Committee.
But critics say there is not enough money to make the plan viable. About 130 million Americans who pay into Social Security and are under 55 would be entitled to personal accounts. Excluding interest owed on borrowed Social Security funds, the cash surplus from Social Security taxes this year will leave enough for an average of $434 available for each account.
The Social Security Administration projects that, at its height in 2008, the cash surplus will reach $97 billion, an amount that about 165 million workers would have to share, leaving an average of $588 each. But that cash surplus would decline rapidly to zero after a decade. By 2016, all that would remain is $40 per account."
This is a really dreadful idea. First of all, the private accounts are tiny: money would be paid into them only as long as Social Security runs a surplus; current projections put that at ten years. If, over those ten years, the average account had more than three or four thousand dollars put into it, I'd be very surprised. Second, note this sentence: "The balance of the accounts, plus interest, would eventually be subtracted from a retiree's traditional Social Security benefit." So these private accounts aren't added to your Social Security benefit; the amount you put in, plus interest, is deducted from your benefits. This, in turn, means that you could lose money, although since the accounts are so small, the risks aren't all that great. Third, as the Post article notes, this proposal would do nothing to strengthen Social Security's financing over the long run. In fact, according to the Wall Street Journal, "an analysis from the Social Security Administration's chief actuary shows the DeMint proposal would worsen the system's projected shortfall by 2079."
Fourth, and most important, this program is funded using the current Social Security surplus. Jim DeMint, one of the bill's sponsors, says that the point is to "Stop the Raid on Social Security." But DeMint and his fellow Republicans could stop the raid on the Social Security surplus any time they wanted, by the simple expedient of either cutting spending or raising taxes enough that the federal government did not need to draw on that surplus. Creating new private accounts have nothing to do with that. What this plan means is, rather, that at a time of exploding federal deficits, they are going to add a huge amount to our national debt. To quote the Center for Budget and Policy Priorities:
"The analysis of the plan issued today by the Social Security actuaries shows that by diverting substantial sums from the Social Security trust fund to private accounts, the plan would worsen Social Security’s solvency problems — were it not for the inclusion in the plan of an assumption that large revenue transfers would somehow be made from the rest of the budget. The actuaries’ analysis shows that the plan would drain $1.1 trillion from the Social Security trust fund in the first decade of the proposal.
The plan’s designers have attempted to mask this adverse effect of their plan by assuming hefty transfers from the rest of the budget. The Social Security actuaries estimate that the transfers would have to equal $1 trillion (in today’s dollars) to prevent the plan from hastening the point at which Social Security would become insolvent. But the assumption of these very large general revenue transfers is essentially a budget gimmick. The rest of the budget has no surplus revenue to transfer; it is in deficit as far as the eye can see. The actuaries’ analysis shows that in the absence of these general revenue transfers, the plan would cause Social Security to become insolvent three years sooner than otherwise would be the case, in 2038 rather than in 2041. (...)
(T)he plan would increase the federal budget deficit every year for the next 75 years and beyond. For example, in fiscal year 2007, the deficit would be about $89 billion higher than it otherwise would be. The debt that the federal government owes to outside creditors would increase by $1.1 trillion by 2015."
So: we add 1.1 trillion dollars to the federal debt, in order to give today's workers private accounts that will have only a few thousand dollars in contributions, which we will then deduct, with interest, from their Social Security benefits. What a nifty idea! Recall that the point of it all (see Post article) is "to pressure Democrats to negotiate, and to portray movement." I trust my party will resist the temptation to negotiate, although the temptation to burst out laughing might be a bit more difficult. And as for "portraying movement", I guess it does do that. But the trick, I always thought, was not just to move somehow or other -- flailing, squirming, writhing, wriggling -- but to move purposively towards a worthwhile goal. And I don't quite see how this new proposal "portrays" that.
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