Privatizing Social Security The Bush Mistake

[JoeTheEconomist]

GenXers and Millennials won't pay the cost of the system under the current plan?

If I understood the OP correctly, I think he is suggesting that what would have happened is that the Boomers would have enjoyed a reduction in SS contributions leading up to retirement, along with an increase or at least maintaining of generous benefits upon retirement, based on a short term artificially inflated SS trust. In the long term, we GenX folks and the Millenials behind us would have ended up faced with a more dire reality check, demanding an increase in SS taxes we pay, and reductions to benefits and pushing back of retirement age such that the substantially negative effects would fall on us and pass the Boomers by.

I've heard this before about Bush's plan, but have never had the details laid out to evaluate for my own self.

I drop in on these boards to get feedback.

My goal in writing is to create articles which give the average person the ability to consider the details. If the article doesn't come through, let me know.

 

[Toddsterpatriot]

In the long term, we GenX folks and the Millenials behind us would have ended up faced with a more dire reality check, demanding an increase in SS taxes we pay

My understanding was we'd pay the same SS taxes, just divided between "Trust Fund" and private account.

This is a common misperception because the Bush press team did not explain the transition costs well. Today, any dollar of revenue shortfall results in lower benefits. Under Bush's plan, any revenue shortfall is made up by higher taxes.

What you heard was that there are no higher taxes. We will pay for the Social Security changes with reductions of 'government waste'. Ultimately, government waste needs to be eliminated, but those savings go to lowering the deficit not to Social Security. Cutting someone else's government service isn't paying for Social Security. It is essentially a tax increase on that someone else.

and reductions to benefits and pushing back of retirement age

Reduction in SS benefits paid, theoretically covered by an even larger increase paid from the private account.

You have to be careful here because there is no single Bush plan. There must have been 3 or 4 different versions. My article looks at the pure play privatization plan. In a pure play privatization plan, the cost is $10.4 trillion (likely higher). Other plans cut benefits. If we agree to cut the benefits of those people in GenX then the cost will be less. Tell me what is the difference to someone in GenX who pays an extra dollar for the same benefits or the same amount for a dollar of less benefit.

This is a common misperception because the Bush press team did not explain the transition costs well. Today, any dollar of revenue shortfall results in lower benefits. Under Bush's plan, any revenue shortfall is made up by higher taxes.

You realize there is already a shortfall in the current program, right?

What you heard was that there are no higher taxes.

You are mistaken. What I heard was "a 10% (or 50%) reduction of payroll taxes will result in a 10% (or 50%) reduction in benefits" Since the program is currently in the hole, that reduction combined with the higher benefits from the private portion will result in a smaller long-term deficit.

We will pay for the Social Security changes with reductions of 'government waste'.

No, we'll pay for it with lower benefits and larger transfers from the general fund.
Until it's completely privatized. Then we'll have 12.4% of lifetime income providing for retirements, without the government standing in the middle.

In a pure play privatization plan, the cost is $10.4 trillion (likely higher).

Over what period? Compared to what longer-term, larger savings?

Tell me what is the difference to someone in GenX who pays an extra dollar for the same benefits or the same amount for a dollar of less benefit.

As opposed to the current path which will be an extra dollar of cost and a dollar of less benefit.

 

[Dont Taz Me Bro]

It was a shifty plan to push the cost of the system from Boomers to GenXers and Millennials (who really didn't even have a vote).

That's already happened.

 

[Toddsterpatriot]

Where is the need for the doubled payroll tax?

The need is created by diverting cash away from Social Security. Let's say I make $100,000, and pay 10% payroll taxes. At the end of the year, $10,000 goes to Social Security. In the Bush plan, 4% goes to my private account and 6% goes to SS. $4,000 is going to my private account. Where does the system get $4,000 to pay retiree benefits? It gets the money from the general fund. Guess who pays the taxes that provide for the subsidy from the general fund - it is the guy who put $4,000 into his personal account.

Let's say I make $100,000, and pay 10% payroll taxes. At the end of the year, $10,000 goes to Social Security. In the Bush plan, 4% goes to my private account and 6% goes to SS. $4,000 is going to my private account. Where does the system get $4,000 to pay retiree benefits?

Let's say we leave the system as it is and they need $5000 more to pay retiree benefits.
Where does the system get $5,000 to pay retiree benefits?

 

[JoeTheEconomist]

It was a shifty plan to push the cost of the system from Boomers to GenXers and Millennials (who really didn't even have a vote).

That's already happened.

That was supposed to happen with the 1983 reform, but the solvency has come in so much that almost every boomer alive expects to be hit by benefit reductions. Let me know if you want to see a piece on the 1983 reform. The gist is that the heaviest tax increases and benefits cuts feel on GenX and later.

 

[Stephanie]

With what a know of unregulated corporations from history this thread is not only unmoral but evil.

Corporations do NOT care about you and you don't get a vote unlike with your government.

must you overtake every thread with your mumble jumble . ?

 

[Sun Devil 92]

10 years ago, GWB tried to introduce personal accounts into Social Security with a plan that remains a strawman for democrats to this day. This plan was dumb, not in the way that the critics suggest. The greed of Wall Street was the least of its problems. It was just a dumb idea.

His plan in total did little more than change the pocket which pays for Social Security. It was a shifty plan to push the cost of the system from Boomers to GenXers and Millennials (who really didn't even have a vote). The Trust Fund would have been exhausted more quickly, and our children would have been left to pay for his promise of benefits to anyone born before 1950. It was a bad idea.

I write on the issue of Social Security reform, and welcome a discussion on the 2005 plan. The longer piece can be found here : Bush’s plan would not have fixed Social Security

In short, there is no new investment capital created. No we weren't going to get 7% returns. No this plan isn't good for the poor. In total, his plan doesn't fix Social Security. It replaces Social Security with something that is entirely different. He wanted the system to be bigger. No bigger will not work.

Why don't you give a 10 bullet point description of the plan so we know what you are referencing.

Most don't understand details.

All they know is that Bush said Social Security and reform in the same world and the left wing apes started flinging all kinds of s@@t all over the place. It never got beyond that.

The president laid out his framework for broad based reforms for Social Security in the State Of The Union in 2005. That proposal would:

• Allow workers to invest a small portion of their Social Security taxes in individual accounts.
• Reduce the benefit formulas to factor in Social Security to reflect earnings from individual accounts
• Create a guarantee for those people born before 1950 for the benefits promised by the system
• Provide direct subsidies from the general fund to the system to fulfill the promises made by the system.

This looks like something I would support provided:

1. Bullet point one....the small portion would gradually increase over time. The individual accounts WOULD NOT BE in private investment firms. It would stay with th

Where is the need for the doubled payroll tax?

The need is created by diverting cash away from Social Security. Let's say I make $100,000, and pay 10% payroll taxes. At the end of the year, $10,000 goes to Social Security. In the Bush plan, 4% goes to my private account and 6% goes to SS. $4,000 is going to my private account. Where does the system get $4,000 to pay retiree benefits? It gets the money from the general fund. Guess who pays the taxes that provide for the subsidy from the general fund - it is the guy who put $4,000 into his personal account.

Yes, this is correct.

So, as Bush stated....you go slowly. You don't get from a Paygo to an accrual account system without some pain.

Someone has to pay for all those people who don't put into the system and still take out.

 

[Sun Devil 92]

With what a know of unregulated corporations from history this thread is not only unmoral but evil.

Corporations do NOT care about you and you don't get a vote unlike with your government.

must you overtake every thread with your mumble jumble . ?

Agreed.

Joe is sharing good information.

Matthew is flinging poop.

 

[JoeTheEconomist]

Let's say we leave the system as it is and they need $5000 more to pay retiree benefits.
Where does the system get $5,000 to pay retiree benefits?

Social Security isn't about need. It is about laws. If the system runs short of money, benefits are cut. In the Bush paradigm, taxes are raised. All told, I will keep what we have.

"Bush professed his worry that doing nothing would mean that our children and grandchildren would have to borrow $10.4 trillion. Ironically enough, his proposal introduces the guarantee for Social Security benefits that would ensure future generations would have to borrow the $10.4 trillion."

 

[JoeTheEconomist]

Reduction in SS benefits paid, theoretically covered by an even larger increase paid from the private account.

You are mistaken. What I heard was "a 10% (or 50%) reduction of payroll taxes will result in a 10% (or 50%) reduction in benefits" Since the program is currently in the hole, that reduction combined with the higher benefits from the private portion will result in a smaller long-term deficit.

Do you have a source for that belief? Benefit cuts were not in the original framework. It was added later because of the transition costs. Instead of raising taxes by a dollar we are going to cut the benefits you get by a dollar, as though there is a difference.

Your statement later "As opposed to the current path which will be an extra dollar of cost and a dollar of less benefit." is flawed. If revenue is insufficient, then benefits are cut. There is no option of both. You might see a $0.50 increase in tax and a $0.50 decrease in benefits, but the dollar of shortfall is a dollar.

In a pure play privatization plan, the cost is $10.4 trillion (likely higher).

I took the figure from Bush's whitehouse piece.

No, we'll pay for it with lower benefits and larger transfers from the general fund.

And where does the 'larger transfers from the general fund' come from? What is the difference to the taxpayer between a $1 of payroll taxes and a $1 of income taxes. One generation will carry the cost of funding not only their own retirement but that of the parents, grandparents, and great grandparents. Paul Ryan's plan called for the equivalent of 20% payroll taxes. Are you thinking that is a good idea?

Until it's completely privatized. Then we'll have 12.4% of lifetime income providing for retirements, without the government standing in the middle.

without the government standing in the middle? What do you think the central administrator is going to do?

 

[Toddsterpatriot]

Reduction in SS benefits paid, theoretically covered by an even larger increase paid from the private account.

You are mistaken. What I heard was "a 10% (or 50%) reduction of payroll taxes will result in a 10% (or 50%) reduction in benefits" Since the program is currently in the hole, that reduction combined with the higher benefits from the private portion will result in a smaller long-term deficit.

Do you have a source for that belief? Benefit cuts were not in the original framework. It was added later because of the transition costs. Instead of raising taxes by a dollar we are going to cut the benefits you get by a dollar, as though there is a difference.

Your statement later "As opposed to the current path which will be an extra dollar of cost and a dollar of less benefit." is flawed. If revenue is insufficient, then benefits are cut. There is no option of both. You might see a $0.50 increase in tax and a $0.50 decrease in benefits, but the dollar of shortfall is a dollar.

In a pure play privatization plan, the cost is $10.4 trillion (likely higher).

I took the figure from Bush's whitehouse piece.

No, we'll pay for it with lower benefits and larger transfers from the general fund.

And where does the 'larger transfers from the general fund' come from? What is the difference to the taxpayer between a $1 of payroll taxes and a $1 of income taxes. One generation will carry the cost of funding not only their own retirement but that of the parents, grandparents, and great grandparents. Paul Ryan's plan called for the equivalent of 20% payroll taxes. Are you thinking that is a good idea?

Until it's completely privatized. Then we'll have 12.4% of lifetime income providing for retirements, without the government standing in the middle.

without the government standing in the middle? What do you think the central administrator is going to do?

Your statement later "As opposed to the current path which will be an extra dollar of cost and a dollar of less benefit." is flawed. If revenue is insufficient, then benefits are cut. There is no option of both.

Ummm....payroll taxes have been hiked in the past and now benefits will be cut in 2030, how is that not both?

And where does the 'larger transfers from the general fund' come from?

What is the current long-term shortfall in the system? Does it get larger over time?
Are we better off paying transition costs and getting rid of the program, with higher privatized benefits, or do we continue hiking payroll taxes with benefits that government could decide to cut with a simple vote?

What do you think the central administrator is going to do?

In a perfect world, send the payroll deduction to the mutual fund company.

 

[JoeTheEconomist]

Your statement later "As opposed to the current path which will be an extra dollar of cost and a dollar of less benefit." is flawed. If revenue is insufficient, then benefits are cut. There is no option of both.

Ummm....payroll taxes have been hiked in the past and now benefits will be cut in 2030, how is that not both? [/QUOTE]

Past 1983. This law was under consideration in 2005. In 2005, you are looking at some trillions of dollars in present value shortfall. How you divide the shortfall between tax increases and benefit cuts is up to you. But there isn't a scenario where you get a $1 of tax and a $1 of benefit cut in order to deal with a $1 of shortfall.

And where does the 'larger transfers from the general fund' come from?

What is the current long-term shortfall in the system? Does it get larger over time?
Are we better off paying transition costs and getting rid of the program, with higher privatized benefits, or do we continue hiking payroll taxes with benefits that government could decide to cut with a simple vote? .[/QUOTE]

Why do you think you are getting higher privatized benefits. I am guessing that you missed the part that 7% real is not a realistic figure.

You continue to refer to hiking payroll taxes. That is an option that elected officials might take. My guess is that they will not be elected very long if they do.

What do you think the central administrator is going to do?

In a perfect world, send the payroll deduction to the mutual fund company . [/

QUOTE]

Does the phrase "Central Administrator" sound like a perfect world to you? Among other things the CA would decide in what you could invest. Just as a guess, I am figuring that Philip Morris is out, and Solendra is in.

 

[Toddsterpatriot]

Does the phrase "Central Administrator" sound like a perfect world to you? Among other things the CA would decide in what you could invest. Just as a guess, I am figuring that Philip Morris is out, and Solendra is in.

I'm willing to limit investments to broad indexes, less government interference that way.

 

[Toddsterpatriot]

Why do you think you are getting higher privatized benefits. I am guessing that you missed the part that 7% real is not a realistic figure.

I don't need 7% to get a better return than from SS.

You continue to refer to hiking payroll taxes. That is an option that elected officials might take. My guess is that they will not be elected very long if they do.

How deep will the benefit reductions be in 2030? Those won't be too popular either.

 

[Ame®icano]

How can something that hasn't happened be a mistake?

Mistake no. It was simply a stupid idea that was framed around really poor economics. There is a reason that their parents put their money in trust where these people couldn't invest it.

It's not like they had a choice.

Imagine if they did.

 

[JoeTheEconomist]

Does the phrase "Central Administrator" sound like a perfect world to you? Among other things the CA would decide in what you could invest. Just as a guess, I am figuring that Philip Morris is out, and Solendra is in.

I'm willing to limit investments to broad indexes, less government interference that way.

You are, but the political money is in control so most politicians aren't. The government took housing which is one of the most stable industries in history, and turned it into a bubble that statistically occurs about once in a thousand years.

The problem with my article is that I was limited to 800 words. One of the things that I had to cut was the part about protecting the safety and soundness of the system. All of these plans had a central administrator. This doesn't limit risk. It concentrates risk in the companies of the index. This is the time when you will have Coke trading at 45 times earnings. You will have companies on the outside starving for capital because of the govt borrowing to pay for retiree benefits. There will not be a single politician who does not have a company in their home district that wants into the cheap capital. And the politicians are just going to tell Solyndra no because it is the right thing to do?

 

[JoeTheEconomist]

Why do you think you are getting higher privatized benefits. I am guessing that you missed the part that 7% real is not a realistic figure.

I don't need 7% to get a better return than from SS.

You continue to refer to hiking payroll taxes. That is an option that elected officials might take. My guess is that they will not be elected very long if they do.

How deep will the benefit reductions be in 2030? Those won't be too popular either.

But Social Security needed 7% real just to be a bad deal for people in GenX and later. It was just another timebomb waiting to explode.

This problem resolves itself long before 2030. Today a 67 year-old statistically expects to be alive in 2034. It is only a matter of time before people realize that the bomb falls on them personally. Social Security has skid to where it is on the hand-wring of our elders. They didn't give a crap because it wasn't going to affect them personally. In 2005, more than 50% of the public expected to be dead before the system cracked. It is now below 20%. I haven't looked in a couple of years. People worry when it hit them personally.