Centerfield

I think it is very significant that days after the inauguration the republicans are saying “the president's plan cannot pass the House “ and that it is a “dead horse”. (David Brooks and Chairman of the House Ways and Means Committee Bill Thomas)

I consider this a positive development, but that doesn't mean its dead. Suggestions of bundling it with tax reform to make it more politically palatable appears to be the current talking point.

I think SS reform will mean hard choices, fiscal responsibility and a pragmatic approach.

I have yet to hear any politician make a sensible suggestion. IMHO

William -

Yours is the first coherent post on (that I've read) on the fundamental problem with SS. We have to borrow the money later or, with some planning, borrow it now. The difference lies in the amount and terms.

I would like to see a more detailed proposal come from the Administration sooner than later. I think that the more minds that grapple with the specifics, the more likely we are to get reform that is useful and effective.

Part of the problem, it seems to me, is the the Democrats' first hack at this situation is the one Marshall and Drum (and some prominent elected Dems) have taken: there is no problem, or conversely, there is no crisis. Grappling with the majority party is one of the duties of the minority. In this case, may I say it?, the Dems have been a "miserable failure."

GWB is not the only one who has ideas on this. We have the right to hear a diversity of opinions and a multitude of solutions. There is a history to SS that must not be ignored, and a reason why it is not means tested. It is the classic modern Democratic program, and they are going to let the Republicans define it any way they want, and reform it any way they want. All for the sake of a major public hissy fit. Very sad.

If you consider the SS system in isolation, then it technically has "assets" until 2042. But SS doesn't exist in isolation, it's part of the federal goverment. So when talking about SS reform, government spending and taxation as a whole must be considered. Under current projections, in 2018 the SS system runs into deficit, and the government must find ways to come up with the extra money. Period. And that's where the "no problem" folks part ways with reality.

According to the NP crowd, there's no problem because the government owes SS some money, so they'll just have to come up with it. And hey, we could always just raise the SS tax now, so that the government would owe the system more money, and that would make everything peachy-keen forever! IOW, they want to consider SS only in isolation, ignoring all external realities. If this were a valid approach, we indeed would have no problem with SS, or Medicare, or anything else. We'd just set up seperate programs for everything, and the government could promise money to the programs, and everything would be perfect. No problems, no crises, bottomless benefits for everyone forever!

In reality, of course, the resources for government to fulfill its promises must actually come from somewhere, and that somewhere is the taxpayers.

That's another good point, Tully. The most commonly discussed alternative to private market accounts is to "beef up" the system with a combination of options #1 and #3 from my post above -- e.g., a combination of more taxes and less benefits.

If we choose to take that step before 2018, or before the system runs a deficit, it will simply cause a bigger surplus, which the government will turn around and spend on other things, most likely.

That's why I don't even like the current setup. Pay-go would be honest, but this isn't. We're being double-taxed. The surplus is spent, and then we have to pay for that spending as well. Our "reward" for paying excess taxes is the guarantee that we'll have to pay them all over again, with interest. Expanding that double-hit is not a solution, it's just making the problem bigger.

Here are some SS poll numbers.

As an aside:The third poll question is interesting. I'm getting the impression that like many words in our vocabulary “mandate” seems to be evolving a new meaning.

I'm getting the impression that like many words in our vocabulary “mandate” seems to be evolving a new meaning.

Ya think? :-) I keep forgetting--was it Demosthenes who first complained about the debasement and corruption of language, or was it Hammurabi?

Thomas Sowell has a good column up that puts the SS issue in a nutshell for those dizzied by the details.

Tully: Boy! I didn't like that link at all. He tells all the positive points without spelling out the negative ones. On the other hand I think William's original post lays things out in a balanced way.

An interesting thought has occurred to me! Consider the following suggestion:

One possible way of satisfying the zeal for private accounts, and get something through congress, would be to link the amount going to private accounts and the difference between SS tax revenue and payout.

Rather then have the current surplus go into the “trust fund” and get spent, give it to the people. As the surplus gets smaller the amount going into the accounts get smaller. When there is no surplus the private accounts receive nothing.(At which point the account can function as an IRA alternative)

What Mr. Sowell left out.

Negatives of private accounts:

1) Higher administrative cost possible.
2) Higher chance for fraud.
3) The propensity for old folks to get confused and blow their savings.
4) Increasing the national debt to fund “transition” costs.
5) Stock market crash relatively close to your retirement (inherit instability of financial markets).
6) Dependence on the investing skill and savings discipline of each individual (Your mileage may vary!).

Giving people control of their lives is a great idea. Up to the point where they get old and confused. (Like say about retirement age :-}

Sowell left most of those out because they're chimerical straw men lobbed in by opponents who already know they don't apply. (I don't accuse you of this, just noting where they come from.) By the numbers....

[1] Higher administrative costs are possible, but are they likely? And the operative question is, how high would administrative costs be? Congress' own pension plan, the federal Thrift Savings Plan, operates on administrative expenses of 1/10th of one percent (0.1%). That's damned impressive by any standard, government or private. SSA runs at 2.0%, twenty times as much, but has other administrative functions going on. There's no reason at all this couldn't be done in the same fashion as the TSP, and cheaper than SS. 2% fund charges are rather high by market standards. In long-term funds with stable holdings 1% is beginning to get pretty excessive--and that's half of the SS expense load.

[2] The entire system right now is a fraud in many ways, continually misrepresented to the public by everyone. We have no ownership in the money we've paid in, and what we get back is subject to the whim of government and our own longevity. Our children don't get to inherit it if we die early--in that cae, we've simply paid and paid for nothing. The TSP hasn't had a major fraud incident yet, in over 20 years of operation. See #1.

[3] Ownership of accounts and limited-choice asset allocation doesn't need to confer immediate withdrawal rights. There are already models for annuitizing level-benefit withdrawals. Who says we'd even give people the chance to blow the whole account by immediate bulk withdrawals? Straw man.

[4] This one is problematic until details are known. But it's worth noting that to the extent that borrowing for transition costs reduces the NPV of future liabilities by an equal or greater amount, we're NOT putting ourselves farther in debt. One thing I have noticed with the "no problem" people is that when they criticize any potential borrowing of transition costs, they use the whole-dollar (including interest) time cost without adjusting to present value. At the same time, they use only the net present value (NPV) of the current liability, while ignoring the known liabilities that will accrue in the future. This is called "stacking the deck." The real-world evaluative method to use is NPV versus NPV. If the system can be made better in any way without increasing actual NPV of future liabilities, the reform is a winner. If the reform increases NPV of future liabilities, hide your wallet and lobby against. (This is the same calculation you use when considering refinancing a mortgage, by the way.)

[5] Once again, there's a lot of confusioning rhetoric being pushed and there's no way to make that assessment until the details are proposed. But market risk is handleable, and there is no reason to put ALL of the private portion into straight equities--and there are also bonds and real estate, which tend to perform contrary to equities. Surely you've heard of the "balanced portfolio" concept? If (for example) the government portion of the program was still paying 2/3's of the base benefit, you're only exposed to the markets at all by 1/3. And the closer you get to retirement, the less exposure you're likely to be allowed, and the more your account could be annuitized into level-pay and lower risk. This one's been handled for decades. See also #3.

[6] See #3 and #5. I haven't seen that proposed! From the anti's I hear this great cry that any shift to individual ownership rights in accounts MUST be accompanied by handing total control of accounts over as well, which all them ignorant people will proceed to blow on cocaine and Enron. Sez who?

The devil, as always, will be in the details. We don't yet have details, so any current objections are philosophical and political,not substantive. But almost all the objections I've seen are to things that have not been proposed, and that will almost certainly NOT be proposed. Demogoguery and propaganda. And just about every objection I've seen is one that can be handled, even easily handled, with proper construction. It is indeed possible to construct a partially individually-owned retirement system that will lower government liabilities and even provide greater stability and economic benefits in the long run, including inherited transfer of residual balances. The big questions are, what will be proposed, and could it get passed? Answer the firt, and we can beat on the devils, which would help answer the second.

As you say, the devil is in the details. (Which Mr. Bush refuses to disclose) There are good choices that can be made to get around or avoid the points I listed. But first you have to admit pitfalls exist, Mr. Sowell's article never did.

1)I used the word “possible” on purpose. TSP is a great example of a well run plan. But I've haven't seen any quotes from Bush that address how the accounts will be set up. Considering his dislike of government bureaucracy and love of the private sector do you really believe he is going to create/expand a government agency?

2)Your assuming the money will not end up in the hands of the wall street mutual funds. (You know, the ones currently paying million dollar fines for fraudulent practices) SS is full of fraud, but after my family's dealing with the wall street types I'll take government fraud over private conman. (just my personnel preference)

3)Annuities are a great idea. Which is why I included this point. So that my concern would be addressed. (If the point isn't made now there is no guarantee it will be included or addressed)

4)So why did Mr. Sowell leave this out? (Do you have a link that shows those calculation, I been looking for one for a while?)

5)I know several people who's 401k's were caught by the stock market bubble. It is possible to regulate around this, but only if you acknowledge there is a problem.

6)(See #5)

Would you buy a car before the plans for it existed?
I find this selling of private accounts before the details exist very distasteful.
Is it reasonable to object to rampant speculation, while at the same time selling a “mystery grab bag” product?
I grew up around car salesmen. I have a built in knee jerk dislike of being “sold”. I also can smell a con job a mile away, and in my opinion Mr. Sowell's article reads like a telemarketer working some talking point's for the team. Yuck!

Which just leads me back to what I've said for months--until we have details, it's all just whistling in the dark. The most amusing thing to me is the volume and knee-jerk partisan nature of the whistling.

What, you expected Sowell to do an in-depth mega-million word analysis of all details and every contingent possibility in a column slot? He's writing a column, not a textbook, and he's clear in pointing out that there are no magic bullets. (Though a textbook on it from him wouldn't surprise me.)

If we are serious, we can compare one alternative to another, instead of comparing one alternative to perfection. What is different with the private retirement accounts that the President is proposing, compared to the Social Security system as it exists now?

Which really should be the operative question--if we can muzzle the knee-jerkers on both sides for a bit--and is what I've been arguing for all along. I have no desire to sink the current system, as flawed and corrupt as it is, to put in something worse. I'm quite willing to sink the current system if you can show me something better. If all you can offer is a fuzzy break-even, it's back to the drawing board. The available capital is that current stream of excess revenues. The current liabilities are that massive amount of unfunded liabilities (a perpetually growing figure) including the "trust fund." If you want more than that current stream of excess revenue for financing, you damn well better be able to show that refinancing the liabilities makes fiscal sense--and there are standard tools for making those comparisons.

[1-2] I personally like the idea of expanding the TSP. I'm pretty sure one of the reasons it's done so well is that the Congressional retirement funds are there. It's tough to buy that kind of oversight--or potential vengeance. TSP has it built in. It's amazing how vigilant politicians can be when their own personal money is on the line.

[3] Yup. The closer to retirement age, the better the idea--especially a dedicated-term annuity with inheritable benefits. Or a low-risk bond portfolio with scheduled level withdrawals, which is much the same thing.

[4] Show me details, I'll show you calculations. See the problem? But that is the standard we need to use in doing comparisons. And see above--not everything can go in an x-sized syndicated column.

[5-6] Devil, meet details! Details, this here be Mr. Devil...Yes, absolutely, and a prime item for discussion. Structuring will mean one hell of a lot. The idea of putting it all in individually crap-shootable accounts like unregulated instant-withdrawal IRA's leaves me cold indeed. It also leaves the voters cold, which is why the NP crowd keeps demogoging it so loudly. But I sincerely doubt such a system could ever make it through Congress, and I sincerely doubt you'll see it seriously proposed. It's a political one-way ticket to Loserville.

Prime areas to settle, IMHO:

Overall benefit level comparisons.

Cost comparisons (in NPV terms).

Risk control (portfolio structuring).

Risk control (agency structuring).

What I find amazing about all of this is that SS long-term problems should be a non-partisan issue. At the same time, the longer we delay addressing it the harder the solutions become. Now one could argue it being a "crisis". And as as the original post points out there are many ways to argue the solution. But as I recall, the talk about long-term SS problems have been non-partisan until the last few years.

Now that GW says there's a problem the reflexive answer of the Dems is to say "there is no problem" I know they see this as a potential political victory but at what cost? to further delay addressing the issue.

If there was ever an issue that "thoughtful centrists" would address in a non-partisan way it would be this.

What I fear is the same process and outcome we saw with Clinton healthcare. Its not that the failure of the Clinton plan was good or bad, its that it became an issue to avoid over the following 10+ years. And like SS, the longer we delay adressing healthcare the harder the solutions become.

Where is the courage and vision in our elected officers?

Tully: Fundamentally it doesn't look like we are that far apart. I don't have any ideological problems with private accounts. I just don't have any trust or faith that it will be done in a pragmatic and thoughtful way, and without killing SS. Especially after Medicaid reform looks so much like a poison pill.

I never expected to get a dime from SS. I have a big enough 401K and make enough money that it doesn't matter to me as an individual. However I have a great deal of concern about what happens to the working poor. I come from very humble beginnings. Empathy for the a minimum wage manual laborer will always be with me.

Your tight with W. Get him to cough up some detail.

Tight with W.? Well I did live in Texas for a while, but they never return my phone calls. Maybe I drunkenly and obnoxiously hit on Condi some night at a sorority party when we were both at DU. (Seriously, the party gave up trying to get money out of me many many dozens of moons ago. No money, no access. I'm tight with locals in both parties.)

I'm all for privatization of a part of SS, if there is no net increase in cost to the taxpayers. As Tully said, we pay twice already. Once in the form of higher taxes, a second time to bail out the system when it gets in more trouble.

I like the idea of a required immediate annuity upon reaching the retirement age. Whatever is in the account is what the individual can purchase. If we can dictate how the money is invested in these personal accounts, we can dictate that at retirement, the entire amount (or a specified minimum) must be converted to an immediate, inflation protected annuity to ensure a minimum income for life.

Of course, GWB now refuses to use the word "privatize" and it has become GOP law to substitute "personal" for "private". With that type of attitude it's no wonder we can't have a nonpartisan debate. And further of course is my view the GOP's motivation isn't to improve SS or provide a safety net for old people, it's to get rid of a system they have loathed from the beginning. That, in my view is the only reason they're even talking about it.

What an interesting debate! Full disclosure first: I'm a moderate Republican --- a cloth-coat type with both neocon and libertarian tendencies. I have a great interest in the SocSec debate, as it is clear that something needs to be done to save a system that is going to break.

Many have commented on the inability of the parties to work together on this, and I concur. I think Tim's last post is a good example of why this problem exists. Democrats are convinced that we Republicans are only tackling the issue because we hate SocSec and want to destroy it. As an Inside the Beltway GOPer who's worked for Congress, I can assure you that most Republicans are approaching this issue in good faith, not out of spite. Similarly, a lot of my fellow Republicans are hesitant to work with Democrats on this issue because they feel that, deep down inside, Democrats oppose private accts because they want people to be dependent on the state. That too, as I'm sure the Dems on this board will tell you, is ridiculous. Democrats are concerned that people will blow their SocSec funds on brokerage fees and bad investments, leaving the uneducated with nothing. This is a legitimate concern, and one that a centrist like me shares.

So how about this. We switch to private accounts, but instead of giving people a great deal of control over what they do with their money, we basically give them only a couple of safe choices. Maybe we don't give them any choice at all, we just put their funds in something that will generate compound interest --- the equivalent of taking everyone's money out of the SocSec trust fund and putting it in individual, safe savings accounts for each wage-earner. This is not 1935. The banks are not going to fail. Jimmy Stewart is not going to be explaining to people why they can't have their money. This is 2005, and compound interest isn't the stock market, but it IS a wonderful thing and is far better than the bonds that the trust fund is in now.

Okay, so now the only problem is paying for the costs of making this transition. The only way to do that is make some tough choices. We either have to raise SocSec taxes, cut benefits, or raise the retirement age. I think the latter is the most feasible. Raising the age to 70 for workers under 45 would probably do the trick. People are living a lot longer these days, and asking young folks to work another three years is not unreasonable. Or, an alternative would be to CUT SocSec tax rates across the board while raising the AMOUNT of taxable income that gets taxed. In other words, cut taxes on the poor and raise them on the rich. If the Democrats tried that, it would be suicide. But just as only a Democrat could pass welfare reform and be trusted, only the GOP can raise taxes and be trusted.

I would love to see McCain, Lindsey Graham, Specter, Nelson of NE, Nelson of FL, and some other moderates in the Senate come together and make a deal on a bill they can support. Bush won't get his stock market gamble, but that's a bad idea anyway. I guarantee you, he'd sign the bill if they put it on his desk. He gets his name in the history books. The country gets a solvent system. The Democrats make sure the GOP doesn't gut their favorite prgm. It's a win-win-win situation. Let's hope our leaders have the maturity to do it.

Sounds good to me, Dave.

I think a lot of the plans that have been proposed use the Thrift Savings Plan as a model for the investment side of the accounts. I would tend to prefer that over bank accounts because it's simple enough for most people to understand, while allowing for a higher return.

I think we should make those higher returns possible, but also guarantee a base benefit for those who don't do as well. The Kolbe-Stenholm plan offers that kind of combination of features.

Dave: I don't think I could support a higher retirement age unless you put some very strong caveats in the rules. The jobs the working poor occupy tend to be less forgiving than white color jobs. It's one think to work till 70 when you fly a desk, it's quite another thing to do it if you are a janitor.

William: Stenholm was a Democrat I respected a lot. If he signed onto that plan, it had to be good. Thrift Savings Plans are great. Federal employees love them.

Bob: As someone who grew up in a working class family, I understand your concerns. I guess I just think of my grandfather, who is still shoveling snow at 90. LOL. But the retirement age suggestion was just one idea of many.

Dave: Yea, we had a guy like your granddad in my home town. Well past retirement age he worked a full time job then did yard work and handyman jobs for the “old folk”. I think they had to sedate him to get him in the coffin. On the other hand our buildings janitor has pretty severe arthritis in his back and is in constant pain, with years to go before he can retire. That why I suggested some caveats in the rules, something relating to medical conditions.

Dave:

I've already stated I support some sort of privatization, so I think you are misstating my view.

If you really trust the GOP and think it's wavering Democrats like me who are obstructionists perhaps you should read this from Howard Kurtz' Media Notes extra yesterday. It's a Wash Post interview transcript, taken from Josh Marshall's blog:

"Let's be frank about what this is all about. Turning Social Security into a private accounts system has always been called 'privatization'. It was the privatizers' word of choice. That is, until they did some polling in 2002 and found out that using that word made their phase-out plan very unpopular. So, not only did they decide to stop using the word themselves, which is fair enough, they decided to try to stop anyone else from using it to describe their plan.

"Here's the passage from the Bush interview ...

"The Post: Will you talk to Senate Democrats about your privatization plan?

"THE PRESIDENT: You mean, the personal savings accounts?

"The Post: Yes, exactly. Scott has been --

"THE PRESIDENT: We don't want to be editorializing, at least in the questions.

"The Post: You used partial privatization yourself last year, sir.

"THE PRESIDENT: Yes?

"The Post: Yes, three times in one sentence. We had to figure this out, because we're in an argument with the RNC [Republican National Committee] about how we should actually word this. [Post staff writer] Mike Allen, the industrious Mike Allen, found it.

"THE PRESIDENT: Allen did what now?

"The Post: You used partial privatization.

"THE PRESIDENT: I did, personally?

"The Post: Right.

"THE PRESIDENT: When?

"The Post: To describe it.

"THE PRESIDENT: When, when was it?

"The Post: Mike said it was right around the election.

"THE PRESIDENT: Seriously?

"The Post: It was right around the election. We'll send it over.

"THE PRESIDENT: I'm surprised. Maybe I did. It's amazing what happens when you're tired. Anyway, your question was? I'm sorry for interrupting.

"The Post: So have you talked to Senate Democrats about this?

"That's really great, isn't it? The Post has to argue with the RNC about whether they're allowed to use the word 'privatization' to describe privatization."

So Dave, I think you should at least consider the idea the GOP may have other motives in this issue.

Tim,

I'm sure there are some conservatives out there who are ideologically opposed to government-run domestic programs just as there are some liberals out there with a general dislike for business and the private sector. But as someone who's worked with them inside the Beltway, I am fairly confident in my view that the mainstream of the GOP is motivated by a desire to fix SocSec so that it doesn't lead to 7 trillion dollars of debt down the road (when the SocSec surplus turns into a deficit). The excerpt you illustrated is simply a political calculation as to whether the term "privatization" should be used. That has more to do with public opinion polls than motivations.

I think the best way Democrats can ensure that their input is a part of any SocSec reform is to work with the Republicans towards a plan that both parties can embrace, similar to the Stenholm plan posted above.

Dave:

If both parties are to embrace the reform, does that mean tax increases are on the table? Or reductions in spending on such things as defense?

I concede the GOP has the majority, but the system allows for the minority to block what they view as intolerable actions so it WILL take bipartisan agreement.

And while I appreciate your inside the beltway experience, it's outside the beltway that pays for things. How is the transition going to be paid for?

I think tax increases are on the table. Or they should be. Consider the effect of simply raising the amount of taxable income that is subject to the SocSec tax. That way, you don't have to actually raise SocSec tax rates but you still basically get rich people to put more into the system, which would help cover transition costs. I don't think cutting spending in other areas is the best idea to help pay for this. SocSec has always been considered separate from general revenues, and it should stay that way.

SocSec has always been considered separate from general revenues, and it should stay that way.

No, it hasn't. Not for the first fifty years of the program. And since 1983, it's been technically seperate, but effectively still general revenue.