Deborah Solomon provides some important political news as well as a bit of good policy analysis. Mitt Romney has told us we need to somehow fix the alleged long-run solvency problem for Social Security. Let’s assume for the sake of argument that either future taxes must be raised (something a few progressives advocate) or future benefits must be trimmed (guess which one the Republican nominee is advocating). Here’s where I think the analysis should begin:
As Jed Graham noted in his 2010 book "A Well-Tailored Safety Net," Social Security actuaries have previously indicated just how much workers at various income levels would have to save as a percentage of their incomes over the course of a career to offset benefit cuts.
Deborah tells us that Jed is her husband but he does have a good framework here. Whether my taxes will go up in the future or my benefits will go done, I’d like to know how much I’d have to decrease my lifetime consumption as a result and still end up with the same retirement portfolio. With this in mind, let’s read what Romney is proposing:
A close look reveals just how difficult it will be to close Social Security’s ballooning trust fund shortfall without new taxes, which he promises to avoid. It also shows that Romney’s approach will hit middle-income workers harder than the wealthiest, which may come as a surprise given his oft-repeated comment that he'll slow the growth rate of Social Security benefits for those with "higher incomes." As outlined, Romney’s plan closely resembles one proposed in 2006 by another Republican, former Utah Senator Robert Bennett. Both exempt people 55 and up, raise the retirement age to keep up with longevity gains (about one month every two years) and adopt some form of progressive price indexing that has benefits for the top grow only with inflation, while benefits for the lowest earners continue to reflect real wage gains. While Romney’s campaign hasn’t specified details when it comes to progressive price indexing, there isn’t much room for flexibility. Social Security Administration actuaries found that Bennett’s plan would cut promised benefits for a 22-year-old average earner -- someone making about $45,000 per year today -- by about 24 percent and a maximum-earner (making $110,000 and above) by about 35 percent. That seems progressive. But looks can be deceiving ... For an average earner, saving 1 percent of wages a year, investing it in Treasuries and cashing it in for an annuity would offset a 10.3 percent benefit cut. That means a $45,000 earner would have to save 2.3 percent of income, or $1,000 a year, to offset the 24 percent cut under the Bennett plan. Meanwhile, someone earning $110,000 would have to save 2.1 percent of pay to offset a 35 percent benefit cut (each 1 percent of pay saved can replace 16.8 percent of benefits for top earners). That means a $1 million earner, who pays Social Security taxes on only $1 of every $9 earned, would have to save just 0.23 percent of income to offset benefit cuts.
That sounds like a regressive proposal to me. Now I’m sure Team Romney will try to deny all of this but Ms. Solomon should be congratulated on some excellent reporting.
8 comments:
When I think of "privatizing" Social Security, I envision investments which will hopefully grow over time, and can be liquidated, without the use of general revenues, to provide these annuity-type benefits.
Better yet, why not have the citizens invest in annuities, as was originally proposed when Social Security was first considered.
What you do not want, in a retirement plan system, is what we have now, a "reserve" fund to make up for any pay-as-you-go cash shortfalls.
You do not want a reserve fund which relies 100% on general revenues, the same way we pay all pay-as-you-go expenses. The return needed to generate that type of reserve is zero, for there is no reserve fund which can be liquidated without the use of new general revenues.
That's what Roosevelt wanted in the first place - a self-supporting system, without the use of general revenues.
That is why "privatizing" the system is so important for Social Security's future. It ensures that the government will not spend the reserves, as it has done consistently since 1983.
And, that these reserves will be available to liquidate into cash in order to pay these annuity-type benefits.
Don Levit
"Don Levit said...
"When I think of "privatizing" Social Security, I envision investments which will hopefully grow over time, and can be liquidated, without the use of general revenues, to provide these annuity-type benefits."
The current Social Security system uses an investment that your mind seems to have a hard time comprehending as an investment: it's the entire workforce of the United States and its willingness to pay taxes for a life long annuity for the sum total of its aged relatives.
You are exactly right.
The concept of taxes, including this idea of printing money out of thin air to cover deficits, is hard to get a grasp of.
Taxes pay for all expenses, including those not involved with a trust fund.
Social Security does not even have "dedicated" taxes, for taxes can only be designated for the general welfare, not for specific prrograms.
The FICA and SECA taxes DO NOT GO DIRECTLY TO THE TRUST FUND.
THEY MUST GO TO THE TREASURY'S GENERAL FUND, ALONG WITH OTHER TAXES, AND THE MONEY BECOMES INDISTINGUISHABLE FROM OTHER MONIES.
NO, THAT IS NOT MY IDEA OF PAYING FOR BENEFVITS OVER MANY YEARS.
WE WILL SOON ARRIVE AT THE POINT WHERE ALL OUR CURRENT TAXES ARE PAYING FOR SOCIAL SECURITY, MEDICARE, AND MEDICAID.
AND YOU WANT TO RELAY ON TAXES, or are you relying on taxes to be paid by future generations?
How does this reliance on taxes strengthen the full faith and credit of the U.S. Government?
Don Levit
Levit SHOUTING still doesn't make your argument sound.
FICA and SECA taxes are collected by Treasury but fully tracked via monthly reporting of the SSA OACT and deposited quarterly by Treasury to the Trust Funds as fully documented with fund codes and everything in their publicly published Monthly Trust Fund Reports, one Report each dor all the 17 or so Federal Trust Funds including for example the Federal Highway Trust Fund. Under your logic gas taxes are not in fact segregated from other taxes because at some point they pass through Treasury's hands and so Transportation projects funded by it actually have no dedicated funding at all. After all everything is fungible and Congress can change the rules at any time.
This is somewhere between simple logic chopping and outright puerility that would deny that the Federal government even HAS internal accounting and fund tracking.
FICA taxes do not go to the "General Fund" as that is defined by Treasury. You are simply wrong as to the actual mechanics and are relying on a tragically cartoonish theoretical depiction of tax collection as a flow chart with only three or four boxes. Reality simply doesn't operate in the kindergarten fashion your argument requires. No matter how often you present it in ALL CAPS so even the dullest (in your estimation) student can get it.
You never seem to have convinced anyone at EconoSpeak or Beat the Press with this line of argumentation. Even they you have put your own face by the dictionary definition of "reiteration". It all seems like a waste of your time, as it certainly is of ours
And to the point of the post.
The current SS payroll gap over 75 years is 2.26% of payroll, of which the typical wage worker is on the hook for 1.23%. Absent some sort of tax increase retirees are faced with a 25% cut in benefits but not until 2032 or so. Turning that around this means that the typical worker only needs to "save" that 1.23% in the form of increased deduction in the form of FICA (in real terms indistinguishable from mandatory contributions to some "personal" account) to guarantee a full 100% payout of scheduled benefits.
Logically anyone proposing a system based on "personal" accounts should be required to show a better result or a lower cost for the same result compared to a simple FICA increase, particularly one that can be phased in over time. And the Bennett Plan, like all other plans that give enough detail to be scored, simply fail that test. They either call for more paycheck deductions than a FICA based solution would require or a result that is little better for workers than the 25% cut (and that only for the subset of workers/retirees still collecting after 2032) that a plan of Nothing would produce. Or often enough both. Leaving the question "Why should WORKERS buy in?" Theoretically THE question in a democratic system where current and future "participants" in SS are an overwhelming majority.
But not the question that is ever asked, we never get a simple cost/benefit analysis on a "greatest good for greatest number" basis, instead it all is sloganizing around Ownership Society and Intergenerational Warfare. Or occasionally hyper technical arguments about ROI that ignore the fact that measured in real basket of goods terms each generation of SS recipients will get a better result than current and past ones do and did. Oddly even including those who would experience that 25% cut to baseline that a plan of Nothing currently projects. (Because the schedule grows the benefit around 40% by the time the 25% cut accrues).
Simply put personal accounts simply don't pencil out for the vast majority of workers. Not when compared to the Something of a simple FICA increase or even the plan of Nothing. What benefits there are flow to a small minority, notably to that part of the 1% who are not participants in any real sense to begin with.
Make them say it in numbers. Or STFU. And they don't HAVE the numbers.
Bruce:
The differences we have on the SS trust fund are 2 different perspectives: the Trust Fund Perspective and the Budget Perspective.
From a paper entitled "2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds," published by the Boards of Trustees, Federal HI and Federal SMI Trust Funds:
Pages 234-235 "One can view the financial operations of Medicare and Social Security in the context of the programs' trust funds or in the context of the overall federal budget. The financial status of the trust funds differs fundamentally from the impact of these programs on the budget, and people often misunderstand the relationship between these two perspectives."
"This 'trust fund perspective' is important because the existence of trust fund assets provides the statutory authority to make such payments without the need for an appropriation from Congress."
"The budget is a comprehensive display of all Federal activities, whether financed through trust funds or from the general fund of the Treasury. This broader focus may appropriately be termed the 'budget perspective' or 'government-wide perspective' and is officially presented in the 'Financial Report of the U.S. Government."
"The financial status of a trust fund appropriately considers all sources of financing provided under current law , including the availability of trust fund assets. From a budget perspective, however, general fund transfers, interest payments to the trust funds, and asset redemptions represent a draw on other Federal resources for which there is no earmarked source of revenue from the public."
www.healthreformgps.org/wp-content/uploads/tr2012.pdf.
Don Levit
While Don misdirects what Deborah Solomon's article told us - Mark Thoma gets an intellgent email on this, which he posted at his blog.
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