Tuesday, July 19, 2005

House GOP offers its version of Social Security phase out plan

The House GOP has presented its ideas on how to phase out Social Security.

Manufacturers of smoke machines and mirrors anticipate rapid increases in the price of their stocks.

The New York Times published an AP story on the new proposals from the House GOP.

WASHINGTON (AP) -- The House Republican plan to overhaul Social Security requires retirees to give up their guaranteed benefit level if they want a personal account that can be passed on to heirs, GOP aides said Monday.

Only those who invest the accounts in government securities while they are working and in an annuity when they retire can be certain of receiving the full Social Security benefit they are promised, the aides said.

Other investment decisions would expose individuals to the ups and downs of the financial markets. That means their monthly benefit could wind up lower or higher than now envisioned.
In other words, you are giving up any guaranteed benefit and depending on luck to provide a decent return.

There is also no discussion of the fact that merely creating individual accounts will sharply increase the cost of administering Social Security. The current total cost of administration is less than 1% of the annual benefits paid out. Proposals to create individual accounts are expected to require hiring up to 100,000 additional employees to handle them. This is more than double the current workforce. This is guaranteed to lower the return to beneficiaries. The very best private companies have administration costs of 10% or more of annual benefits paid.

But there is more in the story.
The program envisions individuals receiving a monthly benefit that consists of a blend of traditional Social Security -- from the program's trust funds -- and money from personal accounts.

Aides also disclosed that in many cases, a personal account that is inherited by a spouse would be used to pay a portion of the survivor benefit they are entitled to.

The effect over time would be to reduce the amount of money in the inherited account while easing the burden on the Social Security trust funds.

If surviving spouses lack an account of their own, they can decline the inheritance and receive the benefit that current law provides, according to the aides.
In other words, there is no real benefit to the surviving spouse. Any benefit they get will be lowered by what the investments return.

Also (see below) the cap on possible funds to go into the private accounts. The private accounts under this plan are guaranteed to be small. There is no real possibility that the private accounts can pay survivors better than the current system does. But the price of changing to these accounts will be very high.
Unlike Bush's proposal, the House GOP measure uses surplus payroll tax funds to establish personal accounts rather than allow each worker to divert a portion of their payroll taxes.
What this means is that the money that is currently in the trust fund to pay baby boomers from 2017 to 2041 will have been used to pay for this plan. In exchange for increasing the total cost of administration and giving up guaranteed benefit amounts, they will cause the predicted problem (that only might occur) to be moved form 2041 back to 2017 when it will certainly occur.

What a deal!! Give up the benefits of a guaranteed floor for your retirement in exchange for a much more expensive system that that offers NO GUARANTEES but if you are really, really lucky, just might provide a few dollars more in benefits for a few people that happen to be in the correct categories at the right time.

Why don't we just keep the current system and hand every worker a lottery ticket twice a week. It is more reliable for all retirees and a lot cheaper as an overall system.

Oh yeah! There is one more neat little trick included in this plan. The investment accounts are limited to a very small amount. This is what I meant when I said they were "Capped."
The bill would make a major change [...] by taking money from the trust funds and distributing them into personal accounts set up in the name of individual workers. The distributions would stop when the trust fund surplus is exhausted, in about a decade, but the accounts would remain in place.
That limits the total amount in any private account to about $3500 at most over the next 12 years and nothing after that.

See? If you buy this very expensive luxury(?) and accept the lowered benefits and higher administration costs it will require, the only money that goes into your retirement account is the excess of about 10% or so of your FICA tax that is being used to increase the trust fund between now and about 2017. That means that your very expensive and risky 'private account' cannot include more than about $3500 by 2017 if you are paying the maximum FICA tax between now and then. It also means that the benefits the current trust fund was intended to pay must instead be paid by higher taxes. The alternative to higher taxes after 2017 withthis plan is that the benefits must be reduced.

In short, this is a scam to fool voters into switching from the current effective system to one that will cost a lot more to pay lower benefits to almost everyone.

Let me restate the GOP proposal. If you will buy this expensive pig-in-a-poke now and give up the rights to a guaranteed benefit with automatic inflation protection for beneficiaries (not included in any GOP alternative) it is possible that you just might find that you have a slightly higher retirement benefit -- if you are very lucky. No guarantee that you will be lucky. There is a guarantee that replacing the trust fund that is currently being built up will have to be replaced by higher taxes or lower benefits after about 2017.

But you will make some investment managers very rich when they get the contracts from the government to manage your (overpriced and underpaying) accounts.

Oh, yeah. You will also offer those brokers the possibility of stealing millions along the way. This has happened in both Chile and Great Britain. It has never happened to the American Social Security System.

How will they steal the money? There is a simple process. The brokers will bid below their own cost of operations in order to win the contract to manage the accounts. Only a crooked bidder can bid that low, so they will get the contract. Then, since they will be losing money from day one, to stay in business they will have to steal from the account holders. This is easy to conceal in confusing reports to account holders. It is as predictable as the sunrise in the east tomorrow morning.

Expensive pig-in-a-poke, anyone? Here it is. All costs and risks hidden behind smoke and mirrors.

Also in the July 18th New York Times is an editorial.Here are some key paragraphs:
The bill would include a proposal to establish private accounts, ostensibly with money diverted from the surplus in the Social Security trust fund. In reality, every penny of the trust fund is already promised for future benefits, so Congress would need to borrow the money to establish the accounts. As a result, the proposal would increase the budget deficit by some $80 billion next year and about $1 trillion over 10 years, based on numbers from Social Security's chief actuary.

As if that's not bad enough, the proposal omits the benefit cuts and tax increases that would be necessary to improve Social Security's finances in a fair way.[...]

House Republicans are betting that their Social Security ploy will be smart tactics. If the Senate passed a Social Security reform bill - a big if - input from Senate Democrats would ensure that it would not include private accounts. But if the House and Senate pass different bills, they'll go to a conference controlled by the Republicans. In that forum, the leadership could force the House's private accounts into the legislation's final version. This all remains theoretical, but in the minds of Republican strategists it at least raises the possibility of enacting private accounts this year.


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