Politician-proof privatization for Social Security

The straw-man argument against social security privatization goes like this: "The stock market is too risky; it's no place to park the retirement safety net FDR set up for workers."  ["FDR": Franklin Delano Roosevelt.] 

And with the recent declines in the stock market, there's the following obligatory addendum: "SEE?  We TOLD you so." 

Furthermore, depending on the blogger in question, the straw-man argument might end with the smug assertion that those who support SS privatization are the "Stupidest people on the planet"—or similar ad hominem epithets typical of (a) the grammar school playground, and (b) some left-leaning blogs I've visited.  And they get away with it easily, because privatization proponents always accept the premise, and are left trying to defend the stock market investment theme—an impossible, unwinnable argument. 

I've had enough of that straw man.  Let's knock it down and expose the real issue.  It's a simple, two-step process, as follows...

Step 1: Knocking down the straw man

• Is the stock market too risky? YES. 
• Should we allow workers to expose any of their SS retirement safety net to the equity markets? NO.
• Should we restrict all SS retirement obligations to the US federal government only? YES. 

In theory, that should make the "stock-market-is-risky" crowd very happy, shouldn't it?  Yes, it should.  The straw man is now out of the way. 

Step 2: Exposing the real issue
Private property versus government property, that's the issue we should be debating—and here's a proposal to smoke it out into the open:

• Issue a special new type of Treasury bond to each worker, instead of the "credits" now tracked by the SS Administration. 

The new "Social Security Retirement Bonds" would be issued to each individual worker—probably electronically in a new database, but possibly on paper, the same way US Savings Bonds are issued.  The terms could be structured such that there would be no difference in the system's financial effects or obligations: the bonds would only activate on retirement, would be nonmarketable and non-transferrable, and would void at death. 

The big difference: the new bonds would have a key feature, familiar to the holders of standard US Treasury bonds—they would be the private property of the worker, backed by the full faith and credit of the United States government.  As with normal Treasury bonds, the terms would be unalterable by future politicians. 

Compare that with the government-controlled system we have in place (...see the Social Security Administration's website):

"Your Social Security Statement is a concise, easy-to-read personal record of the earnings on which you have paid Social Security taxes during your working years and a summary of the estimated benefits you and your family may receive as a result of those earnings." 

Notice the key words: "estimated" benefits you and your family "may" receive.  For clarity and full disclosure, the Social Security Adminstration should add the following sentence: "Important: Note that the benefits you may receive are only estimated.  Your actual benefits will vary if future politicians change the way the system works before or during your retirement, thereby altering the promise the federal government had previously made to you." 

In short, now that the stock market straw-man is knocked out of the way, the question we should really be debating is as follows:

Should social security "benefits" be...

(1) the private property of each worker, with unalterable terms as specified by past politicians; or...

(2) estimates made by the government, subject to change, with actual benefits controlled by the government and alterable by future politicians.

Said another way: Should the US workers who have accumulated social security credits be given the same guarantees we now give to holders of US Treasury bonds, bills, and notes (which include Japanese, Chinese, and British bondholders)?  Or should those US workers continue to trust, with no guarantees, that future politicians will not renege on promises made by past politicians? 

My guess: FDR would favor the former.  In any case, the real issue is whether SS "credits" should become private property.  The "stock-market-is-risky" argument is just a diversionary straw man.  The important debate is about "privatization"—not "the stock market."

============
End note:
Policy wonks might want to tweak the terms of the new bonds such that the financial implications of the new vs old system remain identical.  I probably left out a detail or two, esp. regarding the non-retirement benefits such as disability.

Comments

[Dan]

I like the principle of privatization - but why make the bonds void upon death? Wouldn't true privatization allow me to "will" my bonds?

I realize that, for the purposes of solvency, it may be advantageous for the govt. to take money and then never give it back (if I die before using it). But it seems like we ought to have a moral problem with that. (I realize, that, actually, this same moral problem applies with the current system).

[Steve]

Same reason retirement annuities expire at death. In any case, it's necessary to match the financial implications of the current system -- to control for that variable.

Easiest way to implement would be the functional equivalent of dollarizing the "credits" currently being tallied by the SS admin, and locking down the ownership of those assets.

[Tom Hanna]

You're knocking down the wrong straw man. It's the "riskiness" that's the real straw man. The "risk" in the stock market over a 30-50 year working life, if you're talking about index funds or something similar, is higher than with Social Security certainly. With SS managed by bureaucrats and politicians, there's no risk - you absolutely will lose money after inflation, There is zero risk of coming out ahead. With stocks, you risk only making 5% instead of 9% if you happen to somehow start working and stop working on the very worst possible days. But again, there's absolutely no risk of one thing - doing worse than with the current system.

THAT is the argument we SHOULD be having.

[Jason]

I have another somewhat similar plan. Instead of issuing pieces of paper looking like this http://tinyurl.com/2vgcqg they would look like this http://tinyurl.com/3yjgt3

I understand the obligation to those in retirement, the expectations of those near retirement and the limitations of a paygo structure, but what is the theory behind the Federal government running a mandatory retirement program? Is there a problem with individuals deciding how much to save and where to invest it? I have no problem with someone not investing money in the stock market if they think it is too risky. That's the beauty of private property. We don't make every investment decision an election issue.

As for senior citizens starving is anyone touches social security. That's the straw-man.

[Bob]

Hey, I'll take the bonds any day and twice on Sunday. Actually, I'd be happier with my and my employers SS contributions compounded annually at 6% (long term return of the S&P 500) as a lump sum, thank you very much.

Now, what is interesting is those that point to stock risk but ignore bond risk. That's right. You can loose money on a total return basis even with government bonds. All one has to do is buy at a low yield and sell at a high yield.

[PseudoNoise]

This ceases becoming an insurance program if you do that. The whole point of collective insurance is that you collect (hopefully low) premiums from a lot of people, then distribute to various people according to their needs. Retirement benefits are one aspect -- I would guess the largest. There's also survivor's, disability -- very important if you happen to be, you know, disabled.

You don't expect to get your money back penny-for-penny from car, fire, property, or other insurance. SS is no different. It's a safety net, and if your needs grow beyond what you've put in, we don't ship you out on an ice floe (anymore).

[Ron Hardin]

You have to give congress the power to change the retirement age from time to time, to match the demographics.

Think of the promise as that you get an inflation-protected annuity for the last 10 years of your life, not all the years after 65 no matter how long people are living then.

[Robbie]

This plan is genius because it actually provides an incentive for working and contributing to Social Security. Debt rollover works here, so we could end the demagoguery about how the Social Security fund is "broke." Debt rollover is a beautiful thing. As long as the U.S. government stays in business, we can never be "broke."

[Joe C.]

My plan: Everyone aged 40 and above as of Jan. 1, 2009 or later, will continue to be in SS as currently constructed. When the last person in this group dies, the program is over (~60 years). Everyone <40 as of that date gets to keep their FICA and employer match from now on, but lose what they have put in, and will never receive benefits; however, they'll have 25 years to plan for retirement.

Which group do you think will be more pissed (i.e. the group that has the worse deal)? My bet is that it will be the group remaining in SS.

[Joe C.]

Oops!"Everyone aged 40 and above as of Jan. 1, 2009 or BEFORE..."

[Andrew]

Joe C... to make it more palatable, you'd probably have to make it optional for anyone born after Jan 1, 2009 to switch, then make the new system mandatory for anyone born after that date. That way no one that was betting on SS but happens to be 39 gets screwed, and no one that would rather keep their taxes but happens to be 41 gets screwed.

People that aren't born yet have their whole lives to plan under the new system.

As an aside, what do you people think of this: http://www.andrewfarmer.name/2008/03/retirement-accounts.html

[Paul Petillo]

Bob was right. It is an insurance program with many more facets than that of a retirement account. If you are relying on it to provide for you in your old age, you have made some major planning errors.

Social Security is currently in surplus. Leaving it alone is the greatest hurdle that politicians have.

Consider the last - and final budget Mr. Bush is proposing.

Current outlays for Social Security, Medicare, Medicaid, and miscellaneous other benefits that the poor and elderly desperately need amount $1.635 billion. To meet that expense, the budget would need to redirect several known receipts. Payroll taxes cover almost two-thirds of the needed cost of all of those programs. As a stand-alone receipt, those taxes pay 32% more than Social Security needs to operate. Redirecting that excess, adding in what is collected from corporate income and excise taxes and killing the ill-conceived Medicare Advantage program would cover the shortfall nicely. But that idea may not satisfy either side of the aisle. Without that cash, Congress would have to make some serious considerations.

The money for entitlements is there with privatization, without issuing bonds, without redirecting money in to the equity markets, without enriching Wall Street.

The US government should focus on paying back to SS what it owes, strengthening the dollar, and paying off the deficit.

We should, in the meantime, focus on growing our retirement money and not looking at fixing what is, if run correctly, a decent plan for the people who will need it.

Alan Sloan of Fortune suggested that we turn the program into a sovereign wealth fund and allow it to invest where it finds the best opportunity. It probably wouldn't be in Treasuries.

[JBL]

The Social Security website (ssa.gov) has a quick little benefit calculator. I gave it a few hypothetical numbers. I used a birthdate of 3/4/1986 and a retirement date of 3/4/2051 (65 years old). I gave it incomes of $13,000 (roughly full time at minimum wage), $48,201 (2006 median income), and $94,200 (2006 cap on FICA-eligible wages). Here are the inflation-adjusted estimated benefits:

For the poor: $3,248
For the median: $7,079
For the wealthy: $9,880.

In other words, a majority (and probably a large majority) of Social Security payments go to people who are already relatively well off. So much for the 'social safety net' and 'benefits that the poor and elderly desparately need' rhetoric.

The arguments in favor of a solid safety net actually favor pretty much dismantling the current Social Security system.

[Dave]

I'm confused here Paul, you say you want to pay off the deficit, which means you advocate ending social security completely (being as liabilities from it are the second largest aspect of the national debt), but you also call it a pretty decent system for those that need it (and for the record I agree with this latter part).

You also hint you don’t want to redirect money to wall street, but then end with a quote from Fortune magazine, saying there are probably better investments than in treasuries? Where would these opportunities lie if not on wall street? And do you really trust a govt bureaucrat to make investment decisions in the private sector with your tax money? Also consider that the govt buying up private sector assets is actually a form of socialism.

And this part in particular

"The US government should focus on paying back to SS what it owes"

I used to think this too, because I was fooled by politicial rhetoric. But thanks to Steve and my own research getting myself informed, I realized that this is another way of saying that the SS surplus should be kept in cash under a giant mattress. The US govt should take back the interest bearing paper that it issued to SS (Tbills) and replace it with non-interest bearing paper (dollars). Both are backed by the full faith and credit of the US govt. One pays interest. One does not. Hence the mattress metaphor (and for the record, there is actually no difference between the 2 options since the interest is paid by the govt to itself. See Steve's article a while back).

The govt owes workers what it owes, and its carefully recorded in the national debt, regardless of what form of "paper" the govt issues. "Pay back SS" is just political rhetoric and mild scare tactic to make people think their SS money is "gone" and went somewhere else, preferable something they object to like Big Oil or simply "the rich". Even if you believe the money is "gone" it could easily be said that the money raised from the sale of those Tbills to SS went not to "the rich" but to life saving research from govt grants. Or educational loans/aid for "the poor" which pays for itself through lower unemployment, a growing economy and more tax revenue.

[Dan]

For the purposes of solvency, would it be possible to reduce S.S. payouts to the "rich" retirees of the future (say, those 55 and younger today)? (I'm very "pro-rich" - not a Dem or someone who hates successful people, etc., but I do see that we have a problem with overpromises - somehow we have to get things under control and back on track).

Effects:
- wealthy retirees feel only minimal impact on their lifestyles, if any

- "safety net" concept is preserved

- rather than part of a three-legged stool to fund retirement, SS becomes simply an expensive form of insurance in case one's other retirement assets don't produce enough income to live comfortably. (I realize there is a reverse incentive problem here, but perhaps we could come up with a fix).

Is this helpful? Or, as I suspect, is there some good reason not to do this?

(Note, Obama proposes that we lift the 97k cap on income taxable for SS. This plan will amount to a 14% tax hike on the rich. Would the plan I'm suggesting here be a way to NOT do what Obama is proposing?)

Seems like some reasonable reductions in the "promises" of SS coupled with economic growth policies (tax cuts, less regulations, no tariffs, etc.) would be the ticket to restoring strength to our entitlement system (and, thus, to our economy and currency in general).