Monday, December 06, 2004
About SOCIAL SECURITY
Some friends and I have been arguing (by e-mail) the merits and demerits of President Bush’s proposal to change Social Security. My understanding is that the President wants to have individual workers invest ten percent of their payroll tax in private accounts. The idea is that the investments in these private accounts will eventually provide a greater retirement income than the ten percent of the present payroll tax. There are plausible arguments for and against this proposal. I must make clear that I am personally opposed to the President’s proposal. Therefore, my summary of the arguments in favor may reflect my own bias.
The basic argument in favor of privatizing part of Social Security (and, in fact, eventually privatizing all of it) is that the present method of funding by a payroll tax can not be sustained indefinitely. The payroll tax is imposed on the first X dollars (about seventy thousand at present) of a worker’s gross yearly wages, with no deductions allowed for dependants, charitable contributions, medical expenses, or other items allowed as deductions in determining the income tax. It is a regressive tax. Workers who earn more than X dollars a year pay a smaller percentage of their income as payroll tax than workers earning X or less. Although at present the payroll tax rate is set such that the total tax collected exceeds the total sum of all benefits paid, it is estimated that there will come a time when the benefit payments will exceed the tax collected. A simple fix would be simply to increase the tax rate. However, since the tax is already regressive, increasing the rate sufficiently to keep paying benefits to a growing fraction of the population that is retired would become politically impossible. Hence, privatizing the system by giving every worker an individual retirement account would eliminate the need to increase the tax rate. Some advocates expect that the private accounts would produce greater payments than the present scheme because of the growth of value and income provided by the private accounts.
There are other arguments in favor of privatizing Social Security, either partially or completely. I will not go into them here.
My argument against privatizing any part of Social Security is based on these premises:
(1) The behavior of the stock market and private investments in general is unpredictable. There are times when private investments are very lucrative. If a worker retires at such a moment, he or she may receive a very handsome retirement income. There are also times when these investments lose most of their value. If a worker retires during a depression, he or she will find that the retirement income isn’t worth much.
(2) Ours is a prosperous society. Our economic system can easily produce more goods and services than we can consume. There is no question that our society can afford to be generous to its retirees. In addition, society owed a debt of gratitude to those workers who have devoted their working years to producing the goods and services that we all have enjoyed. They are entitled to a decent retirement living. Society can and should provide for them.
(3) The choice for providing old age benefits seems to be between a government pension and a private annuity or savings account. Government is motivated to provide service. Private institutions are motivated to provide profit for themselves. Although there is dishonesty, corruption, and inefficiency in both government and private institutions, I tend to trust government more than private institutions to provide the decent retirement benefits that our retired workers are entitled to.
Having stated my objections to the President’s Social Security proposal, I feel I should suggest an alternative. I believe that Social Security should remain a pension provided by the government. The payroll tax is regressive and I would like to see it abolished. The Social Security Trust Fund is a fiction. The US Treasury Bonds held by the Social Security department should be cashed in and the proceeds used to pay benefits. Future benefits should be paid out of the general fund. The income tax rates should be adjusted as needed to raise the additional revenue lost through the abolition of the payroll tax.
Why do I write that the Social Security Trust fund is a fiction? Just follow the money. At present the payroll tax is high enough to pay all benefits and also invest in a very safe vehicle for future benefits. The safest vehicle is a US Treasury bond. Social Security takes the excess money to the Treasury and buys bonds. The Treasury puts the money into the general fund. The government spends the money. At some future time, Social Security needs extra money. It takes bonds to the US Treasury and cashes them in. The Treasury gets the money from the general fund. The government then has to replenish the general fund by some combination of raising taxes, selling more bonds, and cutting costs. By following the money, you can see that the idea that we are paying now for future benefits is a fiction.
[The idea that the Social Security Trust Fund is a fiction was expressed some time ago in a television interview by Allen Sloan.]
The basic argument in favor of privatizing part of Social Security (and, in fact, eventually privatizing all of it) is that the present method of funding by a payroll tax can not be sustained indefinitely. The payroll tax is imposed on the first X dollars (about seventy thousand at present) of a worker’s gross yearly wages, with no deductions allowed for dependants, charitable contributions, medical expenses, or other items allowed as deductions in determining the income tax. It is a regressive tax. Workers who earn more than X dollars a year pay a smaller percentage of their income as payroll tax than workers earning X or less. Although at present the payroll tax rate is set such that the total tax collected exceeds the total sum of all benefits paid, it is estimated that there will come a time when the benefit payments will exceed the tax collected. A simple fix would be simply to increase the tax rate. However, since the tax is already regressive, increasing the rate sufficiently to keep paying benefits to a growing fraction of the population that is retired would become politically impossible. Hence, privatizing the system by giving every worker an individual retirement account would eliminate the need to increase the tax rate. Some advocates expect that the private accounts would produce greater payments than the present scheme because of the growth of value and income provided by the private accounts.
There are other arguments in favor of privatizing Social Security, either partially or completely. I will not go into them here.
My argument against privatizing any part of Social Security is based on these premises:
(1) The behavior of the stock market and private investments in general is unpredictable. There are times when private investments are very lucrative. If a worker retires at such a moment, he or she may receive a very handsome retirement income. There are also times when these investments lose most of their value. If a worker retires during a depression, he or she will find that the retirement income isn’t worth much.
(2) Ours is a prosperous society. Our economic system can easily produce more goods and services than we can consume. There is no question that our society can afford to be generous to its retirees. In addition, society owed a debt of gratitude to those workers who have devoted their working years to producing the goods and services that we all have enjoyed. They are entitled to a decent retirement living. Society can and should provide for them.
(3) The choice for providing old age benefits seems to be between a government pension and a private annuity or savings account. Government is motivated to provide service. Private institutions are motivated to provide profit for themselves. Although there is dishonesty, corruption, and inefficiency in both government and private institutions, I tend to trust government more than private institutions to provide the decent retirement benefits that our retired workers are entitled to.
Having stated my objections to the President’s Social Security proposal, I feel I should suggest an alternative. I believe that Social Security should remain a pension provided by the government. The payroll tax is regressive and I would like to see it abolished. The Social Security Trust Fund is a fiction. The US Treasury Bonds held by the Social Security department should be cashed in and the proceeds used to pay benefits. Future benefits should be paid out of the general fund. The income tax rates should be adjusted as needed to raise the additional revenue lost through the abolition of the payroll tax.
Why do I write that the Social Security Trust fund is a fiction? Just follow the money. At present the payroll tax is high enough to pay all benefits and also invest in a very safe vehicle for future benefits. The safest vehicle is a US Treasury bond. Social Security takes the excess money to the Treasury and buys bonds. The Treasury puts the money into the general fund. The government spends the money. At some future time, Social Security needs extra money. It takes bonds to the US Treasury and cashes them in. The Treasury gets the money from the general fund. The government then has to replenish the general fund by some combination of raising taxes, selling more bonds, and cutting costs. By following the money, you can see that the idea that we are paying now for future benefits is a fiction.
[The idea that the Social Security Trust Fund is a fiction was expressed some time ago in a television interview by Allen Sloan.]
