Saturday, February 05, 2005
"Fixing" Social Security
President Bush proposes to “fix” Social Security by allowing workers to put part of their payroll tax into investment accounts. These accounts would draw interest or dividends and would be used after retirement to provide income.
The President says that the problem with Social Security as it is now funded is that in time the number of retirees will increase more rapidly than the number of workers. At present there are about three workers for each retired person. By 2050 or so, there will be only two workers per retiree. The payroll tax then will not pay for all the benefits that retirees receive under the system.
It is clear to me that a sensible correction to the Social Security problem is to increase the payroll tax, not by increasing tax rate but by raising the cap on taxed earnings from the present limit of around ninety thousand dollars per year to, say, two hundred thousand. Such a correction would keep the system solvent for many years after 2050 and would provide plenty of time in the future to develop other useful changes.
President Bush says that his proposal to have workers invest part of their payroll taxes in savings accounts would “fix” or “save” the system. However, it would do nothing to relieve the shortfall that will occur about 2020, when the payroll tax will no longer fund all the benefits. At that time the Social Security Administration will have to start cashing in the bonds deposited in the trust fund. These bonds represent the excess of payroll tax over the cost of benefits. The switch to individual savings accounts will not delay the date when the trust fund bonds are used up, some time around 2050. In fact, it probably will hasten that date.
What is he talking about? What does he mean?
I believe he really means to abolish the system. That is his permanent “fix.” To abolish the system, he must first convince the public that it is going to go broke. He must also convince the public that individual savings accounts are better than a guaranteed pension or annuity. He has already divided his audience into two groups: those born before and after 1950. He assures the older group that any change will not affect them. He assures the younger group that individual accounts will be better for them than what the present system will provide. He expects that future historians will celebrate him as the President who was able to bring about the demise of the Social Security system adopted in the time of Franklin Roosevelt.
I hope he doesn’t succeed.
The President says that the problem with Social Security as it is now funded is that in time the number of retirees will increase more rapidly than the number of workers. At present there are about three workers for each retired person. By 2050 or so, there will be only two workers per retiree. The payroll tax then will not pay for all the benefits that retirees receive under the system.
It is clear to me that a sensible correction to the Social Security problem is to increase the payroll tax, not by increasing tax rate but by raising the cap on taxed earnings from the present limit of around ninety thousand dollars per year to, say, two hundred thousand. Such a correction would keep the system solvent for many years after 2050 and would provide plenty of time in the future to develop other useful changes.
President Bush says that his proposal to have workers invest part of their payroll taxes in savings accounts would “fix” or “save” the system. However, it would do nothing to relieve the shortfall that will occur about 2020, when the payroll tax will no longer fund all the benefits. At that time the Social Security Administration will have to start cashing in the bonds deposited in the trust fund. These bonds represent the excess of payroll tax over the cost of benefits. The switch to individual savings accounts will not delay the date when the trust fund bonds are used up, some time around 2050. In fact, it probably will hasten that date.
What is he talking about? What does he mean?
I believe he really means to abolish the system. That is his permanent “fix.” To abolish the system, he must first convince the public that it is going to go broke. He must also convince the public that individual savings accounts are better than a guaranteed pension or annuity. He has already divided his audience into two groups: those born before and after 1950. He assures the older group that any change will not affect them. He assures the younger group that individual accounts will be better for them than what the present system will provide. He expects that future historians will celebrate him as the President who was able to bring about the demise of the Social Security system adopted in the time of Franklin Roosevelt.
I hope he doesn’t succeed.
