Social Security
President Bush created already huge deficit with his policy of cutting taxes and raising spending at the same time. Now he would like to make a new hole in the budget with his plan to transform Social Security. Bin Laden claims that his goal is to
bankrupt the US; it looks like Bush does everything to help Bin Laden to achieve this goal.
Bush bases his plan on the fact that in the average the return of stocks is higher than the return of treasury securities. One can use this idea to solve the problems of Social Security without massive borrowing required by Bush proposal.
Social Security is a huge defined benefits pension plan. The main difference between Social Security and other pension plans of this kind is the rule that SSA can invest only in treasury securities and other pension plans do not obey this restriction. If Social Security were considered as a regular pension plan its financial situation would be excellent. Why could not we change the rules? This is not a new proposal; for example, it was suggested to divert 15% of SS tax to stocks and bonds.
Stocks give higher returns because they are more risky and individual accounts envisioned by Bush cannot provide secure income. However, a pension plan with long term goals can bear the risk; for Social Security the risk becomes insignificant in the long run. We get all benefits of individual investment accounts without their drawbacks. As an added benefit we obtain smaller management fees: it is much cheaper to manage large investments.
There exist serious objections against this proposal. It can lead to substantial influence of the government on the economy and such an influence is very dangerous. The investment decisions of bureaucrats are far from optimal ( better to say, the bureaucrats optimize their own well being). It seems, however,
that one can avoid all of these troubles.
The only way to guarantee that bureaucrats will not make wrong investment decisions is to avoid giving them the right to decide. This means that all decisions should be included in the law . For example, one can accept a rule that some part of SS tax should be invested in all existing mutual funds (or only in index funds) and the amount of investment should be proportional to the market share of the fund. One can modify this formula taking into account past returns, the degree of risk, etc; it is important only that the rule should be very precise and known to everybody. Of course, a formula of this kind cannot be optimal, however, it will work better than a decision of an average owner of individual account.
Such an investment strategy of SSA will not lead to market distortion.
In Roosevelt times Social Security was dismissed by many Republicans as a socialist idea. Today most of us agree that this was a good idea (and people having different opinion prefer to keep their opinion for themselves). Social Security is government program of right kind: all important decisions are made by Congress and bureaucrats do not have any power to change them. The above proposal has the same features.
What about individual accounts? This is a wrong idea if we are talking about saving Social Securiry,
however, it is a very good idea to create them at the top of Social Security. The goal of the government was to provide a safety net for retirees and this goal was achieved: Social Security provides them with modest, but decent standard of life. However, a natural goal of every person is to preserve his standard of life after retirement. This is his own problem, but the government can and should help him. Now the government is encouraging the retirement saving with its tax policy
(I am talking about IRA, 403 b plans, etc). However, the use of tax deductions in this relation is not reasonable. Let us suppose that a person in 33% tax bracket contributes $1000 to tax deductible IRA account. This means that he pays from its pocket only $670 and $330 are taken from the government. In other words, the government contributes $500 for
every $1000 invested by taxpayer. However, if the taxpayer is in 15% tax bracket, the government contributes only $175 for $1000 he invested. There is no incentive for young people that do not earn very much to contribute. The situation will change if instead of tax incentive we will have a fund that matches contributions of all people with the same rate (or , may be , contributions of young people should be matched with higher rate). The government could make an initial contribution to the retirement account ( one of proposals of this kind has a fancy name KidSave) and pay the management fee if the annual contribution exceeds some limit.
People will be real owners of their accounts ; they
will be able to make their own investment decisions.
(Notice, that in all proposals concerning the Bush-style reform of Social Security the freedom of
decisions of individual account holders is severely restricted.)
bankrupt the US; it looks like Bush does everything to help Bin Laden to achieve this goal.
Bush bases his plan on the fact that in the average the return of stocks is higher than the return of treasury securities. One can use this idea to solve the problems of Social Security without massive borrowing required by Bush proposal.
Social Security is a huge defined benefits pension plan. The main difference between Social Security and other pension plans of this kind is the rule that SSA can invest only in treasury securities and other pension plans do not obey this restriction. If Social Security were considered as a regular pension plan its financial situation would be excellent. Why could not we change the rules? This is not a new proposal; for example, it was suggested to divert 15% of SS tax to stocks and bonds.
Stocks give higher returns because they are more risky and individual accounts envisioned by Bush cannot provide secure income. However, a pension plan with long term goals can bear the risk; for Social Security the risk becomes insignificant in the long run. We get all benefits of individual investment accounts without their drawbacks. As an added benefit we obtain smaller management fees: it is much cheaper to manage large investments.
There exist serious objections against this proposal. It can lead to substantial influence of the government on the economy and such an influence is very dangerous. The investment decisions of bureaucrats are far from optimal ( better to say, the bureaucrats optimize their own well being). It seems, however,
that one can avoid all of these troubles.
The only way to guarantee that bureaucrats will not make wrong investment decisions is to avoid giving them the right to decide. This means that all decisions should be included in the law . For example, one can accept a rule that some part of SS tax should be invested in all existing mutual funds (or only in index funds) and the amount of investment should be proportional to the market share of the fund. One can modify this formula taking into account past returns, the degree of risk, etc; it is important only that the rule should be very precise and known to everybody. Of course, a formula of this kind cannot be optimal, however, it will work better than a decision of an average owner of individual account.
Such an investment strategy of SSA will not lead to market distortion.
In Roosevelt times Social Security was dismissed by many Republicans as a socialist idea. Today most of us agree that this was a good idea (and people having different opinion prefer to keep their opinion for themselves). Social Security is government program of right kind: all important decisions are made by Congress and bureaucrats do not have any power to change them. The above proposal has the same features.
What about individual accounts? This is a wrong idea if we are talking about saving Social Securiry,
however, it is a very good idea to create them at the top of Social Security. The goal of the government was to provide a safety net for retirees and this goal was achieved: Social Security provides them with modest, but decent standard of life. However, a natural goal of every person is to preserve his standard of life after retirement. This is his own problem, but the government can and should help him. Now the government is encouraging the retirement saving with its tax policy
(I am talking about IRA, 403 b plans, etc). However, the use of tax deductions in this relation is not reasonable. Let us suppose that a person in 33% tax bracket contributes $1000 to tax deductible IRA account. This means that he pays from its pocket only $670 and $330 are taken from the government. In other words, the government contributes $500 for
every $1000 invested by taxpayer. However, if the taxpayer is in 15% tax bracket, the government contributes only $175 for $1000 he invested. There is no incentive for young people that do not earn very much to contribute. The situation will change if instead of tax incentive we will have a fund that matches contributions of all people with the same rate (or , may be , contributions of young people should be matched with higher rate). The government could make an initial contribution to the retirement account ( one of proposals of this kind has a fancy name KidSave) and pay the management fee if the annual contribution exceeds some limit.
People will be real owners of their accounts ; they
will be able to make their own investment decisions.
(Notice, that in all proposals concerning the Bush-style reform of Social Security the freedom of
decisions of individual account holders is severely restricted.)
posted by Republican-against-Bush at 11:43 PM
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