Details Of Social Security Reform Leaked

Speaking on condition of anonymity, one of those infamous administration officials revealed some of the details of President Bush's ideas for Social Security Reform.

The Associated Press reports the size of the private accounts could be similar to those in a proposal by Senator Lindsey Graham, R-S.C., and the main plan from Bush's 2001 Social Security commission:

The White House cautioned Tuesday that Bush had not decided on a specific plan.

But the administration is leaning toward letting workers divert 4 percentage points of their 6.2 percent in payroll taxes - almost two-thirds - into investment accounts, up to $1,000-$1,300 a year, the official said. The remainder of the workers' payroll taxes would continue going into the system.

Graham's plan calls for annual contributions to be capped at $1,300, while the commission proposed a $1,000 cap.

The more difficult aspect of any reform will be the financial tradeoffs. According to the Associated Press, any reform proposal will likely cut traditional benefits for younger workers to help fund the future shortfall, with returns from the private accounts expected to cover, but not guarantee, the difference. Then there is the issue of the estimated $800 billion to $2 trillion shortfall over 10 years caused by diverting payroll taxes into the proposed private accounts:

In the main plan offered by Bush's commission, promised benefits would be cut for many workers, with reductions ranging from 0.9 percent to 45.9 percent. Investments in the personal accounts are counted on to make up the income loss.

Growth in benefits would be slowed dramatically by tying them to inflation rates instead of wages. The rate of inflation grows more slowly than wages over a person's lifetime.

Income from the worker's private account, funded with a portion of their Social Security tax, would be expected to at least make up the reduction in benefits.

Comments

[Dave Schuler]

I understand the benefits of the plan. The problem that I have with it is one of political calculus. I can't imagine circumstances under which future Washington politicians will have the will power to refuse to insure these private accounts in which case the government will be financing something that approximates the current Social Security system without the revenues of the current Social Security system.

There's another problem I have with the plan. Equities are a commodity just as peanut butter or automobiles are. A substantial influx of money into mutual funds investing in equities will mean a lot more money chasing the same stocks so it's reasonable to expect that it will result in a sharp short term increase in stock prices especially for Fortune 500 stocks. Since a lot of the compensation of CEO's of such companies is in the form of stock options their compensation will rise without their having done a single thing to earn it.

I don't have any problem whatsoever with Fortune 500 CEO's making a lot of money. I do have a problem with Fortune 500 CEO's (and financial managers) making a lot of money through rent-seeking. So there really should be a wind-fall profits tax for the start up of a plan of the sort that's being proposed.