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  • More Obfuscation on Social Security

    Posted by David Foster on May 18th, 2005 (All posts by )

    The Wall Street Journal (5/17) carries a letter from the AARP criticizing private accounts. Extract: “To compensate for the less of Social Security revenue into private accounts, the federal government would have to borrow significant sums in order to pay promised benefits–$754 billion in the first 10 years, and $3.5 trillion in the following decade.”

    AARP suggests as an alternative (1)raising the wage cap on SS taxes, and (2) “diversifying the Social Security Trust Fund investments to get a higher return.”

    Huh?

    To the extent that SS Trust Fund inflows are invested in corporate securities to get that “higher return”, they would not be available to fund other government shortfalls–thus, the government would have to issue additional debt to cover these shortfalls. Just as in the case of private accounts, the money going into the private accounts would have to be made up by other debt. Whether the money is invested by the government or by private account holders makes no difference on the amount of new Treasury debt that would have to be issued to offset it; the only thing that changes is the legal status of the account ownership.

    Also: one variant of private accounts would require that the money be invested in Treasury securities. In this case, the money would still be available to fund other government shortfalls…just as if it were going into the Trust Fund.

    The tradeoff with stock/bond investments is probably-higher returns in exchange for more issuance of government debt to cover the money no longer flowing in from SS payments. This applies whether the investments are made in the form of individual accounts or whether they are made thru a government pool.

    We need more clarification of what the SS alternatives really mean, which requires good-faith attempts to elucidate complex financial matters. There’s been far too little of this and far too much political posturing, on both sides.

     

    4 Responses to “More Obfuscation on Social Security”

    1. Jonathan Says:

      A big question which reform opponents tend to avoid is why enrollment in SS should be mandatory. If SS is really actuarially sound, letting people opt out of the system shouldn’t hurt it. OTOH, if the system is really a transfer scheme with no equity, then allowing opting out, while guaranteeing benefits to those who wish to stay in the sytem, seems like a politically doable start to needed reform.

      If it makes sense, as I think it does, to change the system into something like the Chilean one (where you had the option to stay in the original system or choose from an array of vetted private alternatives), any shortfall in SS revenues could be financed by long-term borrowing. Selling bonds is less economically destructive than is raising taxes. Also, by shifting some or most of the monies in the system into private investment funds we would be making those funds unavailable to pols for discretionary spending. The reformed system’s liabilities should be the same as the current system’s, but its assets would be much better controlled.

    2. dittybopper Says:

      Extract: “To compensate for the less of Social Security revenue into private accounts…” How can this be? How can there be a loss of revenue if the people don’t want voluntary private accounts? Isn’t that what the poles say? So, if the private accounts are voluntary and the people do not want them, how can there be a loss of revenue? The poles and AARP couldn’t be wrong could they?

    3. Tman Says:

      Another thing that had me scratching my head when reading that letter from the AARP (which is here by the way- Link) was the following statement-
      “Money to create private accounts would worsen the solvency outlook rather than improve it and lead to large benefit cuts. One-third of payroll taxes would be diverted each year from the task of paying current retirees to funding investment accounts. ”

      One third? Who ever said that ANYONE suggested diverting one third? Again, complete misinformation from the AARP. They know where their bread is buttered.

      [Link converted to html by JG. Please put links into the html format specified under “Post a Comment”. Otherwise long links screw up the display of the comment page.]

    4. Neal Phenes Says:

      If the AARP is indeed suggesting diversified investments as a safeguard of an investment portfolio, then what does that say about their commercials that portray investing in the stock market is similar to playing the slots in Vegas? Have they changed their tune about the safety of a divresified portfolio? If so, they wasted a lot of money on that commercial and they should contact their members to advise them to follow a prudent investment plan as suggested by the economists of the Bush Administration.