Social Security

Social security is very boring. I really couldn't give a rat's ass about it. But I guess it's important for us 20-somethings to think about. George Bush talked about the issue quite a bit in last night's State of the Union address, and this article reviews his proposal.


Here's the highlights:


Bush’s Social Security plan akin to a loan

Participants would forfeit part of accounts' profits
By Jonathan Weisman
Washington Post

WASHINGTON - Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately get to keep only the investment returns that exceed the rate of return that the money would have accrued in the traditional system.

... it could come as a surprise to lawmakers and voters who have thought of these accounts as akin to an individual retirement account or a 401(k) that they could use fully upon retirement.

"You'll be able to pass along the money that accumulates in your personal account, if you wish, to your children . . . or grandchildren," Bush said last night. "And best of all, the money in the account is yours, and the government can never take it away."

The plan is more complicated...


'It's not a nest egg. It's a loan.'

In effect, the accounts would work more like a loan from the government, to be paid back upon retirement at an inflation-adjusted 3 percent interest rate — the interest the money would have earned if it had been invested in Treasury bonds, said Peter R. Orszag, a Social Security analyst at the Brookings Institution and a former Clinton White House economist.

"I believe you should be able to set aside part of that money in your own retirement account so you can build a nest egg for your own future," Bush said in his speech.

Orszag retorted: "It's not a nest egg. It's a loan."

Under the system, the gains may be minimal...


With a 4.6 percent average gain over inflation, the government keeps more than 70 percent. With the CBO's 3.3 percent rate, the worker is left with nothing but the guaranteed benefit.
If instead, workers decide to stay in the traditional system, they would receive the benefit that Social Security could pay out of payroll taxes still flowing into the system, the official said. Which option would be best is still unclear because the White House has yet to propose how severely guaranteed benefits would be cut for those with individual accounts.

... Basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase."

Robert Pozen, a Massachusetts investment executive who served on the president's Social Security Commission, said the mechanism makes sense. Workers who draw money out of the Social Security system for their accounts should have to pay that money back with interest.

Limited choice

But critics of the Bush plan ...

Indeed, the system would ultimately look something like a proposal made by President Bill Clinton, in which the government would have invested Social Security taxes in the stock market.

That idea was criticized by conservatives because the federal government could end up choosing winners and losers in the financial markets. But under the Bush system, the government is still choosing the stocks and bonds to be bought with Social Security money, said Jason Furman, a former Clinton administration economist. Individuals would get a limited choice, and the government would still keep most of the returns.

...

link: http://www.washingtonpost.com/wp-dyn/articles/A59136-2005Feb2.html
if the link has expired and you want to read the article, let me know, I will get it.