What I Know and Think I Know About Social Security - Part II
In the last column I outlined the way in which Social Security works, including the progression of its benefit schedule, and suggested changes that could be made to remedy the solvency gap with which the system is faced. Let's focus now on Bush's proposal for private Social Security accounts.
It would allow workers to invest a portion of their Social Security taxes in the market, that is, in one of several mutual funds selected by the government. The main rationale is that the market would offer greater returns than retirees are able to enjoy under the present system.
Private accounts were first offered as a means of eliminating the solvency gap. This can only be accomplished if greater gains from private accounts allow for reduction in the existing benefit schedule. For example, suppose a retiree would get $1,000 per month under the existing system, and he diverts half of his taxes into a private account.
Proponents of private accounts claim that for the half invested in the market he would get more than the $500 he would get under the present system - say, $700. So the benefit from the system could be reduced to, say, $400, and both sides would benefit: The system would save $100 and the retiree would receive $1,100 instead of $1,000 - if all goes well.
Private accounts have been sharply criticized for the risk they involve, as well as for the immense amount of money required to make up for lost taxes when the plan first goes into effect. What is more important, is the one objection that overrides every other argument, namely: If investment in the market is as profitable as advocates suggest, then why not change the law so that the Social Security system itself invests in the market? If there is good reason for individuals to invest in the market, there is even better reason for the system as a whole to do so, for the system would benefit from large-scale operation, and unlike individuals, it wouldn't have to worry about the market going sour when it had to draw out funds. Until this criticism is answered, all arguments on behalf of private accounts are bogus.
But even though the private accounts proposal may be dead in the water, it's worthwhile to consider its effects and implications. To begin, it would reduce the system's progressivity. Consider the example of two retirees, one of who is receiving $1,000 per month and the other $2,000 per month. Now suppose they each invested half of their taxes in the market. Their conventional benefits would be $500 and $1,000 respectively. Which is to say that the amount received according to a progressive benefits formula would be cut in half; while the market would determine the amount they receive from their investments. Progressivity is reduced in proportion to the amount invested in the market, and would therefore be reduced by private accounts.
It was obvious where Bush was heading with his private-accounts proposal, but after finding his way to private accounts blocked, he ambled down another path, called "progressive indexing." Remember that initial benefits are determined by indexing the earnings amounts to average wage levels, which rise more rapidly than the cost of living. On the progressive-indexing plan, this would continue to hold true only for the lowest 30% on the income scale -- those earning about $20,000 per year or less. For everyone else the initial benefit level would be indexed to the rise in cost of living or to some measure between that and the rise in wage level. All of these workers, therefore, would suffer a benefits cut. The difference between the rise in cost of living and the rise in average wages is only one percent, but over the years the difference would accumulate and would be substantial.
Although a supposedly liberal investment executive formulated the progressive indexing plan, it reeks "Bush." To be sure, it can be touted as progressive, but its progressivity is skewed. Like the present system, it doesn't even touch income over $90,000 per year. The burden of the plan is borne by the middle class, and these burdens would increase through the years. Thus Social Security would become increasingly irrelevant for the middle class, and they might become increasingly resentful toward the lower 30% whose benefits are unaffected.
The larger question raised by Bush's private-accounts proposal, along with his progressive-indexing proposal, is: Why? Bush hyped the Social Security "crisis" to the point of impugning the integrity of the government over which he presides. Then, as a way of resolving the "crisis," he pushed a proposal that would take the security out of Social Security, degrade the progressivity that has been one of its chief virtues, and threaten the foundation of the widespread loyalty it has enjoyed. Why would he go to such extremes in hyping the "crisis?" Why, to resolve the "crisis" would he offer a plan so antagonistic to the program he purports to save?
A useful clue is found by examining why Bush would focus on Social Security rather than on Medicare and Medicaid, which, by all reports, have the more serious problems. The most plausible answer is that private Social Security accounts, for all their faults, at least make sense in a way that private health care accounts do not. Let me explain: Social Security provides me money to buy the ordinary things of life - food, housing, clothes, etc. For these items, I can shop around and make effective decisions, because their costs are within my means and because I know what will satisfy my needs. Medicare and Medicaid, by contrast, provide health care, and when it comes to health care I cannot shop around and make effective decisions. Let's suppose I receive a health-care account amounting to, say $750 per month and let's suppose I have an accident. Am I going to shop around and find out which hospitals and doctors give the best service for the price? Of course not. And even if I have the opportunity to look around, I have no good way to determine which doctor or hospital offers the best treatment.
So it seems that Bush chose to focus on Social Security rather than Medicare/Medicaid because he could propose private accounts for the former but not the latter. Coupled with the fact that Bush hyped the Social Security "crisis" beyond all reasonable bounds, and hyped private accounts despite their being an unnecessary and undesirable solution, and the "why" jumps out at us: Bush's main purpose was not to solve the Social Security "crisis," but rather to sell the idea of private accounts. He hyped the "crisis" as a way of achieving this purpose.
Why were private accounts Bush's ultimate goal? Two answers are proffered by proponents, both unsupportable. One answer is that private Social Security accounts give the individual greater freedom in disposing of his money. However, what they need is the freedom that comes with having sufficient cash. Furthermore, the "freedom" offered by the private-account plan is largely illusory, for in order to provide a greater degree of security, the individual's choice would be limited to several mutual funds designated by the system.
Another rationale for private accounts is that they provide a way for the low-income individual to amass wealth. If you're not laughing already, put yourself in the position of the low-income Social Security recipient who relies largely on her Social Security benefits for daily living expenses.
Instead, the most plausible conclusion, as many others have suggested, is that Bush put forward private accounts simply because he wants to destroy Social Security as a progressive social insurance program. In its place he wants a system, or non-system, in which every individual is on his own. This is the point of his "ownership society."
In Bush's view, society is not a joint venture, but rather a jungle in which the economically powerful prosper and everyone else scrambles to get what they can. This is one of the ways Bushism degrades the quality of our lives.
While the evidence for my conclusion may be circumstantial, circumstantial evidence is often sufficient to convict - especially when there is a pattern of past misconduct.
It would allow workers to invest a portion of their Social Security taxes in the market, that is, in one of several mutual funds selected by the government. The main rationale is that the market would offer greater returns than retirees are able to enjoy under the present system.
Private accounts were first offered as a means of eliminating the solvency gap. This can only be accomplished if greater gains from private accounts allow for reduction in the existing benefit schedule. For example, suppose a retiree would get $1,000 per month under the existing system, and he diverts half of his taxes into a private account.
Proponents of private accounts claim that for the half invested in the market he would get more than the $500 he would get under the present system - say, $700. So the benefit from the system could be reduced to, say, $400, and both sides would benefit: The system would save $100 and the retiree would receive $1,100 instead of $1,000 - if all goes well.
Private accounts have been sharply criticized for the risk they involve, as well as for the immense amount of money required to make up for lost taxes when the plan first goes into effect. What is more important, is the one objection that overrides every other argument, namely: If investment in the market is as profitable as advocates suggest, then why not change the law so that the Social Security system itself invests in the market? If there is good reason for individuals to invest in the market, there is even better reason for the system as a whole to do so, for the system would benefit from large-scale operation, and unlike individuals, it wouldn't have to worry about the market going sour when it had to draw out funds. Until this criticism is answered, all arguments on behalf of private accounts are bogus.
But even though the private accounts proposal may be dead in the water, it's worthwhile to consider its effects and implications. To begin, it would reduce the system's progressivity. Consider the example of two retirees, one of who is receiving $1,000 per month and the other $2,000 per month. Now suppose they each invested half of their taxes in the market. Their conventional benefits would be $500 and $1,000 respectively. Which is to say that the amount received according to a progressive benefits formula would be cut in half; while the market would determine the amount they receive from their investments. Progressivity is reduced in proportion to the amount invested in the market, and would therefore be reduced by private accounts.
It was obvious where Bush was heading with his private-accounts proposal, but after finding his way to private accounts blocked, he ambled down another path, called "progressive indexing." Remember that initial benefits are determined by indexing the earnings amounts to average wage levels, which rise more rapidly than the cost of living. On the progressive-indexing plan, this would continue to hold true only for the lowest 30% on the income scale -- those earning about $20,000 per year or less. For everyone else the initial benefit level would be indexed to the rise in cost of living or to some measure between that and the rise in wage level. All of these workers, therefore, would suffer a benefits cut. The difference between the rise in cost of living and the rise in average wages is only one percent, but over the years the difference would accumulate and would be substantial.
Although a supposedly liberal investment executive formulated the progressive indexing plan, it reeks "Bush." To be sure, it can be touted as progressive, but its progressivity is skewed. Like the present system, it doesn't even touch income over $90,000 per year. The burden of the plan is borne by the middle class, and these burdens would increase through the years. Thus Social Security would become increasingly irrelevant for the middle class, and they might become increasingly resentful toward the lower 30% whose benefits are unaffected.
The larger question raised by Bush's private-accounts proposal, along with his progressive-indexing proposal, is: Why? Bush hyped the Social Security "crisis" to the point of impugning the integrity of the government over which he presides. Then, as a way of resolving the "crisis," he pushed a proposal that would take the security out of Social Security, degrade the progressivity that has been one of its chief virtues, and threaten the foundation of the widespread loyalty it has enjoyed. Why would he go to such extremes in hyping the "crisis?" Why, to resolve the "crisis" would he offer a plan so antagonistic to the program he purports to save?
A useful clue is found by examining why Bush would focus on Social Security rather than on Medicare and Medicaid, which, by all reports, have the more serious problems. The most plausible answer is that private Social Security accounts, for all their faults, at least make sense in a way that private health care accounts do not. Let me explain: Social Security provides me money to buy the ordinary things of life - food, housing, clothes, etc. For these items, I can shop around and make effective decisions, because their costs are within my means and because I know what will satisfy my needs. Medicare and Medicaid, by contrast, provide health care, and when it comes to health care I cannot shop around and make effective decisions. Let's suppose I receive a health-care account amounting to, say $750 per month and let's suppose I have an accident. Am I going to shop around and find out which hospitals and doctors give the best service for the price? Of course not. And even if I have the opportunity to look around, I have no good way to determine which doctor or hospital offers the best treatment.
So it seems that Bush chose to focus on Social Security rather than Medicare/Medicaid because he could propose private accounts for the former but not the latter. Coupled with the fact that Bush hyped the Social Security "crisis" beyond all reasonable bounds, and hyped private accounts despite their being an unnecessary and undesirable solution, and the "why" jumps out at us: Bush's main purpose was not to solve the Social Security "crisis," but rather to sell the idea of private accounts. He hyped the "crisis" as a way of achieving this purpose.
Why were private accounts Bush's ultimate goal? Two answers are proffered by proponents, both unsupportable. One answer is that private Social Security accounts give the individual greater freedom in disposing of his money. However, what they need is the freedom that comes with having sufficient cash. Furthermore, the "freedom" offered by the private-account plan is largely illusory, for in order to provide a greater degree of security, the individual's choice would be limited to several mutual funds designated by the system.
Another rationale for private accounts is that they provide a way for the low-income individual to amass wealth. If you're not laughing already, put yourself in the position of the low-income Social Security recipient who relies largely on her Social Security benefits for daily living expenses.
Instead, the most plausible conclusion, as many others have suggested, is that Bush put forward private accounts simply because he wants to destroy Social Security as a progressive social insurance program. In its place he wants a system, or non-system, in which every individual is on his own. This is the point of his "ownership society."
In Bush's view, society is not a joint venture, but rather a jungle in which the economically powerful prosper and everyone else scrambles to get what they can. This is one of the ways Bushism degrades the quality of our lives.
While the evidence for my conclusion may be circumstantial, circumstantial evidence is often sufficient to convict - especially when there is a pattern of past misconduct.
Volume 1, Issue 2, Posted 10.19 PM / 04th August 2005.