Letters to members of Congress do make a difference, especially when they’re personally written and not merely duplicates of mass mailed letters. Now that Alan Greenspan has tried to nudge the Congress into acting, I hope that people who read this will take the time to send emails supporting legislation allowing Americans to divert their payroll taxes from the pay-as-you-go sinkhole to personally owned investment accounts.
The Cato plan is described here, the White House’s effort here. What’s important now is to allow people to choose to put what would otherwise be tax payments into personally owned accounts, not merely to have more “add-on” accounts — such as additional IRA or 401(k) accounts — created. (More details on the politics of the issue can be found at www.socialsecuritychoice.org, now run by former Rep. Pat Toomey.)
Writing letters is easy and can be done starting right now and finished in a couple of minutes. To write to your Representative in the House, click here; to write to your Senators, click here. Congressional staff members do read and count the letters. A higher number of letters pro or con does influence how the waverers vote.
I just got back from watching Mike Tanner debate with an AARP representative and a Berkeley economist. It was in downtown SF. The crowd, mixed age, displayed at least a 50% support for Private Accounts. Very encouraging.
I wrote my reprentative a while ago, asking her to support the Flake/Johnson plan. I got a polite and thoughtful reply back, but I have doubts she’ll ever go in that direction.
To peddle my own wares, if I may, I have a Social Security Calculator page here:
http://www.granitetower.net/sscalc.html.
Cato, of course, has a great calculator for projected retirement benefits. I wanted to find out what my portfolio would have been currently if we had had the Flake/Johson plan in earlier years/decades. You can use the link above to find that out for yourself — I call it the ‘Social Security Historical Calculator.’
The first danger here is that the personally “owned” accounts will be so heavily regulated as to make to notion of ownership moot. Ownership is control, not title.
The second danger here is that regulation of these accounts will lead to state intervention in the stock market.
No guarantee by any politician that proposed reforms will address these issues is of any value, for obvious reasons.
T. J.,
I agree that there is reason to be concerned about intervention in the stock market. However, the federal government has the thrift savings plan for federal employees already and it is an example of how to avoid the kind of tinkering we are both concerned about. There are only a handful of choices, all of them very broad-based equity or bond index funds managed by Barclays Bank.
I also would like total control, but I’ll settle for title today and the limited control I’d have over fund selection. That beats today’s system, where I have no control or title.
The substantive economic difference here is spending versus savings. I may not be able to control how much the federal government borrows to pay for out of control spending, but with personal accounts, at least there will be a few more dollars actually saved and invested.
Imagine if, instead of saving and investing for your own retirement, you took your 401k funds and spent them every year on season tickets for your favorite sports franchise or a trip to the Middle East. You wouldn’t expect to have a very comfortable retirement. That’s effectively what Congress has been doing. It would be illegal and immoral if your personal retirement fund manager did it. It may be legal, but it is no less immoral when Congress does it. Worse, when they do it, they are counting on their future ability to force our kids and grandkids to pay taxes to pay back the debt that is currently held largely by foreign governments, debt those governments are planning on redeeming to pay their own “baby boom” retirement woes.
I don’t think personal retirement accounts will help. I think it would help if the federal government stopped confiscating my money and the money of my employer to give to hucksters and swindlers altogther, rather than switching the direction of my funds from government hucksters to “capitalist” swindlers.
Of course both of these proposals would cause more distortion in our already extremely distorted capital markets. I may have more “options” but all these options do is funnel money to whatever investment options that are deemed to be politically worthy. I would imagine that the requirements for what investments are allowed will involve further politicization of the capital market. These proposals, if enacted, will be another window which the SEC can impose its decrees on the market. Essentially this will be more welfare for established Wall St interests. Those with the right political capital will win a place in the SS pie while the others are marginalized through greater regulation.
The current social security system is a Ponzi scheme fraught with disaster, however, these proposals do not advance liberty. Rather, they may end up being just another Trojan Horse for the state. We need a real solution that will not further harm to the capital markets.
Hmmm…
It seems, Tom, as if at least a few of your blog readership are not quite yet willing to write letters to Congress over this issue. I must say I’m surprised. Any first step, no matter how small, is a step away from a looming disaster.
Ross
Casey,
Please do a little research on the Federal Employees’ Thrift Savings Plan. I think you’ll discover that your concerns about market distortions are reasonably well addressed. My own judgment is that by offering a limited selection of broad-based index funds (S&P 500, Russell 2000, that kind of thing), the opportunity to decide that company X is politically unsuitable as an investment for retirement funds is minimized. The actual management fees are very low and the funds are currently managed by Barclays Bank, not some government bureaucrat.
As for the SEC, they don’t need any other windows… they have plenty as it is and are actively using them. They’ve shown no indication that I’ve seen that they feel ‘constrained’.
I also must disagree with your conclusion that these proposals do not advance liberty. Taking ANY portion of my current social security taxes out of the hands of government to immediately spend and putting it in an account that has my name on it and is actually invested is a huge (HUGE!) step in the right direction. No, it isn’t all the steps. But at least it isn’t what we will end up with if we do nothing… higher taxes AND reduced benefits, resulting a negative effective return, if, indeed, there is any return at all.
Please consider supporting the plan. Ownership – even with limited control – is important. Ownership would overturn, for at least that part of the money that has your name on it, the Supreme Court ruling that you have no claim whatsoever to any benefit other than the one the 536 decide you deserve.
“Taking ANY portion of my current social security taxes out of the hands of government to immediately spend and putting it in an account that has my name on it and is actually invested is a huge (HUGE!) step in the right direction.”
But what if they’re still taking just as much money from you, through the back door via hidden taxes and inflationary debt, to pay recipients of Social Security welfare? If the same amount of coerced redistribution is happening, and in addition you also have to pay into some government-regulated private account, how is this a step in the right direction?
Unless the amount taken by force is reduced, which can only really happen if the amount given by the government to recipients is reduced, it is not that great of a plan.
Various commentators above have pointed to the risks that a change from the current system might be hijacked by statists for their own purposes. That’s true. And it’s true of any proposed change, for the simple reason that sometimes the good guys lose. So all proposed changes have risks, from the risk that you’ll fail to the risk that you’ll instead get something worse. That’s not news. It’s also the case that not changing the system has risks, or at least foreseeable costs (ever escalating taxes to finance obligations). If we want to avert the immense taxes for which the current system will generate enormous pressures, we have to change it. We have to let people out of the seizures of their assets and out of the system of dependency on the state that Social Security creates.
Allowing people to opt out of the system and thereby to reduce their claims on the system is a good deal. And, contrary to the cries of the opponents, last year’s Nobel Prize Winner, Edward Prescott, shoed (in his recent presentation at Cato’s February 8 conference on “Social Security: The Opportunity for Real Reform,” http://www.cato.org/events/ssconf05/program.html ): “There are no transition costs.” (The fact is that those who complain about “transition costs” simply ignore the massive unfunded liabilities of the current system. For more, see http://www.socialsecurity.org/daily/03-30-99.html , http://www.socialsecurity.org/pubs/ssps/ssp13es.html .)
Mr. Gunn states “I think it would help if the federal government stopped confiscating my money and the money of my employer.” (In fact, all of the money is taken from Mr. Gunn; the so-called “employer’s share” is a pure ruse, since it all comes out of the employee’s pocket; his employer pays what it takes to hire Mr. Gunn, and is indifferent to whether to goes to him or to the government.) I agree. If Mr. Gunn has a strategy to bring that about, I encourage him to send it to me. (Having just re-read that, it sounds like pure sarcasm, but that’s not how I intend it. I wish I knew how to achieve what he describes. I think that allowing him to determine that his money will go into investments that he would earn, rather than being spent by the Social Security Administration on government bonds, which merely finances current government expenditures, would be an improvement, a very big improvement. It would also diminish his future claim on government, which would diminish the likelihood that he would be dependent on the state.)
The currently debated reforms are not perfect. They’re not guaranteed not to be hijacked. Life is like that. They are improvements and there is no improvement without action, and action always entails risks. Life is like that, too.
“these proposals do not advance liberty”
I’m not sure ‘advancing liberty’ should be the _only_ yardstick, but consider this:
With the current system, future generations may have to pay as much as 25% in payroll tax. (As per June O’Neill, http://www.socialsecurity.org/pubs/ssps/ssp-26es.html)
With Private Accounts, long term the payroll tax could be reduced to 6-8%.
You don’t think effectively reducing the payroll tax by a factor of three would advance liberty?
“the amount taken by force is reduced, […] can only really happen if the amount given by the government to recipients is reduced”
The proposals do not reduce the amount given to recipients, but they do, in the long run, reduce the number of recipients. As Private Accounts mature, more retirees will be supported by pre-funded portfolios. This will drastically reduce the “amount taken by force.”
As Lew Rockwell writes (http://www.mises.org/fullstory.aspx?Id=1695): “One excuse given is that Social Security needs to be reformed and this is the only politically viable way to do it. But consider the following: if it is politically possible to fund current recipients out of something other than current receipts, why not just let people keep their own money? Why not just cut? Why not permit an expansion of tax-free savings accounts? Or best of all, why not let people use the money for whatever purpose they want? If we are willing to tolerate vast debt incurred in order to pay off current recipients, then why not just let people opt out of the system completely?”
It’s not entirely true that there is no transition cost. The cost is that, for the foreseeable future, we are going to be taxed (either through FICA, through general revenues, or through debt) to support the full costs of the existing SS system, while at the same time having some amount of income commandeered into the forced-savings plan. I realize that the hope is that the plan will eventually lead to tax cuts, and this is why it’s possible for libertarians to be on either side of this question in good faith. I just can’t really say that I’m in favor of a plan that will have the immediate effect of putting more resources under the control of the feds. Especially when you consider the nightmare scenario, mooted by George Reisman, where the government could potentially wind up appointing directors to the boards of major corporations.
There is no scenario under which this change would result in the government ending up appointing directors to the boards of major corporations. Unlike CalPERS, which invests in individual equities, the TSP does not. It invests in index funds.
As for “transition costs”, it’s a ‘pay me now or pay me later’ situation. A couple of over the next few years will be painful. But no where near as painful as the 12 trillion (in current value dollars) later.
I certainly wish one of the options on the table was a complete ‘opt out’ option. It isn’t. Enough said.
Finally, the real issue here is ownership. Right now, you pay your taxes and Congress spends it (and more). Anything that lets me keep (even with restrictions, like IRAs and 401ks have) a few more dollars and divert them from the spending monster is goodness. I don’t know how they will plug that gap in their finances, but I do know that my net worth will rise over time. Given that one of the options in the TSP is a foreign equities fund, I don’t even have to invest in dollar-denominated assets.
Please, if you don’t yet see a difference between the proposal and what currently exists, is that really a reason to oppose it? Many of us DO see a difference and a very considerable positive one at that. If you see a negative one, let’s talk. But if you’re just not sure it will do all the things the proponents claim for it, or you don’t see the ‘crisis’, please don’t let that stand in your way from supporting a change that many, many people far more expert than myself say is the best shot we’ll have at positive change for many years. There really isn’t any point in holding out for something even better. If we can’t get this passed, there’s no way we’ll get to something better anytime soon.
Thanks for your consideration.
Honestly, Tom, Social Security is one of the few institutions I would simply like to see fall straight on its ass. For once, it would be nice to see the geriatric freeloaders and their representative thieves running around like chicken littles trying to find out who to scapegoat as their little money machine finally breaks. I know it’s not particularly constructive, and probably more of a Randian motivation than a Rothbardian one, but I’m sick and tired of “poor” Americans screaming bloody murder just because their monthly budget is starting to approach that of the other half of the world, who often happen to live quite happily on incomes far below our poverty line.
You want to make retirement easier: reduce property taxes, reduce sales taxes, reduce FICA contributions so I can save more (or not, if I want). Get rid of federal monstrostities that are Medicaid and Medicare, and hand out joints to the elderly that complain about pain problems (far more effective and cheap than the latest nasty Oxycontin clone).
Old people think they have the right these days to everything: the right to expensive designer drugs, the right to pain free old age, the right to be coddled by their youngers. These aren’t rights, these are obligations placed on me by people that weren’t responsible enough to take care of themselves and raise good children that understand their obligation to care for and love their parents. Sad because you’re in pain? Old age IS pain, have some dignity and bear it with pride or go off yourself, I don’t care anymore.
If you think old age welfare is bad now, with the moderately self-serving WWII generation, just you wait till the absolute wasteland of self-loving filth that is the baby boomers start collecting. Private accounts won’t stem the tide of the whining, collectivist post-hippie mendicants clawing for “their fair share.” So go ahead and promote private accounts. It won’t help SS, but I guarantee you it will remove whatever’s left that’s good and decent about the financial sector.
I wish those pushing private accounts would be more honest about motivation. Some folks in this thread are, but not all.
This isn’t about saving social security — it is about eventually dismantling it. Private accounts would be a structural change that would be close to impossible to reverse, and that is why its proponents like it. It is a stealth action to reduce payouts without calling it that, as well as a way to not pay back the overpayment current workers have been making for years (a strategy designed by Greenspan, of course), which have been financing tax cuts that have largely gone to the wealthy.
This is a valid viewpoint, although the implicit class warfare bothers me. (Across the board tax cuts, an honest small government president instead of a cut-tax-and-spend-more one like we have now, and a real strategy for benefits reduction rather than deceptive economics would be my preference).
I would simply like to see more honesty about it — that Cato benefits calculator is so economically rosy as to be pure fantasy. But, that’s politics for you.
Interesting comments, all.
I fear that Mr. Gunn’s fears are more likely to be realized if we *don’t* go to personal accounts, i.e., if the boomers simply come to expect a complete ride from Social Security (just as the president has promised them unlimited Viagra).
Skipple Fish (henceforth “Mr. Fish”) raises some interesting issues. On the accuracy of the Cato Social Security calculator, it was put together based on rather conservative assumptions about rates of returns to personal investment accounts. (The calculator is at: http://www.socialsecurity.org/reformandyou/sscalc/sscalc.php ; if you put in the data and click, it will then take you to a description of the assumptions.) I am not knowledgeable enough to expound at length on the matter, but Dr. Gokhale and others spent a good bit of time on the matter and they know much more about such matters than I do.
Mr. Fish is correct that this is a strategic debate over the future of the welfare state. I prefer a system of individual ownership, with the claims on the state diminishng over time to zero. That is one outcome of a system of personal accounts, by which one’s claims on the system are reduced to the extent of one’s involvement in the personal account system, with the youngest workers relying entirely on the results of their savings, as multiplied by one of the strongest forces in the universe: compound interest. Such a move would substitute private property for dependency on the state. It is predictable that, since the Cato Institute and other “D.C. based” (or “Beltway libertarian”) think tanks and groups have promoted allowing people to divert what would otherwise be tax-payments-into-a-PAYGO-system into their own personal investment accounts, some others (most notably Lew Rockwell) have decided instead actively to support the perpetuation of the welfare state, by engaging in a bit of minor adjustments around the edges. So rather than move from welfare statism to ownership, Rockwell and Co. prefer to keep the current system and fiddle with the controls a bit. (He covers himself by saying, really, he’d like to abolish it all at once, if he could.)
What happens in the debate and the legislative battle over Social Security will to a very large extent determine the future of our society: state dependency or ownership.
Mr. Fish,
I have no problem with an elderly anti-poverty program. I do have a serious philosophical problem with an open-ended program that transfer wealth from one generation to another with absolutely no connection between the amount contributed and the amount received. Social Security is this in my mind.
I say that based on the following not-so-unrealistic possibility… Suppose one a research institution develops technology (perhaps in the form of a pill, perhaps surgical, perhaps a combination) that permits significant extension of life.
The way the system is presently strucutred, no matter how long Warren Buffet lives, he will get first claim on my income. Further, no matter what the technology costs, paying for that also has superior claims on my income over my own health and well-being.
This is a prescription for disaster. One should be able to retire when they have saved enough to do so, whether that be at 50 or 70.
The components of Social Security that provide minimal disability and life insurance benefits are not at issue here. Nor is the need for an a program to prevent abject poverty for anyone, regardless of age.
It is just the transfer of wealth from the young to the old, from the short-lived to the long-lived, from the poor to the rich that I have problem with.
The idea that one group of citizens can, “democratically” enslave another group of citizens is abhorrant to me. We on the ‘pro-personal accounts’ side sometimes mention the fact that social security benefits are subject to being reduced by Congress. But they could just as easily be increased. As they were when the prescription drug benefit was added to Medicare. No one has already contributed to the system for that trillion dollar benefit.
Please tell me what is to prevent future similar actions?
As always happens, the discussion fragments several different directions. Nonetheless, this is a good discussion.
Re: Cato’s calculator: the main thing that I find absurd about it is the assumption that one’s income grows at a constant rate of 4% per year throughout one’s working life. According to that calculator, a 22 year old starting out with a $30K salary today will be making, at age 67, $175,235.27 in constant 2005 dollars. I don’t have figures at hand, but do submit that such income growth is unlikely to hold true for a large majority of the population outside of Lake Woebegone (where everyone’s above average).
I’m pleased to see Tom stating clearly that it is, in his view, a strategic struggle. As I was alluding to, would that everyone were so forthright.
Personally, I am very much in favor of a smaller welfare state, personal responsibility, lower taxes, etc. As I mentioned, what I strongly dislike, and would like to see SS-unrolling fans address, is the class-warfare aspects. As mentioned, there was a concerted effort to run up a surplus in SS, presented at the time as a way to save it. The burden of that run up fell on those making less than $80K. Now, the same people who designed that run-up are declaring it is all for naught, and a looming deficit crisis caused in part by tax cuts that largely favor the very wealthy requires cuts.
I suppose I’m especially sensitive to this for personal reasons. Just to disclose bias, I grew up very poor, and through obsessive work and not a bit of luck, am now quite successful. I’ve had the experience of the American Dream. The class warfare going on benefits me strongly. I’m paying off property overseas to which I may retire, as risk mitigation against what the US is becoming. While I will never have children, I worry that the next generation is unlikely to have the same chance I did, due to several disturbing economic, cultural, and political trends.
I favor dismantling the whole thing (I am, at heart, mostly a Friedman-style Anarcho-capitalist). Of course, that’s not on the table. It just looks to me like this particular half measure is worse than what already exists – the proposals I’ve read (Cato’s, and the Bush “proposal”, which only barely exists and keeps changing daily) seem designed as nothing but a wealth transfer from the bottom two-thirds of the income spectrum to the top.
The above rambling is partially in answer to Mr. Relph. Of course there is nothing to prevent Congress from doing anything (If there were, SS privitisation would not be on the table, either.) You say that you’re against wealth transfers from the poor to the rich, and I agree with you. However, that is exactly what this looks like to me. As I said, I’ll do quite well (private accounts will indirectly funnel quite a bit of cash my way) (Incidentally, that’s one reason I post under an obscure pun, rather than my own name); I’m 32 and (if things go according to plan) will be able to retire in about 6-9 years, without any state assistance. I probably won’t, but that’s because I enjoy what I do. I am concerned about those who haven’t had my drive or luck (and, as much as I enjoy being arrogant, I must admit a lot of it was luck), will have paid into a system that has done nothing but fund tax cuts for me and nice margins for fund managers and financial “advisors”.
That the same President that engineered the most financially irresponsible giveaway to the elderly and the drug company is now terribly worried about the solvency of SS is simply laughable. If he were concerned about the solvency of governement programs for the elderly, or even more generally about the solvency of _any_ government program, well, then we’d have someone that actually deserved to be called a Republican.
I apologize that this went on rather long.
Mr. Fish,
First off, thank you for ignoring the glaring typos in my post. And we agree that only discussing things on the table is better than pie-in-the-sky discussions.
I do not understand why you believe the Cato proposal is a “wealth transfer from the bottom two-thirds of the income spectrum to the top.” Perhaps you could expand on that for me. As I see it, it is a step towards keeping what is yours, which isn’t a wealth transfer at all.
A key reason I believe the current system benefits the wealthy over the poor is the lack of ownership. When a hypothetical ditch digger dies, earlier than the typical desk-jockey, his family loses the value of any contributions (other than spousal benefits). So the ditch digger gets a larger percentage of his working paycheck in benefits, but he gets it for far less time – assuming he makes it to retirement in the first place. Ownership allows his “retirement savings” to become a financial benefit for his heirs in the event of his unfortunate death, who probably are trying to figure out how to get the next generation in to better schools or college. Thus each generation of ditch diggers is dependent on the government for anything beyond basic living expenses. Wealth accumulation is a practical impossibility with 1/8th to 1/6th of the family’s lifetime income going to social programs that disproportaionately benefit others.
I presume your luck has taken you to the financial services industry and that is how you will benefit from personalized accounts. Do you benefit from the FETSP today? 5 very broad based index funds wouldn’t seem to me to need a lot of “advising”.
Elimination of federal intergenerational transfers will take generations. Not many people realize that there was no such thing as a ‘retirement age’, much less Social Security. It will take a while to get to the point where people are scratching their heads wondering why this ‘anachronistic socialist program’ survives at all. To start, though, requires that people have some other means of providing for their retirement. Forced, at first, like SS, but owned. This is a clear step in the right direction.
About Skipple’s concern regarding the seeming wealth transfers with Private Accounts, I think Richard responded pretty well, but I’d like to add that we should consider reforms that make the poor better off in real terms. If those reforms also make the wealthy better off, so much the better.
If you ask the poor, generally they would agree. Most struggling families are in favor of anything that can increase their purchasing power. Why wouldn’t they? Whether such changes also increases the real income of the middle class and the wealthy are less of their concern. This is in contrast to many arm-chair intellectuals that are opposed to making the wealthy better off, at any cost. I suspect this attitude is behind a lot of the opposition to Private Accounts.
On Skipple’s concern about Cato’s calculator, I cannot comment on their assumptions, but I’d like to plug my own Historical Calculator again. (http://www.granitetower.net/sscalc.html, or click my name for this particular comment). Since the Historical Calculator uses real historical data, it should adress any concerns about ‘rosy assumptions.’
I want to add that I didn’t build that calculator to compete with Cato’s. On the contrary, I think the two calculators complement each other pretty well. Cato’s will show you a scenario where, assuming Private Accounts are instituted today or in the near future, how will your retirement benefits pan out. My calculator will show a scenario where, if Private Accounts had been in effect in previous decades, what would your portfolio look like today. Admittedly, this is purely hypothetical, but I think it’s interesting to see how the numbers would have turned out using real historical data.
I had to read Aaron Gunn’s post above several times, but I think I’m beginning to understand the perspective.
If I’m getting it right, this is basically the strategy that we should encourage statism, because as the ineffeciences of the system increase, we will move faster towards the toppling of it and the all-encompassing libertarian reform or revolution.
I wish to express caution over that idea. Coming from a quasi-socialist country in Europe, I have witnessed first hand how far statism can go, with the population still clamoring for more of the same. (70% income tax rates and they want to pay more??) You may also want to think about Russia; she went through 70 years of full-scale socialism — a literal lifetime — before getting enough.
I have met lots of libertarians on-line that advocates this approach, but I don’t consider it viable or constructive.