Index Social Security to prices instead of wages?

[dissent]

I say go for it. That move alone will erase 70% of the expected deficiency in the SS system. It'll mean less money for me from the gov, but that's better than a big jack up in the tax rate. Other ideas or opinions?

[Cuda68-2]

Yea, leave my money in my paycheck. I have little or no use for SS.

[Testiculese]

What do you mean 'to prices'? An additional sales tax?

[Vander]

He means linking benefits to inflation rather than wages as they are now. The concept being that since inflation rises slower than wages, benefits will rise at a slower rate.

[Lothar]

The basic idea here is to make it so that anyone getting social security can still buy the same amount of "stuff" in the future as people on SS can buy now. Tying benefits to prices makes this happen automatically.

As it stands, benefits are tied to wages, which grow faster than prices. This means someone on SS 20 years from now will have more purchasing power than someone on SS right now.

It should be noted, SS didn't originally have guaranteed annual increases -- it wasn't until 1972, when there was a strong push by both parties to get the elderly vote, that SS was tied to wages. IMO, this makes it grow faster than it really should -- SS is meant to guarantee the elderly still have enough to live on, not to guarantee they can "keep up with the Joneses"...

Also, whatever SS money you choose to put into a private account is yours, even if it's way more than the expected benefits... and if you die, it passes on to your kids instead of going back into ye olde government pot. Between the two suggestions (price indexing and private accounts), the government saves money, each individual has a slightly lower minimum than expected, but each individual also has the ability to save quite a bit more than that.

[dissent]

From the 2001 Commission Report; if you're having trouble sleeping the full report can be found here

Three Reform Models
The three models for Social Security reform devised by the Commission demonstrate how alternative
formulations for personal accounts can contribute to a strengthened Social Security system.

Reform Model 1 establishes a voluntary personal account option but does not specify
other changes in Social Securityâ??s benefit and revenue structure to achieve full longterm
sustainability.
â?¢ Workers can voluntarily invest 2 percent of their taxable wages in a personal account.
â?¢ In exchange, traditional Social Security benefits are offset by the workerâ??s personal account
contributions compounded at an interest rate of 3.5 percent above inflation.
â?¢ No other changes are made to traditional Social Security.
â?¢ Expected benefits to retirees rise while the annual cash deficit of Social Security falls by the
end of the valuation period.
â?¢ Workers, retirees, and taxpayers continue to face uncertainty because a large financing gap
remains requiring future benefit changes or substantial new revenues.
â?¢ Additional revenues are needed to keep the trust fund solvent starting in the 2030s.

Reform Model 2 enables future retirees to receive Social Security benefits that are at
least as great as todayâ??s retirees, even after adjusting for inflation, and increases Social
Security benefits paid to low-income workers. Model 2 establishes a voluntary personal
account without raising taxes or requiring additional worker contributions. It achieves
solvency and balances Social Security revenues and costs.
â?¢ Workers can voluntarily redirect 4 percent of their payroll taxes up to $1000 annually to a
personal account (the maximum contribution is indexed annually to wage growth). No additional
contribution from the worker would be required.
â?¢ In exchange for the account, traditional Social Security benefits are offset by the workerâ??s
personal account contributions compounded at an interest rate of 2 percent above inflation.
â?¢ Workers opting for personal accounts can reasonably expect combined benefits greater than
those paid to current retirees; greater than those paid to workers without accounts; and greater
than the future benefits payable under the current system should it not be reformed.
â?¢ The plan makes Social Security more progressive by establishing a minimum benefit payable
to 30-year minimum wage workers of 120 percent of the poverty line. Additional protections
against poverty are provided for survivors as well.
â?¢ Benefits under the traditional component of Social Security would be price indexed, beginning
in 2009.
â?¢ Expected benefits payable to a medium earner choosing a personal account and retiring in
2052 would be 59 percent above benefits currently paid to todayâ??s retirees. At the end of the
75-year valuation period, the personal account system would hold $12.3 trillion (in todayâ??s
dollars; $1.3 trillion in present value), much of which would be new saving. This accomplishment
would need neither increased taxes nor increased worker contributions over the long
term.
â?¢ Temporary transfers from general revenue would be needed to keep the Trust Fund solvent
between 2025 and 2054.
â?¢ This model achieves a positive system cash flow at the end of the 75-year valuation period
under all participation rates.

Reform Model 3 establishes a voluntary personal account option that generally enables
workers to reach or exceed current-law scheduled benefits and wage replacement
ratios. It achieves solvency by adding revenues and by slowing benefit growth less than
price indexing.
â?¢ Personal accounts are created by a match of part of the payroll tax â?? 2.5 percent up to $1000
annually (indexed annually for wage growth) â?? for any worker who contributes an additional 1
percent of wages subject to Social Security payroll taxes.
â?¢ The add-on contribution is partially subsidized for workers in a progressive manner by a
refundable tax credit.
â?¢ In exchange, traditional Social Security benefits are offset by the workerâ??s personal account
contributions compounded at an interest rate of 2.5 percent above inflation.
â?¢ The plan makes the traditional Social Security system more progressive by establishing a
minimum benefit payable to 30-year minimum wage workers of 100 percent of the poverty
line (111 percent for a 40-year worker). This minimum benefit would be indexed to wage
growth. Additional protections against poverty are provided for survivors as well.
â?¢ Benefits under the traditional component of Social Security would be modified by:
â?¢ adjusting the growth rate in benefits for actual future changes in life expectancy,
â?¢ increasing work incentives by decreasing the benefits for early retirement and
increasing the benefits for late retirement, and
â?¢ flattening out the benefit formula (reducing the third bend point factor from 15 to 10
percent).
â?¢ Benefits payable to workers who opt for personal accounts would be expected to exceed
scheduled benefit levels and current replacement rates.
â?¢ Benefits payable to workers who do not opt for personal accounts would be over 50 percent
higher than those currently paid to todayâ??s retirees.
â?¢ New sources of dedicated revenue are added in the equivalent amount of 0.6 percent of payroll
over the 75-year period, and continuing thereafter.
â?¢ Additional temporary transfers from general revenues would be needed to keep the Trust
Fund solvent between 2034 and 2063.

[Lothar]

When it says benefits are "offset by" personal accounts at a certain percent, does that mean whatever you put into your personal account is treated as though it earned that percentage interest and then subtracted off of your SS payments at the end?

[Vander]

From my understanding, whatever you divert into your private account plus 3% (interest on the money you are borrowing to fill the private account) is subtracted from your traditional benefit. In other words, if your private account does 3% by the time you retire, you break even. If it does 4%, you're up, if it does 2%, you're down.

I'm not an economist, though.

[Vander]

I wandered upon this. It's .pdf, so I reformatted it to post here.

[quote]
FIXING SOCIAL SECURITY
CHANGES DO NEED TO BE MADE, BUT THE CHOICES ARENâ??T HARD NOR THE MEASURES PAINFUL
BY ROBERT M. BALL AY M 2005

Robert M. Ball served as Commissioner of Social Security under Presidents Kennedy, Johnson, and Nixon, served on many statutory advisory councils, and on the biparisan commission that produced the 1983 amendments. His latest book is Insuring the Essentials: Bob Ball on Social Security, (New York: The Century Foundation Press, 2000).


President George W. Bush has said that the administrationâ??s first task in the Social Security reform debate is to demonstrate to the American people that Social Security has a big financial problemâ??a crisis requiring action now. In trying to make this case, those speaking for the administration have done everything they can think of to make the long-range shortfall in Social Security seem as big as possible. They have greatly exaggerated the problem in three different ways.

The first is to present the drop in the workers-to-beneficiary ratio as very large and unplanned for. They point out that in 1950 there were 16 workers paying into the system for each beneficiary taking out, and that the ratio has gone way down so that now the ratio is only 3.3 workers to each beneficiary and in the long run it will be only 2 to 1 or even 1.9 to 1. They ignore the fact that in 1950 only about 15 percent of the elderly were eligible for benefits and that it was expected by all who were acquainted with the program that the ratio would, of course, change dramatically as a greater proportion of the elderly became beneficiaries.

Instead, the impression is left that the program was sound only when 16 paid in for every one taking out. Thus, of course, when the ratio changed to 3.3 to 1, the program became â??unsustainable.â?

[dissent]

Well, I'm no accountant, but I think No.4 is what I started off this thread with.

Then, of course, there are emergencies and there are emergencies. A volcano erupting in my backyard gets my heart beating a little faster. A government pronouncement that the SS system is going bankrupt in 30 or 40 years leads me to go to the fridge, open a beer, and sit down and enjoy a cold one. Yeah, its not panic time, but when you have to move a whole government bureaucracy around, simple physics tells you that if you use a small force you better start pushing earlier rather than later.

[Vander]

I'm undecided on whether or not to reduce benefit increases, but I'm pretty much against reducing benefits only for higher income earners. I think for SS to remain legitimate, it shouldn't give one income level a better deal than another.

[Will Robinson]

I think it is beyond sad that we have to consider measures to fix the problem when, if the politicians had taken the contributors money and actually invested it in some kind of fund, shares of the fund held in the workers name and let it grow, there would be no problem and the retiring citizens would have recieved much higher payments each month!

It's like a bank stealing your savings account and now they want to 'help' you restructure your budget so you can pay back the money they stole! And you can't even refuse their 'help' because they bring it at gun point!!!

Congress = continuing criminal enterprise
We should be able to execute a citizens arrest on the lot of them under the RICO statute!!

I have dreams of Thomas Jefferson's ghost visiting me and shouting "That's why we gave you the second ammendment. Go get the scoundrels and string them up!!"

[Dedman]

I think it is beyond sad that we have to consider measures to fix the problem when, if the politicians had taken the contributors money and actually invested it in some kind of fund, shares of the fund held in the workers name and let it grow, there would be no problem and the retiring citizens would have recieved much higher payments each month!

That's because SS is set up as a ponze scheme. If you got in early (baby boomers) and are going to retire soon, you have little to worry about. But, those of us that still have 20-40 years left to work before we reach the SS retirement age are in a bit of a pickle. With birth rates dropping in this country, SS will likely be in trouble by the time we need to draw off of it.

If I was to set up a corporation to offer people an investment or retirement program based on the SS model, I would be arested for fraud.

What a great system!

[woodchip]

I'm undecided on whether or not to reduce benefit increases, but I'm pretty much against reducing benefits only for higher income earners. I think for SS to remain legitimate, it shouldn't give one income level a better deal than another.

Consider this. The SS proggy was first set up so working class people had something (read better than nothing)in the way of income when they could no longer work. Back then working class meant hourly workers who did not have profit sharing, 401k's, stock options or high valued property assests. There is some appeal tot he notion that a person who will be getting a 100,000.00 a year pension will have dire need for the pittance he will get off SS. While I realize this becomes a class warfare type issue the bottom line still remains that SS was set up for lower income people.
What I really cannot understand is why the Dems. seem so against putting a portion of SS into a real investment plan. Perhaps it is because they set the whole ponzey scheme up? Like Will points out if a union pension plan was run like SS, the officials would be sent to jail under the RICO act and ERISA.

[Vander]

"the bottom line still remains that SS was set up for lower income people."

The 90k wage cap seems to be a good way to keep the focus on lower to middle income, without giving anyone a better deal.

"What I really cannot understand is why the Dems. seem so against putting a portion of SS into a real investment plan."

I can't speak for Dems, but for me, I'm against it because it introduces more risk. If your private account gets pummeled, the remaining "pittance" traditional benefit is that much smaller. And can you imagine the political pressure to bail these folks out? Not to mention the new immediate debt of diverting payroll tax to private accounts while maintaining the current benefit payments.

[Lothar]

I think you have to find an appropriate level of risk. Allowing people to invest some of their SS money in certain private funds that are, themselves, not too risky, and keeping the rest of the funds in the traditional fake trust fund, isn't a bad idea.

The only way this fails on a large scale is if the whole economy tanks -- and if that happens, everyone on SS would be screwed either way.

I guess that's why I don't buy the "risk" arguments I've heard a few times. As long as you're trusting in current workers to provide for current retirees, there's a ton of risk (from politicians or from the economy tanking.) And as long as there's no real trust fund, there's not even a trivial return on the investment. It's not a whole lot riskier to allow people to invest a small portion of their SS money in better performing accounts, and it comes with fairly substantial rewards.

[woodchip]

Vander, just about every pension plan from state workers to unions are invested in stocks. I think you'll find very few have problems where the plans are held seperate from a company controlled finances ala ENRON (heh, SS is similar to ENRON's pension plan come to think of it). You are also forgetting that any balance held in SS after the benificiery dies (under Bush's plan) would be passed on to the heirs. So tell me again why you are against this?

[Vander]

Because I'm a Commie.

In all seriousness, I don't see SS as in need of a privatization scheme that has little to no effect on it's solvency, introduces a new level of risk, and pumps up debt. Sure, there are some benefits to partially privatizing SS that aren't available in traditional SS, but the opposite is also true.

I just think some digestable tweaks need to be made during the next 40 years. First and foremost, income taxes should be raised at rates based on previous tax cuts and in proportion to what is needed to meet the obligation to the SS Treasury Bonds when the time comes to redeem them. This needs to be done.

Benefit increases should be slowed at some justified level while payroll taxes are raised. Perhaps use a different index for benefit increases. Perhaps a higher wage cap and maximum benefit. Perhaps an across the board payroll tax increase. Perhaps some sort of means tested phase in of all these options during the next 40 years based on what the ever changing forecast looks like. This stuff is all pretty debatable, and we have 40 years to get it right.

The only thing we have to decide right now is whether or not Bush is an honest broker. If Bush is to be trusted with honest financial/SS policy, his claim of "worthless IOU's" is just dishonest rhetoric, and he views the bonds as an obligation that will be repayed. Why? Because he hasn't advocated a payroll tax cut to stop filling the Trust Fund. Rather, he takes the overpayment of SS tax and uses it for income tax cuts, some of which haven't gone into effect yet. If the SS Treasury Bonds are, as he says, not an obligation that must be met, Bush cannot be trusted for honest financial/SS policy, and we should wait for the next Administration to give it a try. It is, of course, my opinion that Bush is not being an honest broker.

[woodchip]

Vander you have to be careful about calling Bush a honest broker or not. Realise ALL President have fostered and nutured SS to the point at which it is today. The only thing Bush is doing is saying:

1) There is a problem

2) Here are some ideas to fix it

3) Suggestions for a fix from the Dem. side are welcome.

If we wait forty years to fix the problem it will be too late. Raising taxes is a typical liberal/commie
( ) response to a problem. The SS trust fund is a myth. Perhaps the very first fix would be for a truely separate fund being set up so that starting tomorrow all SS taxes go into it. That fund could at the very least then draw interest as a typical savings account would. So can we start with this idea first?

[Vander]

"Raising taxes is a typical liberal/commie response to a problem."

And giant income tax cuts for the wealthy are a typical conservative/robber baron response to a problem.

"The only thing Bush is doing is saying:"

Where on that small list do his proposed private accounts fit?

When Bush took office, he was handed a government with a revenue surplus about equal to the overpayment of payroll tax. He campaigned for big income tax cuts. Al Gore campaigned for a SS "lock box." Once *cough*elected*cough*, Bush chose to sign a giant income tax cut. He now claims there's just no money to make good on the promise to payroll taxpayers. Well, why isn't there money?

If the SS Bonds aren't honored, everyone who paid payroll tax from 1983 on gets the shaft to the sum of almost 1.7 Trillion Dollars, with the heaviest burdon placed on those making 90k or less, in favor of the recipients of the income tax cuts. Even a passing reference to "worthless IOU's" should be the biggest government scandal of our time.

In the end, I think SS's real problem is that it is a successful and popular socialist program. That just makes conservative's heads explode.

[dissent]

Well, I make well under 100K, and I still noticed a bump up in my paycheck thanks to Dubya's tax cut. So it wasn't just to benefit "the wealthy".

I think Will's point here (and elsewhere) is interesting, regarding what the politicians have done with the contributed money. This goes for Dems and Reps. If the money went into a real account, with liquid assets, and built up over time; well that would be a real lesson in saving (something the American publics needs lessons on), and a government able to save this money, and grow it, now that would lead to real social security.

I don't think the pols could handle it. That big money pot just growing up there in the SS fund while they had to leave it there - I think they'd all just explode from the angst. Could we ever really do this, or is politicians being honest with money against some law political Thermodynamics (Econdynamics??)?
Probably.

[Will Robinson]

I've read Vanders post from Mr. Ball and now I can say I'm convinced, assuming Mr.Ball isn't playing tricks with the stat's, that he has the best solution I've read! I'm a convert. It has a large chunk of the SS funds going into the market, it has reasonable phased in adjustments and for all I can tell makes so much sense I'm sold!

Now I can't wait for our representative stooges to find a way to avoid such a reasonable solution so I can shoot them all in the name of liberty and justice for all!

(just kidding about that killing stuff you secret service weenies, go back to filming senators playing with themselves in the bathroom)

[woodchip]

(just kidding about that killing stuff you secret service weenies, go back to filming senators playing with themselves in the bathroom)

No that wasn't the secret service filming...it was Michael Moore.