If you choose to invest not all in stocks when opting for private accounts, that is almost a guaranteed loser because bonds don't typically earn 3% over inflation. I oppose the President's plan as outlined, absolutely. It is a risky and nonsensical scheme.
I agree. Investing in stocks is a great idea... if you have any money. If you don't have any money, a responsible financial advisor will tell you to save the money and then invest it, not buy stocks on margin. But, as usual, the government has it backwards. Instead of proposing a little pain to achieve a bigger gain, they are proposing immediate gain with the pain to be postponed or wished away. Bush has already told everyone 55 or older that they will not have to make even the tiniest sacrifice. Sure, anyone who is already retired cannot be expected to go back to work (though the wealthy retired might contribute in some way). But anyone who is ten years away from retirement can adjust to a minor change, say indexing initial benefits to inflation instead of wages.
Pete Peterson, in his recent book "Running on Empty" has it in the right order. He first proposes that we index new benefits to prices instead of wages. Following is an excerpt from this book:
Index New Benefits to Prices, Instead of Wages.
Under this reform, the average new benefit calculated each year for people reaching age sixty-two would be adjusted upward by the increase in the consumer price index rather than by an index of average wages. As a result, all future retirees - by birth year or by generation - would receive the same average benefit, adjusted for inflation, that new retirees receive today. Under current law, higher real-benefit levels will account for about 30 percent of total Social Security benefit outlays by the year 2050. By saving that extra 30 percent, we would just about bring the system back into balance by then. Social Security's cash deficits, while still rising in the 2020s, would start declining again by the 2030s and would eventually disappear. President Bush's own Commission to Strengthen Social Security projected that indexing new benefits to prices would more than eliminate Social Security's long-term deficit. And this would be true if if we "grandfathered" under the old rule everyone currently over age fifty-five.
Source: Running on Empty by Peter G. Peterson, page 200
Peterson then goes on to make proposals to 1) mandate saving in Personal Retirement Accounts and 2) fortify Social Security's Safety Net. But, to my understanding, these are proposals to be funded by the surplus created from the first proposal but only when and if that surplus actually materializes.
Bush did make reference to difficult choices in the following excerpt from his State of the Union:
Fixing Social Security permanently will require an open, candid review of the options. Some have suggested limiting benefits for wealthy retirees. Former Congressman Tim Penny has raised the possibility of indexing benefits to prices rather than wages. During the 1990s, my predecessor, President Clinton, spoke of increasing the retirement age. Former Senator John Breaux suggested discouraging early collection of Social Security benefits. The late Senator Daniel Patrick Moynihan recommended changing the way benefits are calculated. All these ideas are on the table.
Notice anything about the people making those proposals? That's right, they're all Democrats. Pete Peterson is a Republican but Bush chose instead to mention Tim Penny, a former Democratic Congressman. I hope that other Democrats will likewise join in a serious discussion of these difficult choices. However, I also hope that the Republicans in government will step up to the plate on this issue. Otherwise, this will turn into just another government giveaway where some will benefit but Social Security, as a whole, will end up worse off and/or future generations will find themselves even deeper in debt.
I liked the Onion story about being able to use your SS payroll tax to sportsbet. A lot of people think the stock market will stay in this 10K-11K range for a very long time-- if not dip below 10K. This would have been a better plan back in 1975 than 2005.
I see it differently. The current plan is a pure Ponzi swindle which depends on the ability of the Federal government to redeem a huge debt it is accumulating in Social Security Trust Fund "assets" - assets, so called, which are mere instructions to the Treasury to find the money somewhere else. This Ponzi swindle is, currently, masking the actuarial deficit in the federal government accounts. The current-income dollars are used twice - once when they are sent to current retirees, covering the outgo of the SS program, and again when they are "invested" in government bonds in the SSTF. Full stop.So the federal budget is in a severe actuarial defict, but that is being concealed by the "SSTF" smoke and mirrors. And any system of "safely investing" payroll tax revenue in government bonds will have the self-same effect. If you are to actually invest the money, you have to put it in instruments which will pay money to the government with interest in the future. That means private institutions, and that ineluctably means risk.
But that "risk" belongs in quotes because, as we have seen, it must be compared with the current system in which today's payroll dollar pays yesterday's retiree and does nothing to help your grandchildren when it comes time for SS to pay for your retirement. Now that is what I call a risky scheme. So "risk of private investment" is a straw man. SS investments must go into the real economy in order to do what investing is supposed to do - if it is to prevent the government from strangling the economy with taxes to pay for your retirement.
OK. But, you ask, why allow private accounts rather than having the government do the investing? Great idea - if your objective is to put the government in direct control of the board of directors of each of the largest corporations in the country. But if that isn't what you want - if you want a free enterprise system for your grandchildren - the investments have to be in the name of the beneficiaries. You gotta have your own account. Which is the only possible true "lockbox" to keep the politicians from controling, and raiding, the money.
You will ask, "where is the money gonna come from for the private accounts?' I answer, it will in the first instance
throw the budget out of balancereveal the existing imbalance in the budget. But the very question reveals that, to anyone who gives it a moment's thought. It is only as the private accounts reveal the actual deficit that real pressure for discipline in federal spending will begin. And therein lies the actual motive for the reactionary attitude of the Democratic Party.An honest investment regime for Social Security offers Congress nothing but blood, sweat, and tears. But those will come, soon enough, even if Congress does nothing at present. The cash flow of SS is reliably predicted to go negative in less than 15 years. That's an actuarial heartbeat, and from then on the Congress will be fighting the battle of the budget in earnest, trying to redeem the debt in the SSTF sinkhole and still find enough to buy reelection (and, incidentally, maintain a Department of Defense and a few other odds and ends). The temptation to strangle the economy completely with tax increases will be the bane of our grandchildren's existence.