Friday, September 22, 2006

Voodoo Economics and Social Security, Part 2

At the end of my first post in this series on Social Security, I offered this provocative quote from our president on March 16 of last year:
Personal accounts do not solve the issue.
To be fair, and to move the discussion along, here an expanded quote of what he said about personal accounts:
Personal accounts do not solve the issue. But personal accounts will make sure that individual workers get a better deal with whatever emerges as a Social Security solution.
And the reason why is because a personal account would enable a worker to, voluntarily, by the way -- this is a voluntary program, you can choose to join or choose not to join. The government is not making you do that, it's your option, and you can decide whether or not you want to put some of your own money aside in a conservative mix of stocks and bonds to earn a better rate of return than that which you would earn -- your money would earn inside the Social Security system. And over time, that compounds, it grows, and you would end up with a nest egg you could call your own.
Bush's claim that his private accounts will allow participants to "earn a better rate of return" than it would now is confusing at best. My money isn't earning interest for me inside the system--it's contributing to a pool that insures that all participants have a minimum income. Retirement benefits are not based on the rate of return of the payroll taxes paid into the Old-Age and Survivors Insurance (OASI) Trust Fund, but are calculated using an actuarial formula. (We'll look at the financial health of the Trust Fund in a upcoming post.)
Some retirees collect more than they contributed to the system and some collect less. Is that fair? Free market purists believe it isn't. But Social Security wasn't created as an investment program; it was designed to create a minimum income for retirees.
A dollar cannot be in two places at the same time. Payroll taxes diverted into private accounts would no longer be available to pay for guaranteed retirement benefits. Put another way, Bush wants to at least partially convert Social Security from a defined benefit plan to a defined contribution plan, which would necessarily erode the guaranteed minimum income.


Anonymous Anonymous said...

Financial markets already provide thousands of options for private retirement accounts. No need to get them entangled with the Social Security system.

3:45 PM, September 22, 2006  

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