Monday, January 03, 2005

A Serious Question

Let's do the unconscionable and take the Bush Administration at its word. Ok, the Social Security "crisis is now." Now being understood to be a proxy for 2018 (when the trust fund comes into play) rather than 2042 (when the trust fund is exhausted). How do private accounts avert the 2018 crisis?

The 2018 crisis- in a nutshell- goes something quite like: The Trust Fund owns government bonds. For the government to make good on these bonds, it must shift resources through higher taxes, reduced spending, even more debt. This plan of action is untenable. (Reminder/ Warning: We're assuming that the Bush Administration's premises are not incorrect.) How do private accounts avert the 2018 crisis?

Through a trade- a private account for a cut to your guaranteed benefit- private accounts can reduce the financing gap. They very well may not improve or even sustain retirement income for those who participate. But that is not (or at least would not be) Social Security's problem. The long term ledger for Social Security improves as obligations are off loaded. Simple

It is not, however, as simple as that. Social Security is planning on using the money which will be directed to private accounts to pay current retirees. No way around it- Social Security must have that money or current retirees will see their checks shrink. Not a problem we are told. Any tinkering with Social Security will require a certain amount of transition costs- in this case an estimated $2 trillion. A medley of new debt, tax increases, and benefit cuts (but not for current retirees they swear) can be used to finance the transition.

How do private accounts avert the 2018 crisis? We now stand 13 years away from 2018. Let's call those between 50 and 65 years old our 'near retirement' population. The universal expectation is that persons like myself- mid-20s through say 40 year olds, let's call them 'young'- will be likely to take up personal accounts whereas the near retirement population will not (they will be unable to take advantage of very much compounding, any prudential financial advisor would be transitioning them out of growth, i.e. risky, investments soon). 13 years down the road, we are looking at world in which the 'young' are making the trade- lowering Social Security's long term obligation to them but are not collecting reduced benefits yet yielding no net realized savings for Social Security from the Trade. They are also not contributing the full (currently) anticipated payment for the retired population. The retired population (which now consists of today's retired and those near retirement) is still collecting the full 'pre-private accounts' benefits. By 2018, are we not looking at reduced revenues (versus current expectations) against the same benefit payments (versus current expectations)? Unless something has been missed, private accounts turns the 2018 crisis into a 2014 or 2012 crisis. Correct?

Now, you may fairly say, but... but... the transition funds. A fair observation. If the transition is financed by debt, how is that any solution to the 2018 crisis- a crisis precipitated by the need for the general government to directly (in an indirect way) pay Social Security benefits? If it is benefit cuts- particularly directed at the near retirement population (current retirees, it is sworn, will be spared and the 'young' have a different deal facing them)- how will they have time to prepare? And won't these cuts have to be more dramatic- deeper and starting earlier- than under a no private accounts environment? A similar question presents itself on payroll tax increases.

Long term, private accounts can be used to fix the imbalance. But that has nothing to do with the properties private accounts. Long term, anything can be used to fix the imbalance. How does this proposed long term solution get us through the nearer term 'crisis?' Or is this just the danger of taking the Bush Administration at its word?


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