Reinventing Social Security

After reading the front page story in today's Times about Social Security, The Gotham Gal asked me the question I've been wondering about as well.

When all the retirees blow up their "personal investment accounts" investing in speculative situations, who is going to bail them out?

I am no fan of our current social security system.  My social security payroll taxes are going to fund the current retiree's benefits, not my future benefits.  This is a huge ponzi scheme that is going to blow up at some point when there are more retirees to carry than current workers can support.

So reforming this system makes sense.  And making it a "pay for your own benefits" system is a worthy cause.  But allowing participants to manage their own account doesn't seem to make sense to me.  I hope they come to their senses about that.

As for the "huge borrowing" referred to in the Times article that will be required to transform the system, it seems to me that this is the money that will be required to finance all the benefits that aren't going to be funded with the ponzi scheme anymore.  It's an unwinding of the ridiculous way we've financed social security for the past 70 years.

I am all for taking our medicine and recognizing the huge liability that we've been taking on.  If it requires "huge borrowing", so be it.  We've borrowed the money one way or another, so putting it on the books seems like the wise thing to do.

Comments

[Julia]

The U2 song I like, but the Eminem song doesn't really stand out to me.

[Jeremiah]

Your point that the social security liability already exists is exactly right. Whether or not it is “on the books” society will need to pay that obligation. The fact that borrowing will occur misses the point. There are only three ways to make the program pay for itself. 1) reduce the level of benefits 2) change the retirement age 3) increase the return on the funds in the program. Private accounts are an attempt to do the third. The concern that people will squander their accounts with bad investments, necessitating a bail-out to ensure a minimum level of security is an important one. The investment structure of these accounts is, in my opinion, the make or break issue. Accounts that offer free reign to this unprecedented influx of investors seem like a terrible idea. Accounts which channel investments into a diversified portfolio -- which can vary based on age and risk profile -- and perhaps offer more flexibility once a hurdle level of individual assets is reached, make more sense.

[Fred Schoeneman]

Jeremiah,

Excellent points. I think there are some larger ones, though. The first is that when Social Security was originally passed in the thirties, it was passed as a kind of government pension plan, as an investment in your future. If you look at the return on investment, though, for most who pay into the scheme, it's an extraordinarily bad one. While there is no doubt in my mind that many Americans will mismanage their accounts under this proposed new system, they will also have to mismanage the money worse than the federal government has already done.

The second point actually follows from the first, which is that for most people, Social Security is just another tax, not what it was originally intended as, and that it's regressive and probably needs to be lowered.

The third is that if we don't want to privatise the system, we should at least call it what it is -- a tax on the middle class to pay for the poor, and institute some kind of a means test so that people who don't need it don't get it.