Social Security Phase-Out Q&A's
An article distributed by the Scripps Howard News Service does a fantastic job of laying out the “basics”
of the Social Security proposals that are being floated to Congress and
the public. There is much more “below the surface” to consider
than the punditry will let on.
Q: How much could I put into my account?
A:
Workers younger than 55 could divert 4 percent of pay up to $1,000 the
first year with the annual maximum rising $100 plus inflation until
everyone can contribute 4 percent of pay, whatever they make. That's
about a third of the 12.4 percent Social Security payroll tax, which
employers and employees split.
Q: Who qualifies?
A:
Anyone born after 1949. People 55 or older stay in traditional Social
Security. Workers born before 1966 could enroll in 2009, before 1979 in
2010 and everyone else in 2011.
Those
who opt for private accounts cannot switch back if the market tanks,
and they get smaller Social Security retirement checks that will be cut
3 percent plus inflation for every year they are in the work force.
That's the same sum that 4 percent of pay would earn had it stayed
invested in Social Security Treasury bills.
Q: What are my investment choices?
A:
A few conservative stock and bond mutual funds similar to the federal
employee Thrift Savings Plan: stock index funds, a corporate bond fund,
a Treasury bond fund, an international fund and a “life-cycle” fund
that automatically cuts investment risks as you age. Government would
administer them for 30 cents per $100, compared to $1 for every $100
charged by a typical mutual fund.
Q: Could I borrow against my account?
A:
No, and you couldn't withdraw money from it until you retire, either.
So far, it's unclear how often you could change investments, although
Bush's Social Security commission suggested once a year.
Q: What if I become disabled?
A:
That's an open question. Of the 48 million Americans who collect Social
Security this year, 17 million are children or adults receiving
survivors' or disability benefits. Most workers don't consider the
insurance side of Social Security, and so far the Bush plan is silent
on the subject.
Bush
says your children and grandchildren could inherit your account, but if
the parent of a young child dies, would the family inherit only the
account balance? Would they get survivor benefits at a reduced level?
Would disability benefits depend on your account balance if you're
idled younger than 51, the average age for disability? Nobody's saying
yet.
Q: What happens if I divorce? Will I have a claim on my ex's retirement account and vice versa?
A:
Another open question. Today you get a pro-rated share of your former
spouse's Social Security check if the marriage lasted 10 years.
Q: What will my benefit be on retirement?
A:
Another question mark. Senior administration officials say workers come
out ahead if their account earns better than 3 percent above inflation
annually over 35 years in the work force to make up for that reduced
Social Security check.
The
White House points to Social Security Administration estimates that a
portfolio of 50 percent stocks, 30 percent corporate bonds and 20
percent government bonds could yield 4.6 percent a year after
inflation, or $109,000 after 40 years' work if you invest $1,000
annually. But other analysts don't expect returns to be above 4 percent
because of high stock valuation and low interest rates.
Q: What happens when I retire?
A:
The money is subject to income tax on withdrawal and must be used to
buy an annuity to provide a monthly check for life that lets you live
at the poverty level, now $12,400 for a couple. If you have money left,
it's yours to spend or leave to your heirs.
If
your investments are losers or you retire in a prolonged market
downturn that leaves you too short to afford the annuity? Bush hasn't
said yet if he'd support a poverty-level guaranteed benefit or if you'd
have to keep working in hopes the market rebounds.
Q: Will private accounts solve Social Security's long-term solvency problem?
A:
No, and private accounts advance the date Social Security cashes in the
last of Treasury bonds to 2031, not 2042 that system trustees estimate,
says New York University economist Jason Furman.
Administration
officials acknowledge the accounts are “net neutral” on Social Security
solvency and more must be done to erase its shortfall, but they don't
say what or where they get the $4.5 trillion to cover the 20-year cost
of private accounts. Bush ruled out raising payroll taxes, which
apparently requires additional benefit cuts, a higher retirement age,
or both.
What
we've learned: the phase-out proposals will do nothing to solve
this “Social Security Solvency” crisis (and in fact, will make it
worse) and will deliver dubious benefit – if any – to the working
populace.
A better
way of thinking about this was posited by Josh Marshall in a comparison
of the Clinton-era “Save Social Security First” policies and what the
Bush Administration is forwarding:
President
Clinton tried to devote the final two years of his presidency to
“saving” Social Security from the threat of future insolvency — a
threat which appeared substantially closer then than it does today,
less than a decade later. His plan was to shore up the nation's fiscal
standing so that it would be better able to cope with the pressures
created on Social Security by the baby-boom generation in the early and
middle decades of this present century.
Let's stop and understand what that means. He
wanted to take steps now so that Social Security could continue to
exist for future generations as a defined benefit social insurance and
old age pension system. [pResident Bush], on the other hand, is trying
to phase that system out and replace it with a defined contribution
system of 401k-style private accounts.
These
are not two spins upon or flavors of putting Social Security on a solid
footing. The difference is a category difference, as clear as it ever
is between preserving something and trying to bring it to an end. The
difference is fundamental. And anybody who does not understand this
either doesn't grasp the policies involved, has been fooled, or is at
work trying to fool someone else.
Josh is
right – the Clinton proposals to “Save Social Security” didn't deal
directly with the Social Security system itself, they dealt with
putting the Federal Government on a firm fiscal footing to meet the
commitments it promised to retirees and workers since the inception of
Social Security, and especially since the 1983 FICA tax hike sponsored
by Reagan and Greenspan to build what is now referred to as the “Social
Security Trust Fund” to get the system over the baby boom hump.
In the
meantime, the punditry class (and the White House) is hard at work
convincing the public that Treasury Bills (which make up the “Trust
Fund”) are worthless scraps of paper. The Des Moines Register also opined about this notion – and just how silly it really is.
To get a better idea of where notions like “vacating the debt” come from, Juan Cole had this take on a related topic:
Cranky
rich people hire sharp-tongued and relatively uninformed young people
all the time and put them on the mass media to badmouth the poor,
spread bigotry, exalt mindless militarism, promote
anti-intellectualism, and ensure generally that rightwing views come to
predominate even among people who are harmed by such policies. One of
their jobs is to marginalize progressives by smearing them as
unreliable.
Or, in this case, to constantly work the notion that “America Can Do Anything” – except make good on it's financial obligations.
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