Part of the truth seems to be that, unless something is done, Social Security can be expected to slowly start going broke. At some point in the next couple of decades, the benefits paid out to retirees and their survivors — not to mention those receiving disability benefits — will start to exceed contributions from current workers. Due to inexorable population trends, the number of workers will shrink as the number of retirees goes up.
Then, after another decade — or two, or three, depending on who you ask — the Social Security trust fund will finally run dry, like a reservoir that for ages hasn't seen enough rainfall.
For the Social Security fund is very much like a reservoir. Normally, there's an inflow (precipitation routed into the reservoir; payroll taxes routed into Social Security) and an outflow (faucets being turned on; benefits paid out). As long as the inflow tends to exceed or match the outflow, no problem. If the outflow exceeds the inflow briefly, again, no problem. But if the outflow outstrips the inflow chronically for a long period of time, the reservoir runs dry. That's what will happen to Social Security unless something is done.
Bush wants to do something. He wants to lock the current system in place for those 55 and over when (and if) his privatization plan goes into effect (starting, if Bush gets his way, in 2009). For those younger than 55, some of their payroll taxes would be diverted to worker-selected personal retirement accounts (PRAs) instead of reaching the Social Security trust fund. Workers would continue to feed their PRAs until reaching the age at which they would normally retire and draw Social Security. Then (assuming they are eligible for Social Security in the first place) they would draw a reduced amount of Social Security benefits. They would also start tapping into their PRAs to make up the difference.
It would be this reduction in the money amounts paid out to beneficiaries that would keep Social Security afloat.
So one of the key questions about the Bush plan is this: would retirees' PRAs actually make up for their reduced Social Security benefits?
A recent column by personal finance expert Eileen Ambrose, appearing in The Baltimore Sun, said this:
A senior administration official told reporters that workers would come out ahead if they earned more than 3 percent above the rate of inflation annually in their private accounts.
But it also said this:
But markets are hardly predictable. What if you don't earn 3 percent over inflation, which could be difficult if inflation roars back?
Accordingly, it would seem as if the 3-percent-over-inflation target for a PRA's yield is the "figure of merit" here. If PRAs generally manage to achieve that figure, the Bush plan could be workable. If not, then nothing else need be said. The Bush plan will, in that case, not work.
Let's say, temporarily — purely for the sake of argument — that PRAs will generally earn 3 percent over the rate of inflation. What are the other potential pitfalls of the Bush plan?
Ms. Ambrose points out several. One is that there's no certainty yet what the Bush proposal portends for survivor and disability benefits, as distinct from retirees' benefits.
Another is the risk that PRAs will not always meet the 3-percent-over-inflation goal. Since the PRAs will be invested in securities such as stocks, mutual funds, bonds, and so forth, they could run into dry spells and not manifest the intended growth.
If the markets swoon while the investor is still young, there will be plenty of time for them to recover their health. By retirement age, if the inflation-plus-3-percent target has been met overall, the retiree will be fine.
But what if the investment market goes into a coma just when our worker retires? According to Ms. Ambrose:
... the president promised that the government would provide good options to protect accounts from sudden market swings on the eve of retirement.
So, taking Bush at his word, we still need to know what happens if the PRA of any one particular John or Jane Doe tanks, while most PRAs are doing fine.
If one particular PRA loses money, or if it simply fails to beat the rate of inflation by 3 percent, oldstyliberal has so far been unable to learn what insurance, if any, would be in place to offset such a disaster. He encourages liberal Democrats, instead of simply trying to shout down the President's proposal, to work to make sure some form of "account insurance" is incorporated into the program.
There are of course, many other issues. oldstyliberal will go into those in a future installment.
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