Another Voice Heard From

ANOTHER VOICE HEARD FROM….In the New York Times today, former Treasury Secretary Paul O’Neill lobs a bomb at what he calls George Bush’s “tepid” plan for Social Security privatization. Here’s what he thinks we need:

We should ask ourselves what would be a worthy aspiration for the financial security of retired Americans in the years ahead. My answer is that we should establish a process that will produce a substantial annuity for every American at retirement age.

By substantial, I mean at least $1 million.

O’Neill doesn’t provide many details, but he does say that everyone over 35 should be left in the current system. Only young people would be part of his program to provide every worker with a $1 million nest egg by the time they retire.

Of course, he warns us that “the social policy technocrats” will have a few wee questions about how we’re going to accomplish this. That’s my cue, isn’t it? So here are my wee questions. (Note: I assume that O’Neill means a million bucks in today’s dollars, so everything that follows is also calculated in today’s dollars.)

• First, O’Neill seems to think that we can keep the payroll tax intact at its current rate of 12.4%, which will provide young people with enough money to fund these new accounts. But assuming a 5% real return over a working life of 45 years, building a nest egg of $1 million requires contributions of $6,000 per year, and at 12.4% you can only contribute this amount if your income is $48,000 or more. More than half the country couldn’t do it.

  What to do? O’Neill suggests only that the federal government could make up the difference. In other words, good old government transfer payments would continue to do a booming business.

• But let’s assume we could do this anyway. Maybe people will work longer. Maybe returns will be higher. Maybe O’Neill is even more optimistic about wage growth than I am. What would the system look like in, say, 70 years, after all of today’s 35-year-olds are dead and the new system has completely taken over?

  This is all back of the envelope, but I figure the population of retired people in 2075 will be around 100 million, give or take a bit. At $1 million each, that’s a total of $100 trillion in investments.

  The total market capitalization of all public companies in the United States is about $12 trillion today. At a long term real growth rate of 3%, that number will be roughly $100 trillion in 2075.

  In other words, retirees would own everything. That’s a bit of a bleak future for everyone else, isn’t it?

• The transition costs would be a little steep too, wouldn’t they? Just for starters, O’Neill says that everyone under 35 would stop paying into the current system and would instead put their payroll taxes into private accounts. Everyone over 35 would continue to get normal Social Security benefits.

  Fast forward 30 years and what do you have? Everyone over 35 is retired, so there’s no one left paying into the system. Not one penny. And yet all those folks who are over 35 today will still be collecting benefits. In current dollars, you can figure that’s about $1 trillion per year being paid out in benefits with zero taxes to cover it. Hmmm.

So what’s going on? Am I missing something huge and fundamental here? Because unless I am, O’Neill is talking out his ass, substituting airy nonsense about the “courage to dream big” for an actual plan with actual numbers attached to it.

Of course, maybe I am missing something huge and fundamental. But what? Show me the numbers, Paul.