Under the system, the gains may be minimal. The Social Security Administration, in projecting benefits under a partially privatized system, assumes a 4.6 percent rate of return above inflation. The Congressional Budget Office, Capitol Hill’s official scorekeeper, assumes 3.3 percent gains.
If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today’s dollars, but the government would keep $78,700 ? or about 80 percent of the account. The remainder, $21,100, would be the worker’s.
With a 4.6 percent average gain over inflation, the government keeps more than 70 percent. With the CBO’s 3.3 percent rate, the worker is left with nothing but the guaranteed benefit.
Got that? You put some money into a “private account,” and in return you get lower benefits. The feds actually own the account, though, and will pay you the benefits you would have gotten anyway under the system we already have ? but only if the account does well. If the account does really well, you might get a bit of bonus cash.
And the cost? Hard to say. But at least $4 or $5 trillion for a system that ? even in the worst case ? is only $3.7 trillion in the hole for the next 75 years.
Oh, and did we mention that participants are required to buy annuities instead of cashing out their accounts when they retire? So much for bequeathing your “personal account” to your kids in the event of your untimely demise.
What a Rube Goldberg monstrosity: layer upon layer of weird safeguards and limitations just to make sure that the new system can do what the current system already does, namely provide a guaranteed, stable retirement income for old people.
The worst part of the whole thing is how unnecessary it is. As you know, I think the projections of insolvency in 2042 are overly pessimistic, but even if you accept those projections a bipartisan solution could be crafted in about half an hour. Back in 1998 most Democrats (as well as AARP) were ready to support a plan that cut benefits modestly by modifying the formula used to calculate cost-of-living increases. Republican Lindsey Graham has been gathering support for the idea of increasing the cap on the amount of income subject to the payroll tax (from $90,000 to about $200,000). Both Dems and Republicans are open to the idea of investing some or all of the trust fund in equities instead of treasury bonds.
Those are simple, moderate, common sense solutions that would cost very little and would cause minimal pain; they could easily gain broad bipartisan support and would solve Social Security’s problems into the next century and beyond. There’s exactly zero reason to make an enormous partisan battle out of this.
Unless, of course, an enormous partisan battle is the whole point of the exercise.
UPDATE: The Post has corrected its story. Guaranteed benefits will indeed be reduced, but private accounts belong to the account holder, not the government. Annuities are no longer mentioned.
Hard to say what’s going on here, although the administration could clear everything up if they’d actually produce a plan for everyone to look at instead of dancing around every question that comes up. There’s still a ton of extra complexity and additional bureaucracy here just to keep us close to the system we already have.