PRIVATE ACCOUNTS DONE RIGHT….Regular readers know that I’m pretty strongly opposed to George Bush’s Social Security privatization proposal. To the extent that there’s a problem with Social Security at all, I think it’s fairly modest and can be fixed with a couple of simple, straightforward changes. More details are here if you’re interested.

At the same time, I’ve also suggested that there’s nothing wrong with private accounts in theory as long as they’re “properly accounted for, tightly regulated, and honestly funded.” Today I’m going to put my money where my mouth is and outline a private account proposal I could live with. It will also make clear the vast gulf between an honest plan and the Bush plan.

To begin with, I’d adopt the “Longman Plan” as the core of my proposal. (That’s not its real name, but the only place I’ve seen it described is in a Fortune column by Phil Longman. So that’s what I’m calling it.) As we all know, the basic problem with Social Security is that at some point in the future ? the CBO’s estimate is 2053 ? the trust fund will be exhausted. When that happens, total payouts need to drop about 25% in order to match incoming revenue.

Longman’s idea is that instead of cutting benefits 25% we should move the age at which you start getting checks from 67 to 72. This reduces the number of retirees being paid benefits and cuts costs by about 25%, thus putting Social Security on a permanently sustainable course.

However, the retirement age doesn’t change. It stays at 67, and this is where private accounts come in: they’re used to pay for retirement between ages 67 and 72. This has several advantages over standard privatization proposals:

  • You don’t have to buy an annuity. Your private account only has to last five years, so it’s easy to just draw it down 20% each year.

  • Regular Social Security kicks in at age 72 and takes care of you for as long as you live. You don’t have to worry about running out of money.

  • If your investments do badly, the worst that happens is that you have to put off retirement for a year or two. That’s bad, but it’s not catastrophic.

  • On the other hand, if your investments do well, or if you’re willing to live on a reduced amount for a few years, you can retire early.

  • You have money left to bequeath to your kids all the way until age 72. Under Bush’s privatization proposal, you turn your account into an annuity at age 67, so your kids inherit only if you die before then.

  • If you don’t feel like retiring at all, you can just cash out your account and buy a boat or something. It’s your choice.

That’s the core of the plan, but it’s not all. Next up is “properly accounted for.” This means that we use honest numbers to project how much money needs to be put into the accounts to fund five years of retirement. The basic assumption should be stock market returns of about 4.5% and portfolio returns of 3.5-4% ? not the phony 7% returns hawked by outfits like Cato and Heritage.

“Tightly regulated” means the money is put in safe, low-fee, low-churn investments. In order to cushion the impact of a weak stock market wiping out your account just when you plan to retire, all accounts should include a “lifecycle” feature in which the percentage of stocks goes down as the account owner ages. During the ten years prior to retirement, only a small amount of the account would remain invested in stocks.

“Honestly funded” means just that: the accounts are funded by some kind of tax increase, not by borrowing the money. Funding the transition with a higher deficit is foolhardy and dishonest, since it does nothing to increase national savings (the private accounts are offset by a bigger federal deficit) and acts as a drag on the national economy.

The actual funding mechanism could be anything. Maybe an increase in the payroll tax of, say, 1.5% on both employer and employee. Maybe something else: increasing the payroll cap, reinstating the inheritance tax, whatever. There are plenty of possibilities.

There are other details too. Some kind of government matching program for low-income workers, for example. Maybe a built-in mechanism to change the retirement age based on changes in life expectancy. Modest cuts in benefit growth. Nothing insurmountable.

And now the $64 question: if I could live with this plan, why am I so unalterably opposed to private accounts? Simple: it’s because my plan is a fantasy. It’s not the plan on offer from George Bush and it never will be ? and in the real world, supporting private accounts means supporting George Bush’s version of them

And that’s why I oppose private accounts: because I live in the real world, not fantasyland.

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