Monday, November 12, 2007

Back Door Privatization Plan

On the one hand...
Like Bush's plan, [Senator Fred] Thompson's would include investments in the stock market. But he said his proposal was different because it would be strictly voluntary and would be added to the Social Security system rather than carved out of it.
Sounds pretty good. You bolster American's savings for retirement, take some of the strain off the trust fund by adding money voluntarily, and even allow people to pick and choose their additional investments.

On the other hand...
Democratic presidential candidate Barack Obama, a senator from Illinois, said Thompson's plan would undermine Social Security and "if we simply ask higher income Americans to contribute a little more, we can shore up Social Security for generations to come."
Social Security contributions cut out at roughly $98,000 of wage and other earned income, but none on other types of income, like rents, royalties, and capital gains and dividends.

Too, Obama misses an obvious point of Thompson's proposal: nowhere in it does he guarantee that this additional investment option would not be phased in to replace the current mandatory taxation plan.

There is a fine balance to be drawn in discussing Social Security, of course: it was never intended to be anything near a primary income source for retirement: instead, it was intended to be a safety net to take the poorest class of citizens in the 30s and 40s, the elderly, the ones most hurt by the Great Depression, and help them survive.

Not survive in style, survive. And considering the average American lived to about 70 (males far shorter), it was not intended as a long-term annuity.

As private pensions blossomed in the 50s and 60s, Social Security was seen as a fill-in to a longer retirement period. As health insurance started to promise longer lived Americans, suddenly Social Security more widely became a necessary stop-gap to pensions with defined benefits for far longer lived Americans (those pension benefits were not always adjusted for inflation).

And so here we are, as the baby boomers officially start to hit benefits drawdown ages.

Is there a crisis, tho? Most estimates show that we can pay out of the trust fund (which are really just IOUs from the Federal government's operating budget) plus current deposits until the 2040s, other things being equal.

Ah, but there's the rub. By law, Federal budgeting cannot assume a worst case scenario when projecting out funds available.

For one thing, the budgeting process has to assume that the US government can pay all its obligations without printing up gobs of money, and driving inflation (and by extension, COLA-adjusted SSI benefits) skyward.

Does anyone here think, with all the meltdowns in mortgage and banking industries, that the Fed isn't about to prop up the current government by lowering interest rates further, driving the dollar even further down on world markets and raising the prices of just about everything?

Second, the projections assume a growing, thriving economy, usually about 2-3% real growth. See the last paragraph. We're careening towards not just recession, but a depression, at least in the consumer arena if not the entire economy, despite what numbnuts like Bernanke say. Fuel prices have jumped 20% since last year, despite inflation's nominal increases. Food prices have jumped on the order of 5% in total, but note that staples have jumped even higher as corn, corn syrup and some other grains are swapped into biofuel projects.

Yuck! And it's not going to get better in 2008 OR 2009, I think.

So while the immediate problems of Social Security are nominal, all this occurs against a backdrop that could show a long-term handcuffing of the income elements and a freeing-up of the factors that will explode disbursements made from the trust fund.

In short, there's a very real chance that the SSI fund will be bankrupt in very short order, while you and I are drawing down benefits.

Neither Thompson's nor Obama's solutions, prima facie, provide enough relief, particularly given the little back door that Thompson left for a shift of the entire program to a voluntary system. We need to radically rethink the entire system, in my opinion, and further, a combination of both of these proposals is a good place to start.

A national dialogue on just what Social Security is and what it should be is the first step off these proposals.