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Supplemental Private Accounts

Another issue in the mix of hypothetical reality-based economic policies is should liberals support some kind of supplemental private accounts plan on top of existing Social Security. Brad Delong says yes. As a general matter, I'm skeptical that this would work, since people ought to compensate for mandatory savings by proportionally reducing other savings (or increasing indebtedness). Brad's plan basically gets around this because you can just opt out of the accounts. The idea is to just shift the psychology of the situation, which really should increase savings at the margin. Still, I'm skeptical that this would make much of a difference. The obvious way to increase national savings would be to not have the government borrowing hundreds of billions of dollars every year. With that accomplished, I'm not sure what assessment we would make of our national savings needs. The Delong Plan might still be a good idea.

Something that seems more appealing to me would be something like the ASPIRE Act which could be financed through a modest national consumption tax (the tax would be mildly regressive, but the expenditures would be highly progressive, so it works out in the end) which would create a combination of positive incentives to save. Of course you could easily enough establish ASPIRE accounts and implement a Delong-style system of automatic additional contributions to them with the possibility of opt-out.

January 7, 2005 | Permalink

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» The Social Security Debate Once Again from Brad DeLong's Semi-Daily Journal: A Weblog
Matthew Yglesias is thinking about the substance of Social Security, and about press coverage of the debate. On the substance, I think that it is worth stressing that there are two unrelated debates going on. The first is the size of the (conventional)... [Read More]

Tracked on Jan 7, 2005 12:14:47 PM

» Savings, Taxes and Social Security from Deinonychus antirrhopus
Matthew Yglesias has another post on Social Security, private accounts and savings. Needless to say, I find it fits well with previous posts: crappy. The obvious way to increase national savings would be to not have the government borrowing hundreds of... [Read More]

Tracked on Jan 7, 2005 1:28:36 PM

» Supplemental personal accounts from The Harwood Club
He's talking about Social Security, but I think it applies to health care too. [Read More]

Tracked on Jan 7, 2005 2:59:35 PM

Comments

I definitely like the idea of subsidies/credits to lower and middle-income people, if only at first. I keep reading that the best way to help people save is for them to have a nest egg to start off with, something that DeLong's plan accomplishes.

The biggest problem I see with a DeLong style plan is that most of the people who are behind private accounts appear to be the Grover Norquist types. Considering that they are hoping for a fiscal train wreck to destroy the government's ability to collect more than a tiny bit of taxes, I can't see how they'd go for such a redistributionist scheme. Moderate Republicans, on the other hand, could be persuaded.

Posted by: Brian | Jan 7, 2005 11:04:51 AM

"The obvious way to increase national savings would be to not have the government borrowing hundreds of billions of dollars every year. "

If you are talking about truly national savings, you are right on. If you are talking about a national aggregate of personal savings, it would be the opposite. Perversely, because the US government borrows so much, it increases the profitablity of lending. Increasing the profitabiity of lending increases the profitability of saving. Indeed, much of the borrowing the government does takes the form of personal savings, when an individual buys a savings bond.

Now, I'm not advocating that the government support personal saving by borrowing heaps of money from its citizenry. I think the other affects outweigh any advantage this might bring about. I'm just saying that the effect is there.

Posted by: Njorl | Jan 7, 2005 11:23:35 AM

It's been demonstrated, often, that people will save or invest more if the kinds of mechanisms Brad describes are used. One such is: offer workers the option, before they receive their first paycheck with a new raise in it, to designate half their raise for witholding and deposit into 401(k)s. People argue about whether this is explicable in purely rational-actor terms (probably not, but you can make a case involving the informational and transactional efficiencies of a precommitment/ witholding), but the empirical finding is pretty well established. The witheld-and-deposited savings don't just substitute for other savings (though of course they do that to some extent and for some people).

For that matter, the underlying psychological insight is the same as that behind income tax witholding. It's a much greater (emotional and psychological) effort to intentionally set aside a given amount of savings every week for the quarterly tax bill to come than it is to have it deducted-- and that effort means that some people won't do it, or won't do enough of it.

Posted by: Jacob T. Levy | Jan 7, 2005 11:23:59 AM

Social security "as is" works just fine. Why tinker with something that's not broken? Our nation doesn't need to wastefully pay $2 trillion to Bush's buddies for something we don't need. Retirees can't afford to pay 20% to 30% administrative fees for the privilege of forced "savings" accounts.

These are unnecessary wastes of money, designed to put money in the pocket of Bush's supporters from the financial services industry. And it appears to be Bush's continued attack on those who are not wealthy.

Worried about funding possibly running a bit short in 2042? Raise the FICA payroll tax withholding cap from $87,500 to $150,000. Potential problem solved, and the wealthy the carry a fairer share of the burden.

All this economic theory about changing social security is just so much hot air. The question should bd what the American people want....not what "strict father" Bush chooses to do about doling out allowances. He's not again up for reelection...Bush doesn't give a damn what the American people want or think.

Posted by: Deborah White | Jan 7, 2005 11:29:58 AM

I don't get it. Don't we already have opportunities to establish private, tax-advantaged investment accounts for retirement with 401ks, Keoughs, IRAs, Roth IRAs?

DeLong's idea of a Thrift Savings Plan is good, except for the automatic diversion of tax refund money into the account. While he allows getting the full refund if one files a form, that's just adding unnecessary paperwork. It could be a check-off box on the tax-return. Ultimately, though, it will be read by the more libertarian-minded voters as another Democratic plan to force people do something with their money rather than make their own decisions. It's how the Republicans frame the issue: Freedom vs. coercion.

The real problem is that there is a lot of woeful ignorance in America about how Social Security works, what it's for, the notion of guaranteed benefits vs. speculative returns, how much money someone should ideally amass for retirement, how even small savings made early in one's working life are more powerful via compounding.

If honorable politicians and media were doing their jobs, there wouldn't be an opportunity for Republicans to try their smoke-and-mirrors act. How hard is it for a Dem economist to write a series explaining this stuff for newspaper syndication? It should be pitched as self-help, with lots of simple analogies, no esoteric economic theories or jargon, and aimed at workers in their 20s-40s. These are the people who are flirting with the idea of privatizing SS without understanding what that means beyond "maybe I'll get more money in the end."

The Republicans pushing this disaster know all this. Their aims are purely ideological. They don't give a shit what happens to retirees in 40 years because they don't think they'll personally need Social Security anyway.

Posted by: SG | Jan 7, 2005 11:37:32 AM

A hearty and supportive second to SG's comments!

Posted by: Deborah White | Jan 7, 2005 12:08:17 PM

I don't get it. Don't we already have opportunities to establish private, tax-advantaged investment accounts for retirement with 401ks, Keoughs, IRAs, Roth IRAs?

My thoughts exactly.

The private accounts thing is just a ruse to get support for the real goal: destroying social security. The truth is, there are lots of opportunities to establish a private account if you want to.

Posted by: eric | Jan 7, 2005 12:31:04 PM

SG, Deborah, and Eric are absolutely correct. If the GOP really was interested in helping Americans to save for retirement, they would be pushing us to use the many tax friendly means already available for that purpose. Their goal is simply to kill Social Security (and, of course that would kill many seniors eventually.)

Posted by: Vaughn Hopkins | Jan 7, 2005 12:50:26 PM

Another thought occurred to me: Many are saying the Democrats can't just sit still for the status quo, but have to propose alternative changes to Social Security. Ok, suppose the Bushies propose a plan to require mandatory suicides by certain groups of people. Would the Democrats be obligated to propose that this apply to a different group of people, or that a lesser number be required to commit suicide?

Posted by: Vaughn Hopkins | Jan 7, 2005 12:53:56 PM

Paul O'Neill thinks supplemental accounts are a good idea.

http://www.bloomberg.com/apps/news?pid=10000103&sid=awxBHW4_MRns&refer=us

No wonder Bush fired him.

Posted by: bakho | Jan 7, 2005 1:01:03 PM

"O'Neill said he doesn't support Bush's plans for Social Security.

``What I know that they're talking about is pretty weak tea in terms of dealing with the fundamentals,'' O'Neill said. ``I believe that we are sufficiently wealthy as a society that we should have a new dream about what we expect.''

``We should begin by mandating on ourselves as citizens that we're going to save enough in our working lifetime so at 60 or 65 all of us have a $1 million annuity,'' O'Neill said. ``We should say to people it's a mandate and then recognize that people don't earn enough money to accumulate $1 million and the rest of us in society through a tax system should make annual contributions to the accounts of those people.''

Posted by: bakho | Jan 7, 2005 1:05:07 PM

The obvious way to increase national savings would be to not have the government borrowing hundreds of billions of dollars every year.

Matthew,

You're joking right?

Posted by: Steve | Jan 7, 2005 1:27:50 PM

Why don’t the Dems propose a plan with the best of all worlds: 1) retain SS benefits at their current status; 2) provide additional funds to the SS trust account for long term viability; 3) reduce payroll tax rate on current payers earning under $90k; and 4) provide supplemental market based savings accounts. In my mind, if a “flat payroll tax” were established for all earners regardless of income (i.e. a removal of the $90k earnings limit) all these objectives could be met.

The GOP would get what it claims is the primary goal of providing additional funds to the SS trust account for long term viability, as well as its secondary goal of harnessing market growth by providing supplemental market based savings accounts. The Dems would get what they want: ensuring that SS as a social safety net is not subverted or diminished by retaining SS benefits at their current status, as well as a less regressive tax system by reducing payroll tax rate on current payers earning under $90k and removing the $90k earnings limit. Plus, how can the GOP counter that a “flat tax” is unfair, or that reducing payroll taxes for those earning under $90k is unfair.

Posted by: Jim | Jan 7, 2005 2:58:05 PM

"The obvious way to increase national savings would be to not have the government borrowing hundreds of billions of dollars every year."

The obvious way to increase national savings would be to have the government borrow something less than $11 trillion in present value terms in order to restore solvency to Social Security.

Are you completely ignorant of the fact that we have massive unfunded liabilities, or are you just hoping that your readers are too stupid to figure it out for themselves?

Posted by: Larry Jones | Jan 7, 2005 3:00:16 PM

Larry, we are not stupid at all. That's the hangup for Bush's plan to destroy the Social Security system. Our "unfunded liabilities" are the treasury bonds purchased by the excessive FICA taxes over the past 25 years. Those bonds will help pay Social Security outflows for at least another 40 years and probably much longer. Of course, to use those bonds will require that income tax cuts for the wealthy be rescinded, but that surely isn't a problem, is it?

Posted by: Vaughn Hopkins | Jan 7, 2005 4:12:05 PM

Most of the opposition from the left to some kind of asset building program on top of social security seems to be coming from people who don't understand that there is a strong de facto class impediment to entry into the world of IRAs and 401ks. For the most part, only white, white collar professionals have access to 401ks in their employment, and while it is true that everyone (in theory) has access to IRAs, it is also true that virtually everyone in theory can go to college if they wish. The trouble is the subtle intimidation factor, that these things "aren't for people like me."

We all understand that while there is no crisis in social security, there is a crisis in the national savings rate, and that a compulsory or voluntary asset building program that workers could or would have to sign up for when they were hired for their first job would solve the national savings problem and when combined with a shored up (rather than even partially dismantled) social security would help to provide most Americans with a reasonably comfortable retirement.

Posted by: Green Dem | Jan 7, 2005 4:24:57 PM

Vaughan, I hate to break it to you, but the Social Security trust fund is not a gigantic pot of money with which to pay future benefits.

Every dollar that goes into the trust fund is a dollar that has to be repaid at a later date.

With regard to the balance sheet of the federal government, the trust fund is a liability, not an asset.

Posted by: Larry Jones | Jan 7, 2005 4:34:54 PM

Green dem hits it.

401Ks and IRAs don't benefit low income individuals who can't afford to save for those items. As a result, they are forced to rely solely on Social Security for retirement income. This has the effect of worsening income inequality in this country, because studies have shown that the ability to leave some type of inheritence to heirs lessens inequality over time. The poor and low-income don't have any savings to pass to their children. Some type of private accounts would remedy this problem and allow all Americans to save and pass the savings on to their heirs.

Seems like a powerful message.

Posted by: Hoo | Jan 7, 2005 4:59:27 PM

Hoo says: The poor and low-income don't have any savings to pass to their children. Some type of private accounts would remedy this problem and allow all Americans to save and pass the savings on to their heirs.

I think it best to examine some of the assumptions about the efficacy of a "compulsory or voluntary asset building program" (to use Green Dem's description).

Poor and low-income people do not have extra income. Period. If an asset building program is made compulsory, it will only afford these people less to live on now. If it's voluntary, I'd like to see any evidence or indication that more than a tiny fraction of these poor or low-income people would participate. Once again, such a program would be a tax-advantaged mechanism for the middle and upper classes to sock away money, something they already do because they've got the discretionary income to do so.

Green Dem says: The trouble [with 401ks, etc.] is the subtle intimidation factor, that these things "aren't for people like me."

If, in fact, poor and low-income people believe that IRAs are not for them, it is probably because they are hesitant to lock up any part of their cash until the age of 59-1/2. People living with such a small cushion of safety require liquidity to deal with emergencies. The penalties for early withdrawal will drive such people away.

All this is just tinkering around the edges if the problem is a low national rate of savings. As Pogo said, "We have met the enemy, and he is us." The American consumer culture has ingrained in all of us a desire for more stuff, more things than anyone could possibly use or need. Our endless buying is the engine of our economy, and carries the seeds of our downfall as we run out of gas, both literally and figuratively. But don't blame it on the poor and low-income folks. Yeah, they might spring for a big-screen tv, but most of their income goes for the stuff we really need: food, housing, clothing. Health care is a luxury.

Posted by: SG | Jan 7, 2005 5:34:17 PM

"If, in fact, poor and low-income people believe that IRAs are not for them, it is probably because they are hesitant to lock up any part of their cash until the age of 59-1/2. People living with such a small cushion of safety require liquidity to deal with emergencies. The penalties for early withdrawal will drive such people away."

Okay, then let's make social security more progressively funded, and allow lower income workers to divert a couple of several percent of what they now pay in payroll taxes to some kind of asset building program, while (just in case it still needs to be pointed out) shoring up social security. As it is, the share of federal taxes paid by corporations compared with the share of federal taxes that come from payroll taxes has declined precipitously in the last half century. In 1950 26.5% of the total federal tax burden was paid by corporations, and 6.9% by payroll taxes (which are by nature regressive.) By 1970 17% of the total federal tax burden was paid by corporations and 18.2% by payroll taxes. And by 2000 10.2% of the total federal tax burden was paid by corporations, and 31.1% was from payroll taxes.

Posted by: Green Dem | Jan 7, 2005 6:03:27 PM

The problem here is that saving is always a risk for somebody. You don't use stuff now, hoping there will be more stuff later for you to use. It isn't that you put aside salted fish and textiles and such to use later. You give money to somebody else hoping they'll pay more later. But they may not do it; they may not be able to.

If there's a social security crisis in real terms it's that our economy is likely to have less stuff to distribute among more people. If the stuff isn't there, you can't give it to retired people. Unless you take everything from the young people who're working.

If it turns out that way we'll naturally let people volunteer to keep working as long as they want to and let them pay SS on their earnings. In the 1970's when american business wanted a large well-educated workforce that would work for moderate pay with little chance of promotion, suddenly feminism got popular. The alimony laws got changed so that women who'd never worked were particularly vulnerable if their husbands decided to divorce them on whim. Suddenly it seemed not only a right but a necessity for women to work. If we get a SS crunch when there's something resembling a labor shortage, we'll put the old people to work. 'Grey panthers' will get a lot of press.

If something else is limiting then it doesn't matter how we slice it, there isn't going to be enough to go around. We can talk up how wonderful it is to grow your own vegetables. People can make vegetable gardens and can their stuff and eat home-canned vegetables all winter, and that will cut down on their food bills. Wear more sweaters in the winter and keep the thermostats low. Wear less in the summer and keep the air conditioning high; at 85 degrees airconditioning can take the edge off without being nearly so expensive. When you do go grocery shopping you can take a 2-wheeled cart or a backpack and ride the bus. Do it once a week on your day off and it doesn't matter if it's a little inconvenient. Etc.

If there isn't as much to go around we'll all have to make do with less, and it will hardly matter whether people had their retirements in SS or in the stock market, on average. If there's plenty then we'll have to figure out how to distribute it.

Posted by: J Thomas | Jan 7, 2005 8:24:08 PM

Green Dem says: [A]llow lower income workers to divert a couple of several percent of what they now pay in payroll taxes to some kind of asset building program....

That is exactly the kind of Trojan Horse, allowed inside the gates with the best of intentions, that will spell the end of Social Security as a defined, guaranteed benefit for all Americans.

To try to make up the difference by taxing corporations at higher rates is a complication that would be almost impossible to implement, given the general anti-tax fever that grips this country. (This is not to say that corporations shouldn't be taxed higher. It's a measure of our moral bankruptcy that we burden poorer workers so heavily and reward corrupt corporate entities so richly.)

To otherwise make it fair, you'd have to mandate a corresponding decrease in the already low defined benefit level for those who are allowed to divert to an asset building account. Since such an account is subject to risk, those who you would help could very well end up poorer in the end.

If the markets went bullish, it wouldn't be long before everyone would demand the same permission to divert a portion of their payroll taxes. The end result: Farewell, social security.

I believe it's fundamental to state clearly that Social Security is not an investment vehicle. It is not an asset building program. It is more analogous to insurance. You pay in over the years and you are guaranteed a benefit payable monthly for the rest of your life. A portion of the benefit goes to your spouse upon death. It is not a handsome sum, but enough to keep those who can no longer work out of abject poverty. For those with other savings, it can mean a comfortably secure retirement.

I too would like to help poor and lower-income people. In fact, since I was laid off, I count myself in the latter group. But there are other ways of doing this than by perverting the mission and purpose of Social Security into an investment program or a way to prop up a sagging national savings rate.

Posted by: SG | Jan 7, 2005 11:00:55 PM

"I believe it's fundamental to state clearly that Social Security is not an investment vehicle."

No one on the left is suggesting that. Nor would an asset building program have to be administered by the social security administration. It could and should be handled by a separate office or department or what have you.

Posted by: Green Dem | Jan 8, 2005 2:30:00 AM

The problem, of course, is the greed, selfishness and general immorality displayed here in the political thinking. It's right but it's wrong.

Policy wise, Green Dems idea of having additional savings accounts, and redirecting payroll taxes for low-income workers into those accounts with no loss of benefits is a good one. But yeah, the selfishness will kick in and the whole thing will be wiped out.

The right wing likes to make it out to be..well..just sell your TV, sell your car, save as much as you can. Sorry, but we live in a materialistic society. You, for the most part made it that way. Congratulations. So now you're saying that some people shouldn't be allowed to participate?

Fine, you first. Think someone can live off of minimum wage? You first.

Posted by: Karmakin | Jan 8, 2005 10:49:06 AM

2004 Social Security Report: Trust Fund Ratios under the Three Alternatives
2004 Social Security Report: Economic Assumptions under the Three Alternatives
Economic Policy Institute: Changes in trustees' projections over time
Note the outcomes, digest the numbers needed to produce them, see the exhaustion date move out in time. That trend will continue. At more than a year per year.

Posted by: Bruce Webb | Jan 8, 2005 10:57:47 AM

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