Thursday, February 03, 2005
It's All A Lie!
Not that I'm terribly surprised, but in last night's Handjob of the Union speech George W. Bush failed to mention a few things about his Social Security plan. For instance, you don't get to keep the money you invest. It's all a ponzi scheme.
- Bush left out any mention of what workers would have to give up to get those private acounts -- a proportional reduction or offset in guaranteed Social Security retirement benefits. He also glossed over the fact that money in private accounts would be "owned" by workers only in a very limited sense -- under strict conditions which the President referred to as "guidelines." Many retirees, and possibly the vast majority, wouldn't be able to touch their Social Security nest egg directly, even after retirement, because the government would take some or all of it back and convert it to a stream of payments guaranteed for life.
- What Bush did not detail is how contributions in the account would reduce workers' monthly Social Security checks. Under the system, described by an administration official, every dollar contributed to an account would be taken from the guaranteed Social Security benefit, with interest.
"The person comes out ahead if their personal account exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive," the senior administration official said. "So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase."
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. All of that money would be the worker's upon retirement. But guaranteed benefits over the worker's lifetime would be reduced by approximately $78,700 -- the amount the worker would have contributed to Social Security but instead contributed to his private account, plus 3 percent interest above inflation. The remainder, $21,100, would be the increase in benefit the worker would receive over his lifetime above the level he would have received if he stayed in the traditional system.
Under the system, total benefit gains may be minimal. The Social Security Administration, in projecting benefits under a partially privatized system, assumes a 4.6 percent rate of return over inflation. Thus gains in an account would be offset by a reduction in guaranteed benefits equal to 70 percent of the account's balance.
The Congressional Budget Office, Capitol Hill's official scorekeeper, assumes a 3.3 percent rate of return. Under that scenario, the full amount in a worker's account would be reduced dollar for dollar from his Social Security checks, for a net gain of virtually zero.
If investments earned less than 3 percent a year above inflation, a worker would do worse in total benefits than he would have done in the traditional system.