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Retirement Planning and Social Security July 24, 2008

Posted by retirementwithaplan in Uncategorized.
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This blog post originally appeared on another blog server on 01.08.08

Social Security

I should tell you that this entry does not appear in the book. Perhaps my editor deemed it too political. I didn’t argue his red pen but saw it as something worth discussing here instead.

Nothing without a price

Reform always costs money. But it doesn’t necessarily mean that the change in the program is the best way to spend it. Two things should happen first. If the solvency of the program is at stake, Congress should look elsewhere for money. For decades, they have been dipping into the Social Security surplus – and yes, even during this age of fewer workers supporting increased retirees, there is still an estimated $500 billion in surplus received through payroll taxes – and leaving IOUs.

Congress should pay those IOUs back instead of legislating them away.

That would, by default, expose the folks in Washington to fiscal policy that would be embraced by the nation. Changing the way our elected officials do business would have a ripple effect throughout the economy by encouraging savings. Unfortunately, they would have to borrow money to make up for their previous transgressions.

The estimated cost for dismantling the program – and do not kid yourself on this one, once the change is begun, it will continue to be taken apart until the program does not resemble the current system in any way – will be over $2 trillion. And that is just for starters.

Staying on Topic

This was recently evidenced by two announcements from the White House. The first from Gregory Mankiw, the then chairman of the Council of Economic Advisers who was quoted during a conference on tax policy: “There are no free lunches here”, and the second from the President himself: “We will not raise payroll taxes to solve this problem”.

Creating personal accounts will not decrease the national debt even as more is created to change the program. National savings, now at an anemic .02%, depending upon which month you look at will not change without some sort of increase in debt. In our current model of economic health, savings, while worthy, is not something that is encouraged.

In other words, the more we save, the more debt will be needed to make up for the shortfall under current economic conditions. A shift to a savings based society will have short-term budgetary issues as money for expansion dries up.

Chili

The President has been quick to point out the advantages of Chile’s reform of their social system in 1980 as the model for our reformation. But we should be careful before we jump to conclusions. There were several things in place when the program in that country shifted.

In the real world however, it is quite different. References to Chile’s success with their privatization program are mostly superficial.

What many supporters of change in Social Security miss when they tout Chile’s success lie in two distinct differences: When the Chilean government embarked on this change 25 years ago, they built surpluses in the Treasury to ensure against any initial pitfalls and in the system and the workers, who kick in 10% of their pay do so under a mandate, not a choice.

From a purely economical standpoint, the program has failed on several fronts. One, the Chilean government has been forced to heavily subsidize the program as the first generation of retirees begins to tap the system. And the belief that the system would be self-supporting has largely proved to be false.

The Chilean government tied this changed to “one-time” government bonds with costs spread to future generations, a residual payroll tax, governmental privatization of many state run industries and a that deliberate surplus that was created before the reform could be enacted to help pay for the change. None of these conditions are available to us.

Compared to Argentina

It would be much more apt to compare our efforts to those of Argentina, whose national debt ballooned because of their effort to borrow to fix a debt problem in their social system.

The bottom line: for the President’s plan to work, he would be forced to raise taxes.

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