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Mark Your Calendars!
March 10th 04:18:28 PM
S4's hosting series of events in Pennsylvania and the first one is Wednesday!
The first discussion will be held at Haverford College on Wednesday, March 15 at 7 p.m. in the Founder’s Common Room. David John of the Heritage Foundation will be giving a lecture entitled “How Fixing Social Security Will Secure Your Future.”
The second event will be April 4 at the University of Pennsylvania. Time and location is to be determined. The speaker will be Michael Tanner of the Cato Institute, one of the world’s foremost advocates of reform featuring personal accounts.
A third event is planned for April 18 at the University of Pittsburgh and will feature S4 co-founder Patrick Wetherille in a discussion with Professor Larry Frolik of the University of Pittsburgh School of Law. Professor Frolik is also a member of AARP’s Pennsylvania Executive Council.
Posted by Chris Schrimpf
Comments
A Strategy for Reforming
Social Security's Pension Program
Edgar H. Brown, Jr.
Step 1: Mount a major publicity campaign to bring to the attention of the public that under all of the present reform proposals the size of pensions that will be paid to workers now under age 55 will be a gigantic rip-off. Their payroll taxes will be as much as 30% too high for the benefits they will receive.
Assuming their pensions continue to be calculated from the present formulas, workers now over 65 will continue to receive pensions of reasonable size in relation to the money they have paid in, in payroll taxes, and return on investment of these payments. Unfortunately, the portion of these pensions that would normally come from return on investment is in fact being paid from the payroll taxes paid by younger workers, an obvious pyramid scheme. In consequence the Social Security trust fund, the investment vehicle for Social Security, is at about 1.7 trillion dollars when it should be around 13 trillion to cover future pensions.
In all of the present reform plans, the rate of return on investment will go seriously negative for future retirees. This elephant sitting in the corner, that no one notices, is justified by the experts with far-fetched rationales of wondrous intricacy and variously named “Legacy Costs”, “Start up Cost” or “Pay as You Go” as a moral imperative. In effect, they all boil down to return on investment in retirement plans being largely reserved for the well to do. (Although Bush’s plan includes some return on investment, it manages to keep present payroll tax rates and decreases benefits.)
Investment in Treasury bonds and corporate stocks and bonds in retirement programs such as Social Security are about same and none is free lunch. Basically the community at large pays the returned on investment. The bottom line in any social security reform is how benefits modified and what fraction of pensions come from payroll taxes and what comes from the community at large via return on investment. Once it is agreed that workers should get a fair shake for their payroll taxes, reform is easy.
Step 2: Completely solve the problem for workers retiring after 2045. The Social Security Administration should set up a second Old Age Survivor and Dependents Insurance (OASDI) program for these workers keeping present benefits levels. Their payroll taxes are invested in Treasury bonds and their payroll tax rates are reduced (probably about 25%) to a rate making the system financial sound, that is, so that at all times the Trust Fund balance equals a reasonable estimate of future liabilities. In addition, the new system should be entirely separated from the general revenue budget, as it formally was. Failure to immediately put this into effect is obviously inexcusable. There is no reason these workers should be called upon to make a greater contribution to the federal short fall due to their reduce payroll taxes than the general tax payer.
Step 3: During the early years of Social Security payroll taxes, nicely limited to annual wages up to $3,000 in 1940, rising to $7,800 in 1970, paid the full pensions of workers who had only paid in for a few years and in addition the system gradually replaced Old Age Assistance (OAA) benefits that had been paid out of general revenues. Simple social justice strongly suggests that these costs should have been paid for from general revenues instead of payroll taxes. Thus the obvious first step in reforming OASDI is the Secretary of the Treasury announcing, with the concurrence of Congress and the President that there have been errors in calculating the Trust Fund balance and as corrected, in line with sound actuarial principals, payroll taxes can be substantially reduced. The correction consists in calculating OASDI pensions from the outset, in 1937, using actuarially sound formulas based on working years in which payroll taxes are paid, however few, and the difference between the actual pension paid and the recalculated pension should have been charged to OAA. The consequent increase in OAA demand on general revenue would be exactly equal to the amount going into general revenue from the sale of Treasury bonds going into the OASDI Trust Fund. That is, the money that formerly paid these expenses from payroll taxes, now buys bonds deposited in the Trust Fund and hence into general revenues covering the OAA additional charges. This would probably bring the Trust Fund to a level from which gradual, moderate changes in the payroll tax rate could bring OASDI into solvency and mesh with the provisions in step 2.
brown@brandeis.edu
Posted by Edgar Brown on March 11th 10:23:48 AM
That's interesting on it's face, Edgar. However, I must admit, that I can't really follow your plan all the way through.
I agree with your assertion #1, mostly. I disagree that investment in stocks and bonds is equivalent to the pay-as-you go system currently.
I think I see your point on #2. If we separate out those workers retiring after 2045, then the current generation will be required to pay for their own overspending. A good idea, but that is just a one-off solution to the baby boom, not a panacea for the worsening ratios in future generations.
I also agree in #3 that we should acknowledge that the trust fund balance has been miscalculated...as in there isn't one.
Though, I fail to see how any of the changes you propose will allow us to lower the payroll tax.
Posted by jeremy on March 13th 03:02:59 PM
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