Saturday, November 27, 2004

Social Security Reform

The NY Times reports on the Bush administration's plan (i.e., non-plan) to privatize part of Social Security, creating at least a trillion dollars of debt and paying for the transition by adding on to the national debt.
The White House and Republicans in Congress are all but certain to embrace large-scale government borrowing to help finance President Bush's plan to create personal investment accounts in Social Security, according to administration officials, members of Congress and independent analysts.

Borrowing by the government could be necessary to establish the personal accounts because of the way Social Security pays for benefits. Under the current system, the payroll tax levied on workers goes to benefits for people who are already retired. Personal accounts would be paid for out of the same pool of money; they would allow workers to divert a portion of their payroll taxes into accounts invested in mutual funds or other investments.

The money going into the accounts would therefore no longer be available to pay benefits to current retirees. The shortfall would have to be made up somehow to preserve benefits for people who are already retired during the transition from one system to the other, and by nearly all estimates there is no way to make it up without relying at least in part on government borrowing.
Peter Orszag of the Brookings Institute tries to explain the problem with this plan:
"To the extent that the transition is debt-financed, the ostensible macroeconomic benefits from individual accounts are undermined," said Peter Orszag, an economist at the Brookings Institution who has been critical of personal account plans. "In particular, you do not get an increase in national savings. It's engaging effectively in accounting gimmicks to make it look as if you're doing something when you're not."
And what about the Bush plan to reduce the deficit in half in the next five years?
The White House, which has promised to cut the deficit in half while making Mr. Bush's tax cuts permanent, has signaled that it does not intend to include the figures in its budget, since the administration has not endorsed a detailed plan.
Atrios predicts how this will all play out in the press:
Sane people will try to point out what they're doing, Ted Koppel will declare it oh so complicated, pundits will pontificate that no one really understands all these numbers...


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