The intent of this thread is not to debate the merits of Reform.
This thread sufficiently covers this.
Please keep this to educational.

Short Term Cost of Privatization

1) People 55 and over will keep their current benefits.
2) People under 55 will be able to redirect 4% (detail doesnt matter)
into a private investment account.

Therefore, there will be a period of time where people who
are collecting full benefits are entering the system, yet
those paying into the system are paying a reduced amount
into the standard fund.

As such there is a revenue/expense deficit that will need
to come from somewhere to maintain the benefits as
promised.


Q1) Is this correct? If not, why?


Q2) What is the proposal to cover this cost?


Partial Privatization is related to Solvency

1) Social Security collects and spends at some ratio.
For sake of clarity lets assume it is even. 12/12

2) Social Security will allow 4% of funds to enter private accounts.

3) Social Security fund will receive the remaining 8% of income.

4) Assumption: Social Security fund will continue to pay out benefits
in proportion to what is collected. Thus if they are reduced to
collecting 8% then they will pay out 8%.
Proportionally no cut in benefits. 8/8

However, we know that Social Security is not proportional.
It used to raise a surplus and expectation is that there
will be some negative differential in what is coming in to
what has to go out with the status quo. Say with status quo
the ratio is 12/15. This is what makes it headed for insolvency.

So if we reduce the fraction to make the income be 8 as indicated above,
the resulting need to pay out proportional benefits is 10.
(8/10 = 4/5 = 12/15)

Thus, it seems that just adding partial privatization still
leaves a deficit in the remaining fund. 8/10


Q1) Is it correct to say just adding private accounts
does not affect Social Security solvency?
That above proportion benefit cuts would still be necessary?

As an aside, I understand if one is to assume that the 4%
will grow at a rate faster than the money lost as a result of
above proportion benefit cuts, then this still could mean more money
to an individual. Again its a question over whether this is
true not its merits.

I believe the president views this issue in the same way
I do based on the State of the Union. He clearly differentiated
his presentation on private accounts from his discussion of long term solvency
where he talked about raises in age, cuts in benefits, caps on wealthy, etc.

I have, however, clearly heard commentators (for example Sean Hannity)
claim that the privatization plan is to address the insolvency problem.

So in summary...

1) Am I correct in thinking that existence of private
accounts and solvency are two different issues?

2) Am I correct in thinking that they can only be related
issues if the benefit is cut above proportion and assumed
to be offset by the growth of the private account?

3) Am I correct in that is remains unclear where
the "transition money" to allow for these private accounts
will come from? That is may have to raise our deficit?



Advanced Questions for Economists:

1) Treasury bonds are primarily purchased by Social Security
and foreign governments to back up their own economic stability. (True?)
2) Treasury bonds will be purchased significantly less by Social Security.

Thus...
... a larger proportion of our treasury will be owed to foreign goverments.

... the demand side of treasury bonds will dramatically fall.



Q1) Is there a national security issue with the former?

Q2) Since Treasury Bonds are how the government borrows money will it be harder
for the government to borrow enough in a time of crisis (less demand)?


Thanks for helping me understand.

Colin, an economist I ain't. To answer just a few points, however, here goes.

1. The idea behind financing the new form of Social Security is that population will increase along with jobs, thus having more workers paying Social Security taxes.

2. Part of the financing will also come from delaying benefits by increasing the age at which a person can collect full SS benefits. Some see this as a "cut".

3. There is no SS "Trust Fund", that's a myth and has been for close to 40 years. The whole SS system rests on Treasury Bonds, as you noted. In other words, the entire SS benefit pool is IOUs.

4. Foreign countries, particularly China and Japan, hold huge amounts of Treasury Bonds. Were they so inclined, they could hold onto them until every one matures, then turn them in all at once demanding redemption. What would/could the Fed do to satisfy this? Probably only to crank up the printing presses and make more money. Inflation anyone? National security issue? You betcha.

Thanks to political cowardice and government greed, the day of reckoning has not been addressed. But it's getting closer nonetheless.

1. Doesnt quite make sense to me. Either the pool of workers is projected to cover the retirees or its not. They say it will not be. Everything being proportional then (ie ignoring transition period), just reducing the fractions still leaves a deficit.

2. Am I correct in thinking 67 was already being done. That was then accounted for in the gloom projection. Are we talking another increase? I heard Bush mention it as a consideration but not say that was part of his plan.

3. Right. But its not as simple as there would be a trust fund but the government took it. In theory the government borrowed it but is obligated (truly because of bond ratings) to pay it back, so there is a "virtual" fund. If Social Security instead has invested in gold, then the government still probably would have issued the bonds to pay our nasty deficit, therefore we would still owe the same amount but there would be real funds in Social Security. Why is that different?

4. No one ever talks about this. China owns our treasury bonds and Saudis own a good bit of our stock market. I dont understand why people dont recognize the following are national security matters:
- Agriculture: being able to produce our own food, even when imports are cheaper
- Banking, Securities and Insurance: AQ has said it wants to destabalize our economy
- Transportation: Ability to move military equipment, emergency supplies and evacuate citizenry.
- Communications: Ability to maintain organization in face of crisis.
- Energy: To run our military, keep our factories producing, and our families heated.

I guess thats why these were regulated in the first place, DOA, SEC, Treasury, FCC, DOE, etc.

The argument is less direct with Education and Health Care.

Although I don't have the answers to any of your questions, I have a few of my own.

The social security "crisis" is said to be caused by baby boomers retiring right?

However, I have never heard anyone discuss the distant future. After all The expected life span for men is approx 76 years and that of women about 82. This suggests 80% of the boomers or so will be dead within 20 years of retirement.

Therefore, wouldn't the "crisis" be temporary. After enough baby boomers die, won't the problem correct itself?

So, why such a radical reform? Seems like a scam to me.

Why not take the 2-4 trillion we will need to privatize and put it in a fund to maintain current benifit levels untill the problem passes. If it is not enough, raise the income level that is subject to SS tax and implement need testing.

Here is why I think the Democrats will resist any attempt at private account funding that is carved out of the existing tax.

Correct me if I am wrong, but a guy who earns 60K for 43 years will not get 3 times the benefits of a man who earns 20K for 43 years even though he contributes 3 times as much into the system. That means there is already a form of wealth redistribution at work within social security.

Also, the people most likely to elect to have some of their social security taxes go into a private account are more likely to be those who earn more. So if the guy who is paying his own way and part of someone else's way too is allowed to withdraw a portion of his funds, it will have a negative effect on the overall cash flows of the system.

Simply put, if you earn too much then some other guy is entitled to a portion of what you earned and payed into the system. Anything else would just be unfair. : P