Last week, former House Speaker Newt Gingrich unveiled details of his plan to partially privatize Social Security. His plan would allow younger workers to contribute a portion of their payroll tax obligation to a private investment account. Roughly speaking, Gingrich is signing on to the legislation from 2004 sponsored by Representative Paul Ryan (R-WI) and former Senator John Sununu (R-NH).
Like any plan to introduce private accounts, Gingrich must first explain how he will fund benefits for current retirees. Presently, existing benefits are paid for by the payroll tax contribution from current workers -- with private accounts, those payroll taxes would be diverted to private accounts. But I've talked about that issue before in relation to the plans of Herman Cain and Rick Perry, so I won't repeat it here. (If you are interested in how the funding issue applies to Gingrich's plan in particular, read this piece by Eric Black.)
Instead I want to focus on a separate aspect of Gingrich's plan: the protection from downside risk. Under Gingrich's plan (see page 17), if an individual's investments sour, then (see page 17) "[T]he Treasury will send them a check to make up the difference" between their investments and their promised benefits. This guarantee is also part of the Ryan-Sununu plan.
But, as Pat Garofalo at ThinkProgress noted,
[P]romising to make investors whole again sets up a huge moral hazard problem. If investors know full well that the government is going to provide them with a minimum benefit, no matter what they do, then the incentive is to make risky investments and hope for a big payoff. After all, why not take the risk if the government has guaranteed that you can't lose money? Investors have every incentive to bet big in the hopes of a large payout, because if they go bust, the government will bail them out.
Gingrich counters that private account holders could invest only in a select few funds -- each of which would be regulated by the government to meet basic diversification requirements. From his plan (again see page 17):
Because the government authorizes and regulates all investment funds, it is able to manage the risk of the personal accounts. This provides a key check on excessively high-risk investing, and all but ensures that the returns accrued in the personal accounts are more than adequate for retirement.
Gingrich is correct that his plan would not allow an individual to invest purely in, say, the latest social networking IPO. But under the Ryan-Sununu plan that Gingrich emulates, investors could still choose a fund that has higher risk and reward -- such as a fund invested only in international stocks, or small-cap stocks.
Furthermore, Gingrich's plan explicitly allows individuals to (see page 16) quickly switch between funds -- meaning that investors could increase their risk and return by attempting to time the market. These investors would know that if they happened to guess incorrectly -- or if their risky exposure to international stocks soured -- the Treasury's guarantee would protect them from losses.
The protection from downside risk is would be more palatable if investment choice is further restricted to, for instance, balanced or target-date funds. And the plan would have to restrict reallocation within the same account, so that workers could not increase their risk by attempting to guess market trends. However, even with these further restrictions, any federal guarantee of losses from equity investments is a bad idea -- the government is taking the downside risk, but the individual gets any upside gain.
In short, you can't have it both ways: you cannot allow individuals to take on more risk while retaining the absolute safety net of Social Security. If Gingrich believes that privatization is the way to go, his plan needs to force individual workers -- rather than taxpayers as a whole -- to bear the risk of poor investment returns.
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| Obama | Romney | |
|---|---|---|
| Electoral Votes (270 to win) |
332 | 206 |
| Obama | Romney | |
|---|---|---|
| Total | 65,899,660 | 60,932,152 |
| Percent | 51.1% | 47.2% |
| Democrats* | Republicans | |
|---|---|---|
| Current Senate | 53 | 47 |
| Seats gained or lost | +2 | -2 |
| New Total | 55 | 45 |
| Democrats | Republicans | |
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| Seats won | 201 | 234 |
1. Means Test
Stop transferring resources from poorer working citizens to wealthier retired citizens.
2. Let revenue = expenditures
Stop the notion that there is any trust fund. Calculate the payroll tax based on the expected expenditures.
3. Remove the employer portion
Correct the fallacy that somehow the burden of the payroll tax is split between employee and employer. Most economists admit, even Paul Krugman, that the employer's portion really comes from employee wages. Let citizens realize the full burden of the tax.
4. Remove the cap
If payroll it the element being taxed, let every dollar be taxed the same (not progressive, not regressive)
5. Add an addition 5% private accounts (with inheritance rights)
Let the next generation of retirees have at least been forced to save something (since their children will be forced to provide resources). The means testing will at least mean that next generation will have less of an obligation to provide resources. Maybe someday citizens in this country will leave resources to the next generation. It'll sure beat the debt we've been left.
Those resources you don't want to transfer are our resources. We have paid into Social Security for 45 years.
Right, removing the cap is good. Each earned dollar is already taxed the same until you get to $108,000.
It is not the citzens who ran up the debt. It was our government who went in debt for the Bush Tax cuts and wars.
You need to catch up.
The resource being transferred today are those earned by today's wage earners. No resources were put aside in the past. Instead, they were consumed.
Citizens from earlier tax years elected representatives that were willing to consume more resources (at the government level) than they required from taxpayers. They did this by putting debt onto future generations. This is called "generational theft".
The solution is obvious, but very painful. You cannot earn a risk free return without investing in risk free assets. The only (credit) risk free asset is a government bond. If you want to allow private account social security or defined benefit plans supported by the taxpayer the only allowed investment should be US government bonds. At least then the taxpayer is not taking credit risk for the investor.
Yes, the returns on these risk free investments will be much lower. But as the author states, "... you can't have it both ways: you cannot allow individuals to take on more risk while retaining the absolute safety net ..."
There is no such thing as a right that costs money. Entitlement programs based on future revenue are nothing more than promises that our society either can or cannot afford to pay at any given point in time. Our ability to pay on those promises is largely affected by how fiscally responsible government is. Past performance certainly is not inspiring future confidence in that regard.
Programs based on assets do come with rights though. You have ownership of something. You can also insure that asset and/or insure that assets ability to generate income.
For one thing, Democratic party proposals for a public option were at best pilot programs, framed as market correctives to increase competition. Moreover, unlike their plans, which would be paid for with new revenues, Newt's plan calls for the diversion of existing payroll taxes into a private system. The goal, just as with his proposed private option for Medicare, is to simultaneously subsidize private retirement plans while simultaneously defunding the traditional versions of these two programs. When they inevitably go into the red, the GOP will use the opportunity to push for wholesale privatization.
Not only do private retirement plans charge exorbitant fees that can easily siphon off 40% of the total value of the investment when all is said and done, their gains and losses rise and fall with the market. If another financial crisis occurs, future retirees are left with absolutely nothing. In actuality, Gingrich is proposing a massive transfer of public wealth for the purpose of inflating one last bubble for Wall Street. A private option is a transparent ploy, and no one is falling for it.
But the biggest problem is of course paying current beneficiaries while funds are diverted to the new accounts.
Oh yes, because it is the corporate media.
Absent a government funded retirement scheme, I would need to save 20% of my income throughout my working life to achieve replacement income at age 67 if I could earn 7% per year over the life of my investments. As it is with social security taking 12.4% of my income for a likely ROI of below 3%, I have to save over 16% of my income to get to my target retirement income. That is a total of 28.4% of my income going towards retirement when nothing above 20% should be necessary. For me, this year, that is about $5,400 that I have to unnecessarily part with. That is, to me at least, a lot of money. It is sacrificed quality of life throughout my entire working life, and it is missed economic activity as well.