House Republicans propose Social Security opt-out
It was bound to happen…
House Republicans propose Social Security opt-out by Pete Kasperowicz –
House Republicans on Friday introduced legislation that would allow workers to partially opt out of Social Security immediately, and fully opt out after 15 years.
Rep. Pete Sessions (R-NY), who chairs the National Republican Congressional Committee, and several other Republicans introduced the Savings Account for Every American (SAFE) Act. Under the bill, workers would immediately have 6.2 percent of their wages sent to a “SAFE” account each year.
That would take the place of the 6.2 percent the workers now contributed to Social Security.
Another 6.2% is sent to Social Security by employers. Under the Sessions bill, employers would continue to make this matching contribution to Social Security, but after 15 years, employers could also send that amount to the employee’s SAFE account.
[snip]
Under the bill, employees would be able to make tax free contributions to their SAFE account, and take tax-free distributions at retirement age. The bill would also allow employees to stay with the Social Security program if they wish.
And what are they allowed to invest their SAFE account in? In every case where this has been tried on the state level it has failed.
“In every case where this has been tried on the state level it has failed.”
A feature not a bug? Wave your SS insurance good by. Does SAFE, whata name!, have the survivors, wives children and disability payments too? Or is it “You and the family are on your own, good luck”?
The devil is in the details as always – see vouchercare.
Exactamente.
I wonder how many would elect to do this. Say it was 20%. On paper that would be a very big deal.
In 2011 dollars 20% of revenue is ~$140 billion. Half of this amount ($70b) would be retained by SS. In addition, any amount that had been paid in by the switcher would be lost(?)
As a base line the 20% translates to a number around ~$80b a year (rising with GDP) for 15 years. This would mean about $2t over the 15 years of real revenue for SSA. (Money in, no liabilities)
This proposal does not address the long term issues with SS. But it does create a bridge for a good chunk of the Boomers. The numbers seem to add up. (Depending on participation in the opt out)
But this would be the end of SS. It would take another 25 years or so. But this would kill it.
Don’t worry. even the dumbest of us would not do this. It’s too stupid to wrap your mind around. As they say, there’s no free lunch.
MAS says without a reference: “ In every case where this has been tried on the state level it has failed.” Failed? Every case?
This is a defined contribution versus a defined benefit plan. And they have failed in every state, huh?
Let the demagoguery begin.
Except free lunch for the for banksters and wall st types they will squander the SAFE and they will do just fine………………
The SAFE accounts will have to buy special treasuries lest they not be useful to raise cash for tax cuts for the rich.
I think that probably depends on how you define failure. The investment banks probably did very well. Quo bene?
ILSM, you may actually have hit on a way to (SAFEly 🙂 ) redeem SSTF treasuries.
Ideology.
The rentier society (Krugman this AM) don’t need no SS. They just need higher nominal interest rates and positive sloping rent curves.
They already have SAFE, it is called IRA, 401k, 403b and defined benefit plans. The better thing is to raise the limits on those so good savers can get the tax benefit. If SAFE were pre-tax that is the answer.
But SAFE should be post tax like the individual pays SS tax.
The SAFE accounts will have to buy special treasuries lest they not be useful to raise cash for tax cuts for the rich.
If SAFE is pre tax it is just an assault on SS.
Americans of character (the rentiers who built this feudal manor and to good serfs enriching them) do not need SS, or MEDICARE or national health outcomes……….
Republics do not work with all the ideology, the US needs a parliamentary system for this kind of continuous ideology in the chambers supposedly running a government.
And, if the SAFE accounts are in special treasuries, they are different from Social Security how? Ah! They are different because after the government collects the money thus “saved” from the workers, then the financial markets charge the savers to administer a fund which has returns from its investments. Ok, these are supposed to be secure, presumably guaranteed by the government. Or else, by Credit Default Swaps, or something like them, which could in turn be traded. Why, your earnings are unlimited!
Ok, so we have the government underwriting the bets made by the traders in the financial markets and for its trouble in collecting/guaranteeing a chunk of the bond/equity markets it gets what in turn? Zip. Zip in taxes, while SS is taxed. And, of course, the people who manage the SAFE funds will have no contact with Treasury, right? No influence or way to make sure THEIR paper is safe from loss whereas everyone else’s paper is only an IOU. Cool!
Ok. Now, I see the beauty of this! It’s forced savings with a twist. Just like the Savings and loans, and Enron, and the MBS’s and Freddie and Fanny, and AIG and Goldman, Citi, UBS, and the that happy billionaire-type gang, our SAFE trustees will insure you get a 6% return or in special funds apart from SAFE a higher return, etc.
So, the SAFE Trustees will trade all this moola and really only get a relatively modest 25% administrative fee. See? And when their trades go bad, the government will make up the loss with general revenues, presumably. That the tax payers will pay when the whole thing goes bust which it will because of the cyclical nature of markets and the economy. Which is the miracle of compound interest, but just in reverse.
And, of course, if you die your survivors get all the money, if there is any. And, should you get divorced, your ex-spouse gets half, etc. etc. Yes, the end of SS, BK, you are right. And, we end up building a bridge to nowhere, because God knows where the jobs are going to come from for Gen X and the Millenials. First things first, Congress. Jobs, remember. NancyO
Why the class warfare?
Why the class warfare? How long before we hear the racism attack?
“Zip. Zip in taxes, while SS is taxed. ” Since this will appeal mainly to the upper incomes, it is another tax cut at the top.
Where is the “transition cost” estimate? Who eats that cost as less revenue is collected both in the SS cash flow and the general fund budget?
It is class warfare and it is “racist” if only in the consequence. (This is what counts – the result.) But it is more class warfare with the side effect that different demographics (low wage workers, women, and minority workers) are harmed. And yes, the more wealthy will get the double bang of not contributing to the bend point system and getting a cash flow from which they can skim unearned income.
“And, of course, if you die your survivors get all the money, if there is any. And, should you get divorced, your ex-spouse gets half, etc. etc. Yes, the end of SS, BK, you are right. And, we end up building a bridge to nowhere, because God knows where the jobs are going to come from for Gen X and the Millenials. First things first, Congress. Jobs, remember.”
Yes, this is the important thing. However, the worker needs to be put in his/her place first. Taking wealth from the people and the US economy is really a hedge against the bet of destroying “we the people”.
Krasting
“the numbers add up.”
yes, Bruce, they always do. two plus two equals four. your troubles begin when you need to answer “which two?” and “four what?”
“One and one and one make three! one thing i can tell you is you gotta be Free!”
Relax, CoRev–Your side is winning! 😉 NancyO
Only class warfare if one defends the “safety net”.
I understand class warfare, I have won. I am a pensioner in the “man at arms class”.
My kids are not winning and 98% of the population are not.
In this country, in this century my class does not need Tennyson or Kipling writing about “Tommy this and Tommy that” or the impoverished survivirs of the Charge of the Light Brigade.
This proposal would be a wonderful stimulus for the financial industry! We should do it!
Do you have to opt out?
Sorry, I see that you don’t have to opt out. So what’s the big deal. If you can stay in SS and the numbers work then who cares?
On a quick read, there are at least two land mines in the bills:
Contra Nancy’s quip above, it does not appear that SAFE accounts will necessarily be considered community property. (There is a cross-reference that suggests it, but no specification that it will mirror the current stay-married-for-ten-years-and-receive-the-higher-of structure.
Since the 6.2% is for OASDI, those who opt-out will be responsible for buying their own DI–indeed, it is specifically a permitted use of the funds.
So anyone who doesn’t buy DI and ends up disabled is SOL. And anyone who does will–if both (1) they find a policy that matches what SSDI currently does and (2) they’re lucky–realise that they’re putting about 2.4-2.5% of that 6.2% into the DI policy for the first fifteen years, leaving less than 4% of their AGI to be “invested.”
There’s a third issue–there appears to be a way for employers to keep the employee’s contributions without investing them b/c the amount is too small–but that may be mitigated by the penalty structures (I doubt it, but it’s possible).
Also, the penalty structures for being late on your p/a/y/m/e/n/t/ contribution are severe–the same for the individual as for the firm, even though control is clearly more in the former’s area. But that’s boilerplate, so it may not be significant. (If it’s not, look for corporate fraud efforts to go up.)
As Anna Lee suggests, above, the free from taxation piece is the bomb. The question is who will be blown up in the explosion? What is the budgetary effect of suddenly excluding all that income from taxation? Also it is a totally regressive tax deduction beiing far more valuable for those in upper income levels; 6.2% of $106,000 (presently) is a far better exclusion than 6.2% of $25, 30, 40, etc thousand. The plan is a joke, but the butt of the joke will once again be the lower 95%. Are we all really that stupid as to fall for this kind of class warfare on the working class.
Little John the key missing phrase is ‘bend points’.
While Social Security was deliberately set up on an insurance model it does have a reasonable amount of progressivity built in. Although benefits scale up with income in that no one with a higher lifetime income gets a smaller check than someone with a similar work history but lower such income the actual replacement rate of that income varies from around 25% to 85% with higher income folk getting a lower replacement rate. If you allow people above the second bend point to opt out without some mechanism to maintain the effective transfer from above the second bend point to particularly below the first one then it becomes progressively more difficult to maintain those higher replacement rates. That is it is not at all clear that “the numbers work” will still be true under a system that in effect lowers the payroll cap.
The payroll cap is a not particularly perfect but reasonably effective mechanism to balance the pure insurance aspects of Social Security against the retirement benefits. For example if you knew to a certainty that you would start earning the cap amount coming out of school and would maintain your income level at or above that level for your lifetime AND owned a magic teflon shield that would prevent you and yours from enduring any accidental misfortune during your working life then frankly Social Security is a bad deal on paper. And if you come out of school earning more than twice the cap and have guaranteed disability insurance via your employer AND an equal guarantee of lifetime employment then Social Security, even with cap in place, is a bad deal. But relatively few of us are named Cornelius van RailroadTrust IV with that nice legacy spot at your grandfather’s Ivy and a subsequent slot as Assistant VP for Featherbedding at the family firm.
What all this means is that people who consistently earn above the second bend point and near or above the cap have the incentive to gamble, and in fact if the cap is set at the theoretically exact sweet actuarial spot actually have odds approaching 50/50 in opting out the closer they are to the cap. And of course the opposite is true for people whose lifetime earnings keep them under the first bend point, they never make out under opt-out, which is why most such plans build in explicit transfers to them. Which very often under those plans comes at the expense of the broad middle whose earnings are between the first and second bend point.
Which is a feature and not a bug of most right economic ‘reform’ plans from SS privatization to Fair Tax, even where they promise to hold benefits harmless for the poorer end of the spectrum or hold overall tax revenues steady (see Ryan Roadmap or the Bowles-Simpson proposal) they ALWAYS come with a reduction in top rates and/or a shift in tax burden from capital to labor.
As always the devil is in the details/numbers. Pure assertions that such programs are ‘voluntary’ and that nobody is forced to ‘opt out’ mean little to nothing if what minimal transfers from top to bottom that exist are eliminated in the process with the burden shifted to the broad middle.
Bruce,
Good to see you!!!
Ken:
Way out for companies . . . go bankrupt in federal court and have the judge remove the responsibility for investments not invested by the company. Where have we see this before? Also:
“The commissioner may waive the application of this section with respect to any failure if the Commissioner determines that such failure is due to reasonable cause and not to intentional disregards of rules and regulations.”
Bankruptcy is reasonable cause.
little john
the numbers won’t work.
mostly because we will have to pay welfare to those who go private and lose their bets.
I think Bruce’s explanation is too hard to understand, and too hard on Social Security really.
It depends how you look at it. If you “know” you are not going to have an accident, any insurance is a bad investment. But you don’t know. If you think of Social Security as “insurance against not having enough money to retire on,” Then even the high earners are getting a good deal… the insurance… and their premium goes (in part) to pay for the “losses” of those who don’t earn enough over a lifetime to save enough for retirement. The reason their premium only goes “in part” to cover the losses of those lesser folk is that in fact they get ALL of their money back with interest. Just not as much interest as they “could have gotten” if they invested somewhere else and didn’t go broke.
Nice to hear from you two. Have the bill’s promoters put out any math on this thing?
Run–Good point. I forgot to say that only a puny 65% (IIRC) of pension payments are guaranteed under ERISA. Now, the pension guarantee program really is underfunded because companies withheld premiums they owed and were let to do it without penalty. And, Ken H. is right about no express provision allowing the SAFE account to be community property. However, whereas private pension funds are considered community property it is possible the spouse could end up with zip all round in case of divorce. Nevertheless, this needs to be clarified. NancyO
“House Republicans on Friday introduced legislation that would allow workers to partially opt out of Social Security immediately, and fully opt out after 15 years.”
And I couldn’t be happier about it!
Corev,
It won’t be long! I figure by the time next summer rolls around Republicans will offically be refered to as the “Racist” Party.
I haven’t seen numbers, or for that matter even looked for them, but suspect the plan will fall apart where they all do from Ferrara to Bush Option 2 to Posen to LMS: transfer and transition.
Every plan I look at ends up with some external subsidy and/or guarantee for lower income workers. While the results for lower income workers under the current system are by no means luxurious, this is largely because their lifetime earnings have been suppressed to the point that even an 85% replacement rate still leaves them bumping along the bottom. Yet the idea that somehow diverting 6.2% of a minimum wage check will somehow deliver even that miserable result in dollar terms and still less the ROI already implied by the 85% replacement doesn’t pass the basic back of the envelope test. But any income guarantees have to be paid for from somewhere which either means some sort of clawback on upper income personal accounts (e.g. Bush Option 2) or General Fund transfers (e.g. Ferrara).
But the bigger problem than transfers from top to bottom income levels is transition from Pay-Go to truly individually funded retirement accounts. What do you do with all the people who in traditional terms are ‘vested’ in the program? Privatizers simply run aground on this question. The scope of the problem can be seen in the LMS Plan. In order to deliver benefits roughly equivalent to the current system while actually eliminating general fund transfers required a combination of tax increases and front-end benefit cuts totaling 5.2% where a 100% solution under Pay-Go required only 1.92%. And all of this assuming very high rates of real return to compensate for the clawback needed to fund transition. Rates of return that Baker, Delong and Krugman showed in their BDK Paper of 2005 were somewhere between very difficult and absurd to accomplish under the economic assumptions underlying Intermediate Cost.
So I would expect the promoters of this plan as with similar plans to hold back numbers, and particularly economic assumptions, back as long as possible. Because lurking out there in that sea of numbers is the real rock that sinks privatization: the Low Cost Alternative.
You can think of Low Cost as a purely theoretical set of economic and demographic numbers that mathematically produce a fully funded Pay-Go result. Purely theoretical because its methodology requires all relevant variables to move in favorable directions, a result that you can show has a low probability. But there are an infinite set of models that would depart from Low Cost in one particular or another and still deliver the same result, and some of those variables are open to direct targeting. For example you could offset what some would consider unrealistically high fertility numbers with a more open immigration policy than assumed. Equally you could conclude that the 4.5% ultimate unemployment rate of Low Cost was well and truly under NAIRU and compensate for that by increasing Real Wage via such things as accelerated increases in minimum wage. You could play this game all day, but hidden within it is this which I reduced to a jingle in 1997:
“If Privatization is Necessary it Won’t be Possible. If Privatization is Possible it Won’t be Necessary” That is my prime assertion is that any set of economic and demographic numbers that would actually produce the real return assumed by privatization schemes is enough above current Intermediate Cost assumptions as to put it into the Low Cost cloud. While the model wouldn’t necessarily mirror Low Cost the various GDP and Productivity numbers needed would tend to produce the same result. Which to me explains why privatizers tend to resist revealing their economic models, they are too vulnerable to be simply scored against […]
Martin there were similar happy reactions to the Indiana Legislature’s 1897 introduction of legislation to make Pi = 3.2 http://en.wikipedia.org/wiki/Indiana_Pi_Bill. Fortunately for all concerned:
“The bill never became law, due to the intervention of a mathematics professor who happened to be present in the legislature.”
If you take time to look at the details you will find that in the case of Social Security, as in the assertion that you really CAN square a circle (the actual subject of the Pi Bill), is that it more than proves the old saying: ‘Everything is simple if you ignore the complexities’.
In fables it is generally true that the character of the Simpleton is always happy, he doesn’t know enough to be otherwise.
And my bet
is that low cost, high cost, it doesn’t matter. Social Security is designed to replicate ‘honor your father and your mother’ in an industrial society where no family has the ability to resist economic bad luck.
but the country as a whole does… or at the least has the ability to share the bad times as well as the good.
if everyone would stop trying to calculate to the last imaginary penny their maximum “return on investment” and accept the idea that Social Security provides a basic insurance against economic bad luck, they could get on with enjoying and investing the 88% of their money that doesn’t need to be saved for their old age.
there is no hope that they will understand how pay as you go is the equivalent of saving for their old age at a quite decent real interest rate (one that depends on how “all of us” do, and not just picking a lucky stock),
and all of this fussing about the not so subtleties of this or that scheme to “save social security” or replace it… fails utterly to come to terms with the fact that the whole great big goddam problem amounts to a need for the people who are going to live longer in the future to save an extra forty cents per week each year in order to pay for their “right” to retire at 67, or 62 with a lower monthly benefit, with a pension that allows them to live in the same neighborhood they lived in all the years they were earning that money…. yes, earning the money that is now paying the pension.
see, nobody appears to be smart enough to have noticed that they are demanding that Social Security be the only form of saving in which it is necessary to write your name on every dollar you put in the bank so you can be sure of getting “your own money” back.
To come up with counter-arguments to this latest attempt to “privatize” social security, one need only look back in the archives of this (and a few other blogs) to bush’s attempt to piratize social security a few years back.
For those wondering where examples of countries that have “privatized” social security plans, one need not look much past Argentina for a total charlie foxtrot. The IMF forced Argentina to do so in 1994, and after a couple of stock market downturns were receiving less than 10% of what they would have earned had they not privatized the situation. In 1994, only 23% of the working population was not covered by any retirement plan, that number rose to 35% by 2002. Most of the Argentinian plans were designed by the companies running the plans so that you could never change plans during your working life. If your new employer didn’t participate with the company running your plan, you could not contribute to your retirement plan.
A report from the CBO back in 1999:
http://www.cbo.gov/doc.cfm?index=1065&type=0
This Congressional Budget Office (CBO) paper describes the design of the pension systems in Chile, the United Kingdom, Australia, Mexico, and Argentina. Those countries have implemented policies that either replace the public pension system with mandatory personal retirement accounts or encourage their workers to opt out of the existing public pension system. The paper also compares the different approaches of those systems and discusses six aspects of the privatization efforts that may have relevance for the Social Security debate in the United States.
http://www.cbo.gov/doc.cfm?index=1065&type=0
Yes. They have failed in every state.
Privatization is for the finance sectors growth, and that will not work in terms of the productivity to permit the growth of fututre buying power.
The growth needs to be in US productive sectors, something the privatizing party is not concerned to see happen.
Hmmm. That’s interesting.
First, this will also go nowhere and disappear in a few weeks if not days.
But more importantly it shows just how chaotic the R’s in Congress have become. Why shoot yourself in the foot?
With Obama and the Dems dropping in the polls as the economy continues to sink why to the Rs throw this crap out?
As Napoleon said, “Never interfere when your opponent is making a mistake.”
The R’s would do well to just shut up and let Obama do their work for them.
Islam will change
Unsuccessful? seems like Galveston County has been quite successful in having a private SS plan.
Do a google search at Cato.org on private SS plans.