Tuesday, January 25, 2005

Feinstein economics

Sen. Dianne Feinstein has proposed an alternative to Bush's Social Security privatization bill. Bush's idea is that taxpayers divert some of the money they currently would be paying to Social Security in the way of payroll taxes, and put it into their own private accounts. The private accounts would have to be 401k-like. No risking your social security on commodities and such.

Problem is, here is Feinstein's plan. She want's privatization, she says "The only thing I would consider -- and it needs to be thought out -- is private accounts in addition to Social Security."
That's interesting. So she wants the same payout in taxes, but wants people to put additional money into some sort of private account.
You mean like a 401k or something like that, Dianne? Like we already do now?
How do you reconcile these two things the article above states:
Economists say it's harder for low-income workers to save more in part because 12.4 percent of their wages goes to pay for Social Security, which taxes all wage income up to $90,000.
Feinstein's idea points to a middle ground between Bush's plan and leaving the system as it stands now -- so-called add-on accounts, where workers would contribute money for their own accounts in addition to their payroll taxes, rather than using part of their payroll taxes.
Think about that. If low-income people are having a tough time putting money away because they are taxed 12.4 percent, how in the name of all that's holy are they going to be able to have some sort of "add-on account" in addition to that 12.4 percent?

Social Security taxes now take just over 2 working stiffs to pay for one benificiary. What people commonly don't know or recall is that the working stiffs only pay about half of the actual funding for Social Security. The funding comes from other sources too, mostly from employers themselves. Even if employees were allowed to take ALL of their payroll taxes and divert them to private accounts, there would still be money in there to pay for current retirees. Sure, the system would go into the red faster, but by the time the bonds finished paying out, a lot of the people retiring would not need as much help, as they had the opportunity to fund their own accounts for a couple of decades.
The senator cited reports that show of the 4 million Californians who now receive Social Security, about one- fifth have no other source of income and about half would be in poverty without Social Security.
Ok, at some point we have to, as a society, realize that providing for the welfare of the people in our nation does not mean handing out money and allowing them to be lazy and ignore their own welfare. But with 12.4 percent of their income being extracted to provide for their retirement, they can't very well do it now, and 12.4 percent isn't much, but I'd be willing to bet that putting that money in an interest bearing account, starting at 20 years of age, would produce much better returns than waiting to see what Uncle Sam has planned for you.
People also forget what Social Security was designed to do, and in what type of environment it was created in. Social Security was created when most people did not live to the ripe age of 65. Therefore SS was more of a life insurance that only paid out if you happened to be lucky enough to make it that far. With a larger percentage of the population making it past that point, a restructuring of the program is indeed necessary and vital.

David Adesnik at Oxblog has a post on this, where his concerns mostly mirror my own. He has some good links to essays on the subject of SS, including links to essays by Jeffery Brown, Economist at Univ of Illinois, arguing for private accounts replacing some SS taxes and benefits, and Laura Tyson, former Clinton advisor, arguing Sen. Feinstein's platform.
I agree with him that Bush's idea has some strong short term funding problems, and unless Bush can remedy that (or point out where the money is supposed to come from) I don't see how the Democrats or any moderates are going to go along with it.
Still I don't think Feinstein's idea is an appropriate compromise to Bush's plan. Compromise is OK sometimes when you need to get things done, but it's not good to compromise on an idea that obviously didn't take a lot of thought.

Update: Adesnik as his own update, with some interesting bits about SS that I didn't know. That trust fund that will keep solvent SS through 2042 is made up of government bonds. So the federal government has to come up with 11 trillion dollars between 2018 and 2042 in order to keep SS solvent. That's almost 1/2 trillion dollars a year added to the federal budget.

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