SS Topic #3: Private Accounts and the Clawback [updated]
For a while now, the Administration has admitted that the problem they've been selling--insolvency--will not be helped by the solution they've been selling--private accounts. Entering the realm of benefit cuts during his press conference, the President finally dipped his toes into insolvency question.
But what about private accounts? Bush is still determined to make them a part of any overhaul plan. Coupled with the reduced benefits plan the President has laid out, private accounts are even scarier. The Center for Budget Policy and Priorities has an outline of how the accounts will work. These are the results you don't hear much about:
1. Bush is not giving you free money to invest. Your private account would be funded completely by you. You could choose to divert 4 percent of your payroll tax (that's your money that has previously been going to pay today's retirees) contribution into a private account, which you would be charged with growing.
2. Because of this shift, even though it would be phased in, the government would have to infuse the social security system with some 2 trillion dollars to handle the shortfall caused by everyone suddenly keeping their own payroll tax contribution. Where would this money come from? You know the answer. General funds/public debt. It would be a tax on the future: you when you retire, your kids, their kids. All the people this change is alleged to help.
3. Bush is assuming that you will grow your private account at 3% greater than the rate of inflation. Soooo, he will further cut your benefits accordingly. Like I said, you're diverting by your choice your payroll tax. So they will take that money out of your already-cut benefits, PLUS INTEREST. That's the clawback. It's like if you were allowed to get an advance on your paycheck; then when the actual check comes around, it's not just less the advance, it's less the advance plus inflation plus the 3% you are charged with growing yourself through intelligent investment. And all that a part of a new system that prescribed a lower paycheck for you to begin with.
So, private accounts are less of an opportunity than they are a challenge. Like a loan shark that gives you a bundle to bet on the Kentucky Derby and charges you an interest rate that assumes you should win. Bush's plan says: "We know you can do better investing your own money, so we're charging you accordingly. But we think you can do much better, and you can keep all that extra! It may possibly offset the cut in benefits that we're also implementing to make the system more solvent."
4. You could still lose money in the stock market! So your benefits are already reduced, even if you don't choose the private accounts. If you do choose them, to try and make up the difference, and you to grow your account, but only at 2% above inflation, you lose more money, because it doesn't cover the clawback! So, if you try and improve your return with riskier investments, they could fail,(I can personally attest to that) and you lose even more!
At Talk Talk Talk Talk Talk Myself to Death, Doug points to the absurdity of Bush's suggestion that we make safe investments like government IOUs, and to Brad Delong's analysis of the numbers that demonstrate how your benefits would dwindle further if you take the President's advice.
Why is anyone considering this plan?? Self-avowed right-wing Republican Charles Munger, partner of investment guru Warren Buffett, thinks Republicans are "out of their cotton-picking minds."
[UPDATE: Republican Senator George Allen added a fabulous new retirement plan to the mix of options on Meet the Press this morning. Just sell your house when you get old. You don't want to trim hedges anyway when you're retired. No, really that's what he said. So much for the ownership society.]