Even though I have a million things to take care of now that my mom is back across the hall from me and our lives continue to deteriorate, I just have to share some stuff about the Social Security debate that I unearthed in response to comments from Tim here.
The following are exerpts, and it’s worth reading the entire acticles:
From the Chicago Tribune:
Q: So how would Bush’s plan be different from traditional Social Security?
A: Bush’s plan, like Social Security as it originally was envisioned, seeks to maintain an income floor but at the same time give workers choices that might generate wealth. In 2011, when the plan would take full effect, workers who were born after 1949 would have the option of annually investing as much as 4 percent of their wages, to a maximum of $1,000, in an individual account. The other 8 percent of their wages would be invested in the current system. Workers 55 and older would remain in the current system. (Under the gradual phase-in, workers born between 1950 and 1965 can participate in 2009, and those born before 1979 can participate in 2010.) Over time, the amount that could be invested in the accounts would grow slowly, by a little more than $100 a year.
Q: Can I use the money for any kind of investments?
A: No. Under the plan, you would choose from a small number of diversified funds, all relatively conservative. They would be administered by the government and modeled after the Thrift Savings Plan now available to federal workers. The standard option would be a “life cycle” fund, which reduces the percentage invested in stocks as you get closer to retirement.
Q: What happens when I retire?
A: Upon retirement, workers would be required to trade in their investment portfolios for an annuity so that a combination of traditional benefits and their annuity payments would meet the poverty level, which was about $11,400 for a couple older than 65 in 2004. But if that income stream is higher, under Bush’s proposal, retirees could use the additional money in their accounts as they wished, such as continuing to invest, increasing the size of the annuity payment or taking a lump-sum payment.
Q: What if you decide that you don’t like individual accounts after you started investing?
A: You can choose to redirect the money to Treasury bonds, which are the investment vehicle of the traditional Social Security system. They currently earn about 3 percent a year. A worker opting for individual accounts gains if he makes more than that 3 percent rate and loses if he falls below that level.
Q: Would Bush’s plan give me more in benefits than the current system?
A: That’s unclear. It would depend on whether the performance of the investments over time exceeds the benefit reductions necessary to bring the traditional system into balance. Under a variety of scenarios, the benefit cuts could be dramatic, but administration officials also say that the current level of benefits is unsustainable in any case. Workers can choose to stay in the traditional system, but the White House has said those benefits will be reduced by an unknown amount.
Q: What if the stock market swoons and my total benefit is below the poverty level?
A: The administration has not addressed that scenario. Under some proposals, there can be a poverty benefit. But at the same time, officials do not want to reward bad investment choices.
Q: Wouldn’t creating individual accounts require more government debt?
A: Yes. If the accounts are funded out of existing payroll taxes, as the president proposed, then creating the accounts would require Social Security to tap the trust funds even sooner. That is because the system would need to keep paying current beneficiaries while also funding nascent accounts for people who probably will not retire for decades. The borrowing costs of Bush’s plan would be more than $1 trillion in the first 10 years of a fully phased plan, and then $3.5 trillion in the next 10 years. The White House believes the costs will even out over the next 75 years–that any debt incurred will be balanced by gains later–but in the short term the country’s debt burden would rise. The costs would really begin to soar about the time Social Security is projected to begin withdrawing money from the trust funds.
Q: Are there other ways to deal with a financing gap in Social Security?
A: In the past, payroll taxes have been increased and benefits have been reduced (such as raising the retirement age). Bush has ruled out any increase in taxes. Participants in an individual-account program would be required to accept some benefit cuts to help reduce the transition costs, but the administration has not revealed the size or scope of those cuts. Administration officials acknowledge that individual accounts themselves would not solve the long-term financing gap in Social Security, so other, still-unannounced steps would be needed…
And, I suspect, that’s only a hint of the landmines that will be buried and waiting if Bush’s plan succeeds.
From CNN:
For two decades, the Social Security system has been creating a “surplus,” and that reserve is widely thought to be available to make up for shortfalls projected to begin in 2018, when more money has been promised to beneficiaries than will be taken in through payroll taxes.
But that surplus isn’t a pile of cash waiting to be used. In fact, the money — $1.5 trillion plus interest to date — has already been spent.
In accordance with the law, the extra money Social Security takes in is loaned to the U.S. Treasury, in exchange for which it receives special-issue Treasury bonds. The actual cash goes into the government’s general revenue pool.
The bonds are special because, unlike other government bonds, they can’t be bought or sold on the open market, and they can be redeemed at any time at face value.
But just like other government bonds, the special-issue Treasurys pay interest and are backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.
When Social Security looks to tap those special securities, starting in 2018, the government will have to come up with a way to pay the money….
SO, AGAIN, IT’S NOT THE WAY SOCIAL SECURITY IS SET UP. IT’S THE WAY CERTAIN ADMINISTRATIONS SHORT-SIGHTEDLY MISDIRECTED THE SUPLUS FUNDS MEANT TO SUPPORT IT THROUGH THE BOOMERS’ RETIREMENTS.
[And now, back to dealing with immediate crises. Stay tuned for a report on how Alice Walker’s new novel is keeping my spirit fueled — despite the Publishers Weekly review.]
