Wednesday, January 12, 2005

Stakeholder Accounts

If we want to create an "ownership society" this is a wonderful idea that has been put in place by the Bristish. Kinda turns the pay now, receive later approach of our Social Security system on its head. In concept, these accounts takes advantage of time to help fund the future financial needs of those born today. If there is one thing that those born today have is time ... and one thing they lack is money.

The accounts (initially proposed as stakeholder accounts with a much larger funding) could be used for retirement, health insurance premiums or education. They also would enable young adults to enter society with a vested stake, something that does not happen often enough today.

What is Fair?

Could someone explain how using Treasury bonds to fund the Social Security trust fund differs from a case were a company issues bonds to a defined benefit plan that it sponsors?

In other words, General Motors (for example) is prohibited by ERISA from issuing corprate debt to its pension plan in order to fund that plan. The assumption by lawmakers being that you cannot replace an IOU (the pension promise) with another IOU (the bond) from the same party and still have a funded plan. Is the corporate situation analagous to the Social Security Trust where the SS payment promise (made by the Treasury) is being funded by a non-marketable Treasury bond (issued by the Treasury)?

If it is not the same, then what is the difference? Why would the GM plan be considered unfunded by the PBGC when the Social Security system is considered to be funded?

To extend the analogy further, corporate pension plans -- such as that run by GM -- must calculate their liabilities annually. Those liabilities include all promises made to future workers. Once a worker accrues a benefit under an ERISA plan the earned benefit cannot by law be reduced -- a promise once made must be kept (and funded). Considering this, it seems that people are treating the promises now being made under Social Security somewhat cavalierly. Every worker born after 1975 (those up to 30 years old) is now being promised benefits that will be delivered after 2042, yet many commentators seem to be arguing that it does not matter today that a predicted shortfall will be reached in 2042 as that date is too distant to matter. Does this make sense considering that there must be millions of Americans under 30 now in the work force?

Shouldn't we be making sure that we are properly calculating the earned benefits of those in their twenties so they have some idea of what they need to save to supplement their Social Security benefit?

Lastly, those in their twenties are now making a larger contribution than needed to pay current benefits (only about 74 percent of last year's employer and employee payroll tax was used to pay for current benefits). So, that cohort is floating a loan (in effect) to today's retirees. Yet it is this cohorts' benefits that may have to be cut. Those paying extra today to fund the trust will have to pay extra again (in the form of reduced benefits) when they retire.

Is the building of the trust fund a fair treatment of those now in their twenties? Is intergenerational fairness something that should be taken into account.

Monday, January 03, 2005

Can We Afford Private Accounts?

The Heritage Foundation shows here that 74 percent of current Social Security withholding is used to pay current benefits while the remaining 26 percent is the surplus being set aside for the GenXers. Another way of looking at this is that three-quarters of your deferral (9.3 percent of your total pay) is being used to pay today's retirees.

That leaves the reminaing one quarter (3.1 percent of your paycheck) to be parked in the special government bonds sold to the Social Security system by Congress. In turn, Congress is spending those funds on other (non-retirement) things.

If that 3.1 percent were used to fund private accounts Congress would have to find the funds elsewhere. But is this a bad thing or a good thing? In essense, using the funds for private accounts would return the surplus to wage earners, but would still guarantee that the funds would be used for their retirement.

The change would also require Congress to come up with the 3.1 percent from somewhere else, presumably through an increase in income taxes or debt issuance. Yet, because of the way Social Security taxes are assessed, both of those alternative fund raising methods would appear to be more progressive than in the current system.

Comments anyone?