USATODAY.com - Public cool about heart of Bush's Social Security plan: "The heart of President Bush's plan for Social Security, allowing younger workers to create personal accounts in exchange for a lower guaranteed government benefit, is among the least popular elements with the public"
"Younger workers would have the option of investing a portion of their payroll taxes on their own and would receive a lower guaranteed government benefit when they retire. Supporters of the plan argue that earnings on the investments would make up the difference."
Huh? Obviously Social Security is in the news every hour, but somehow people are still not getting the message.
More important than when the money is going to run out (For instance, yesterday we heard that Social Security is probably going to run out of money by 2041), is how low of returns one gets from social security.
Michael Tanner of the Cato Institute writes the following:
"While "the term rate of return may be slightly misleading when applied to Social Security. Indeed, some observers object to the entire concept of applying rate-of-return analysis to Social Security....most economists attribute an implicit rate of return to Social Security, based on a comparison of a persons contributions (taxes) and benefits. This rate of return can be summed up as the average interest rate that a person would have to earn on his or her contributions to pay for all of the benefits that he or she will receive from Social Security, or more technically, the constant discount rate that equates the present discounted value of contributionsThe result of his analysis?
with the present discounted value of benefits. It is important to note that this rate of return has nothing to do with the interest attributed to assets held by the Social Security Trust Fund."
"We can assume that workers retiring today receive a rate of return of approximately 2 percent and that future retirees will receive even lower rates of return."Yes I understand risk aversion, but wow. The people who are against reform must expect to be hit by the sky every time they go outside.
Now of course, this does not mean guaranteed. For instance recently the Christian Science Monitor reported the case of Stanley Logue a 1994 retiree who was getting more through social security than he would have had he invested on his own. Why? Timing. He invested when market went sideways or down. But as I tell people all the time, you can not manage to the exception. (indeed, a much more common "exception" can be seen by examining what happens when someone who has paid into the social security system and dies early.)
In a related note, Auburn's Jonathan Godbey (who has been described as a "financial genius"--yeah it was by his wife) recently gave his class a cool assignment. They had to compare how much they could expect under the current plan vs if they were allowed to invest 4% in private accounts. The results of course suggest that private accounts increase retirement income substantially. He will be updating this in the near future by examining it for each year of retirement to capture the magnitude of the Logue Exception.
So what will happen? I have no idea, but do not necessarily disagree with Tom Morgan (who many of you may hear on the radio) who published an interesting article on how he things the reform movement could play out. The short version of his view: higher taxes, lower payments, and a voluntary private account program.