Expanding Or Privatizing Social Security: Clive Crook Isn't Sure What He Wants to Do

Clive Crook seems to want to both expand and privatize Social Security in part to address the real problem that retirees do not have enough money to have a decent standard of living. Before addressing his main policy proposal, it's worth addressing a few things that he gets wrong.

First, he complains that the program is adding to the deficit, telling readers to:

"Forget the 'trust fund' and its holdings of government debt. That’s money the government owes to itself: It nets out to zero."

Yes, I keep telling Peter Peterson to forget his holdings of government debt. That is simply money owed by the government.

Look, this is a real simple logical point. We keep a separate account for Social Security. Clive Crook and whoever else may not like that fact, but it happens to be reality.

That is why it is possible for Social Security to run out of money in a way that it is not possible for the Pentagon or State Department to run out of money. If Crook doesn't believe in the idea of Social Security being a separate account then his next sentence is nonsense:

"What counts is that the system is now adding to the budget deficit, and will add more with time."

If it's all one budget, then every spending program adds to the deficit all the time. What Crook wants to do is to ignore the $2.7 trillion in government bonds that Social Security built up over the last quarter century by taxing workers more than was needed to pay benefits. This is known as "stealing."

Crook then proposes two measures to eliminate projected shortfalls. One is to raise the retirement age. This proposal ignores the fact that many older workers, especially those with less education, work at physically demanding jobs where it will be difficult for them to work into their mid or late sixties.

His next proposal is means-testing. This one doesn't make much sense once you look at the data. While Peter Peterson may not need his Social Security, there are not many billionaires collecting benefits. To have any noticeable impact on the program's costs you would have to hit people with non-Social Security incomes of around $40k, and even then the gains would be limited.

However Crook is exactly right in saying that the current Social Security benefit is inadequate to support a decent retirement. To remedy this he proposes a mandatory contribution equal to 5 percent of wages to a new government-run retirement fund. (There would be subsidies for lower income workers, but Crook would probably leave many moderate-income workers hard hit with this 5 percent contribution.)

The idea of increasing the money put aside for retirement is fine, except he uses President Bush's proposal for individual accounts as his model. Of course President Bush did not want to have collectively invested money, he wanted people to have their own accounts where they could play around with their money. This would have added cost and increased risk compared to what Crook is suggesting.

As far as Crook's plan, it is not clear what the benefit is from having individuals get an investment return as opposed to a guaranteed benefit based on average returns. The difference is that the government need not worry about the timing of the market (it will survive through a down market), whereas individual workers have to worry a great deal about timing. If the government assumed this timing risk and paid workers an average return on their investment (e.g. 3.0 percent above the rate of inflation), then workers could avoid timing risk.

If there is a downside to going this route and upside to subjecting workers to the risk of market timing, it is hard to see what it is. Anyhow, Crook's plan clearly is not going anywhere any time soon, but it is good to at least see someone recognizing the need to increase, rather than decrease, retirement income.

...
written by coberly, March 15, 2012 10:35

Dean

first, you don't have to have a "hard physical" job to desperately need to retire by the time you are in your early or mid sixties. Much of the work that even college educated workers do is soul destroying and hateful. "Work" is not the purpose of life, but Peters thinks that "workers" have no reason to live if they are not working for him.

Thing is, with Social Security a worker can, and does, pay for his own retirement. So by the age of 62 or so he has saved enough in Social Security, together with the automatic "interest" generated by pay as you go financing, that a worker who needs or really wants to retire can do so... because he paid for it himself. If that worker is willing to accept a slightly lower (monetary) standard of living, he could do so with no increase in the payroll tax. If most workers would like to retire at the same retirement age as today, even with their longer life expectancies AND enjoy the higher standard of living projected for the future, they would need to save, via the payroll tax, an extra one half of one tenth of one percent of their rising wages each year. As far as I am concerned they would be stupid not to.

...
written by coberly, March 15, 2012 10:42

that should have been Peterson, not Peters, who thinks workers have no reason to live except to work for him.

a market based "add on" to Social Security would make some sense given the way people think. but the whole point of Social Security itself is INSURANCE. it does not have to provide a 'decent retirement" by middle class standards. it merely needs to provide a decent retirement by human standards: food, shelter, time, and a reasonable chance to participate in the surrounding culture. i can do it on less than ten thousand per year, and you could to, with just a little luck and planning.

point here is don't kill social security by trying to make it carry more than it was designed to carry.

and it is important to say that Social Security does NOT contribute to the budget deficits. It is NOT "all one budget," not even as an arguing point.

...
written by Bloix, March 15, 2012 10:48

The main problem with individual retirement accounts is that no one knows how long he or she is going to live. If you need to live on your own money, you should assume that you'll live to be 90 - otherwise you might be broke and live your last years on the street.

Of course, for most people the only way to save enough for your 90's is to start eating cat food when you're 70.

The great thing about social security is that it insures you against takes the risk of living too long. You get it as long as you live, and then it stops. So you don't have to worry that you'll outlive your savings.

This isn't Peterson's problem, because like other rich people he doesn't work for his money. He will continue to get richer and richer and richer for as long as he lives.

Forget the "Trust Fund" what is needed is a Trust Fund.
written by JohnP, March 15, 2012 11:40

Didn't he just say what needs to happen is that they need ignore the 2.7 Trillion workers put in a goverment "Trust Fund" because that doesn't matter and make workers start putting 5% of their wages in a goverment trust fund? What's to stop these people from stealing it again?

...
written by PeonInChief, March 15, 2012 11:43

JohnP--

Nothing.

The usual out for "privatization" plans
written by Matt, March 15, 2012 12:20

The typical out for all the "privatization" plans has been a government-guaranteed minimum rate of return - in other words, Wall Street gets to take 2-and-20 AND we the taxpayers get to eat the losses if they bet wrong.

How exactly such a game of "heads I win, tails I win slightly less" is in *any* way related to the mythical "free markets" is best left to the angels-on-the-head-of-a-pin crowd.

If you're a Keynesian, you should not say that Social Security can run out of money.
written by Tyler, March 15, 2012 12:23

Look, this is a real simple logical point. We, the United States, have our own currency. You and Paul Krugman may not like that fact, but it happens to be reality. That is why it is impossible for Social Security to run out of money, just as it is impossible for the Pentagon or State Department to run out of money.

Social Security Can Run Out of Money
written by Dean, March 15, 2012 1:35

Tyler,

we have a law that says SS can only spend what is in the trust fund. You and everyone else you know may not like that law, but that is the law. Until the law is changed,SS can run out of money. That is the simple logic of the matter.

Person
written by hewhoasks, March 15, 2012 3:55

Yes, and the privatizers ignore several things. First is that if retirees receive some average level of support costs the same no matter how the money flows. If the money is from "personal accounts" then it comes out of the dividends created by those still working. If it comes form SS then it comes out of taxes on those still working (to pay the bonds.) The big difference is that there is rsk and huge opportunity to rip off workers and retirees with the "personal accounts" and not with the current system - although clearly the right wing is working on that. They also ignore that markets don't create money - they are just markets, a venue in which transactions are conducted. In a market prices go up when buyers predominate, down when sellers do. With that in mind, look at what George W. Bush said on his road trip to drum up support for "personal accounts": retirees would not be allowed to sell their assets. Yes, by golly, the propaganda made big noise about the capital gains that might (don't forget that "might" implies "might not," by the way) occur but those would be off limits to the retirees. Of course it was propaganda, not anything like what an investor ought to see: a prospectus. Were George W. Bush a mutual fund salesman he'd very likely run into big trouble with the SEC over his claims. What comfort is there in knowing that the sales pitch used to push "personal accounts" would land any investment professional in big trouble, were the professional to flog it? Not much.

Market Risk
written by RockyCreekguy, March 15, 2012 4:18

I've been in the investment area for over 50 years and can say from my experience there are at best an extremely small group of people that have the knowledge, experience and emotional makeup to consistently make money with stocks. Most people think they are investment geniuses when the market goes up and when it starts down, as it inevitably will, they start worrying, and when it finally gets to the point they cannot stand it anymore they dump their holding. When this happens collectively it’s called a market bottom. They then sit on the sidelines, too afraid to reinter the market, with the losses still fresh in their mind. By the time the talking heads on TV have become so elated at the rise in the market they are enticed back in near the top, just in time to repeat the cycle. That’s called buy high, sell low. Social Security should not subject most people to such risks associated with trying to make investment decisions on our own. It is just not prudent. Accepting a lower return from fixed income securities is a small price to pay for avoiding passing this investment risk onto inexperienced people. Increasing the revenue to the trust fund by raising and then indexing the income level subject to tax to something like the CPI would be a far saver approach. Even increasing the social security tax rate on lower income levels would be better than private accounts, and polls show most people would find this acceptable.

Dean: SS CAN RUN OUT OF MONEY
written by coberly, March 15, 2012 5:57

depends what you mean. in the first place the Trust Fund is NOT Social Security. In the second place, IF it ran out of money, the Trustees would (probably) just have to reduce benefits to match income from the payroll tax.

In the third place, as long as the law us UNchanged, those payroll taxes will keep Social Security from running out of money. As a very knowledgeable guy (named Baker I think) keeps reminding us... SS will pay out about 78% of current benefits... on a monthly basis... which will be more in real value in 2040 than 100% of real benefits is today. Moreover, because the increase in life expectancy will add more months to your life, at the end of the day, you will get the same 100% of total benefits as people do today... just spread out a bit more.

They could keep the same monthly benefits over the more months they are going to live just by raising their own payroll tax one half of one tenth of one percent per year.

I wish that ...
written by OJCsr, March 15, 2012 8:56

... when people talk about "raise the retirement age" they would remember two things;

1) employers don't mind losing older workers, and
2) employers don't want to hire older workers.

In other words, jobs for people at or near retirement just ain't there.

Joe

"This is known as "stealing."" is unjustified.
written by AndrewDover, March 15, 2012 9:07

If someone proposed to limit social security benefits to payroll taxes for every year from now on, you might be justified to claim a theft.

But Clive Crook proposed increasing benefits in a progressive way, while increasing the retirement age. That would probably result in a similar scenario as we have now; a increasing trust fund balance for another 8 or nine years, and then a declining balance for the next 15 or so. His proposals might make the balance go up a little slower, and then decline a little slower.

As long as the trust fund goes close to zero in the next 25 years, there was no theft. Or to put it simply: what matters is the proposals, not whether he wants to talk about trust fund balances.

...
written by urban legend, March 16, 2012 12:02

"One is to raise the retirement age. This proposal ignores the fact that many older workers, especially those with less education, work at physically demanding jobs where it will be difficult for them to work into their mid or late sixties."

Echoing OJCsr, it is ridiculous to see this toxic idea discussed without noting -- noting hell, emphasizing -- that the millions of workers who lose their jobs in the mid-to-late 50s have close to a zero per cent chance of ever getting a real job again.

I would also say to coberly, and to Dean, too, that is is irresponsible to keep saying, no matter the context, that Social Security "will" pay out 78% of the benefits it should pay at that time based on the current formula for setting benefits. When -- actually, if -- the Trust Fund set up for the Baby Boom generation retirements is finally depleted, currently projected for about 25 years from now, under existing law it will depend entirely on ongoing payroll tax revenues to pay all benefits. The Social Security Administration has no more than an educated guess whether those revenues in the mid-2030s will be 78%, or 85%, or 105% of what is needed to keep paying full benefits. Continuing to say this "will" happen creates a totally false sense of certainty that significantly affects the policy debate. It also plays right into the hands of the right-wing opponents of Social Security who have been saying the program "will" go belly up when the Trust Fund bites the dust.

About two years ago, hidden in an offhand remark in a report, the CBO Director acknowledged that that the Trust Fund might in meaningful actuarial terms never be fully depleted.

It should also be noted that for most of a 25 year period, actual annual changes in the Trust Fund more closely aligned with the more optimistic of the three projected scenarios the SSA applies for its long-term expectations, rather than the intermediate, more "realistic" scenario. Bottom line: when the economy has done very well, the Chicken Little Date moves further into the future -- i.e., more like the optimistic scenario. When the economy does poorly, it tightens. Despite these four rather awful years, it still hasn't fallen back to the date (2029) projected in 1997. (A mere six years after that, the projected date had been moved all the way out to 2042.) That is not the kind of record of clonsistency that inspires the confidence necessary to make declarations like "78%."

...
written by freebird, March 16, 2012 8:54

"... downside to going this route and upside to subjecting workers to the risk of market timing, it is hard to see what it is"

My guess is that individual accounts with a default 3%+inflation as one option may be more popular, but as you suggest there are bound to be losers in this scenario. Perhaps some rule whereby you control your account so long as you return better than 90% of the default option on an annual basis, and if you fall short, you are forced into the default option for the next four years? Sort of like training wheels on a bicycle.

PRODUCTIVITY
written by joe, March 16, 2012 3:08

OK, the money does NOT matter. Productivity is all that matters. If the economy is not productive enough to support our retirees, it would not matter if the SS trust fund was overflowing with cash, there wouldn't be enough goods and services to go around and the real value of the trust fund would be inflated away. Since the US govt makes it's own money, there needn't be a problem at all. This SS fear mongering is just ignorance and propaganda.

...
written by Calgacus, March 17, 2012 6:40

Of course you are right joe. Coberly, urban legend the simplest way to make Social Security "solvent", to keep enough nickels in the giant Trust Fund piggy bank, now that we have one because of the Reagan / Greenspan SS tax hike's destruction of the US middle class, without changing the law that payments must come from the fund is: Fill the Trust Fund with ultrasupercalifragilistic treasury bonds that pay 10% interest, or whatever is needed to keep the piggy bank full. Simple. Cut taxes, don't hike them, lower the retirement age, would be fine ideas.

AndrewDover: The theft has already occurred, by using the gross SS overtaxation of the past 30 years to inflate the value of the dollars given to the wealthy by the government's multifarious welfare for the rich schemes, paramount among them the "defense" (meaning attack) budget and the financial sector. This of course has resulted in slower economic growth & massive unemployment & wealth destruction. Thief Thieferson wants to compound this theft with more theft.

END OF EMPIRE/
written by clarence swinney, March 18, 2012 1:49

HOW CONSERVATIVES DESTROYED AMERICA
Ruined our great Savings and Loan Industry
Closed Fairness Doctrine that has allowed Mush Dimbaugh types on our public airwaves
Closed Revenue Sharing
Since 1980, initiated our involvement in 10 foreign conflicts
Repealed Glass Steagall—took deposits in 7000 banks and put 80% in (10) Too Big To Fail
Modernization of Commodities Market—from Investment to Casino Derivative Of America
2 very dumb invasions of two of most poor -most unarmed nations on earth=OIL OIL OIL
Ruined our International Reputation as a Do Good Christian nation to Big Bully Devil.
Stood by as Freak Marketeers ruined our Housing Industry.
Stood by as Casino Derivative of America ruined the World Financial Industry.
Impeached a Great President for petty political gains that created long term animosity between two parties.
Attempted to destroy Safety Nets that make America great middle class
Implemented Tax Codes that permitted redistribution of Wealth to top (10%) who now own (73%) of all Net Wealth and (83%) of all Financial Wealth and take home (50%) of all individual income.
Today, they have taken America to ranking in oecd nations as (# 2) as Least Taxed---(# 2) as least taxed corporations and horror horror (# 4) on Inequality from bottom 5 in 1980.
Since 1980, their Spend & Borrow policies are, mainly, responsible for adding 14,000 Billion to a 1000 Billion debt
Fought the great GI Bill.
Fought the WWII Draft
Installed strict laws which created 57 % of prison inmates on Marijuana use charges which make us lead the world in prison population.
Refuse to control the drug Beer.
There are many many more baddies.
CONCLUSION:::: WANT TO SEE END OF AN EMPIRE YIELD CONTROL TO
REPUBLICAN CONSERVATIVES AS WAS DONE IN 2001-2002-2003-2004-2005-2006.
SIX OF WORST YEARS IN OUR HISTORY. IMAGINE IF THEY HAD 12 YEARS???

Expanding Or Privatizing Social Security: Clive Crook Isn't Sure What He Wants to Do

About Beat the Press