A reform like none other for the 21st century.
(Page 2 of 3)
Ultimately, as workers retire in the future relying on the personal accounts to finance the majority of their retirement benefits instead of the government, that will create enormous surpluses in Social Security. Under current law, those surpluses would flow back into general revenues, providing enough funding itself to cover all future personal account contributions to Social Security.
No change would be made in any way for those already retired today, or those anywhere near retirement. Each worker would be perfectly free to choose to stay with Social Security as is and forego the personal accounts entirely. There would be no change in Social Security benefits under current law for those who make this choice. But the Chief Actuary concluded that McCotter’s accounts are so beneficial to workers that 100 percent of workers would choose the accounts.
The workers who do choose the personal accounts, however, would invest their funds by choosing from a range of privately managed investment funds, just as with the Federal Thrift Savings Plan for federal employees, or the Social Security personal account system adopted 30 years ago in Chile that has operated with such great success for the workers of that nation. Nearly 100 percent of workers chose the personal accounts in Chile, validating the Chief Actuary’s judgment regarding the McCotter accounts.
To the extent a worker chooses the personal account option over his career, the personal account would finance an equivalent percentage of the worker’s future Social Security retirement benefits. For a worker who exercises the account for his entire career, the account would finance the maximum of 50% of the worker’s retirement benefits. For those who exercise the account option for fewer years and later in their careers, the account would finance proportionally less under a statutory formula. But the personal accounts will pay more than the amount of Social Security benefits they replace, leaving the retiree with higher benefits overall on net. There would be no change in Social Security survivors or disability benefits due to the McCotter accounts.
Workers who choose the personal accounts are backed by a federal guarantee that they will receive at least as much as promised by Social Security under current law, maintaining the social safety net of the current program. That is similar to the guarantee backing the personal accounts in Chile. That is workable because standard, long-term, market investment returns are so much higher than what completely non-invested, purely redistributive Social Security promises, that it is extremely unlikely after a lifetime of investment that the personal accounts will not be able to pay at least that much.
The bill was officially scored by the Chief Actuary of Social Security, with his scoring memorandum available on the Social Security Administration website. The Chief Actuary scores the bill as eliminating all future deficits of Social Security, with no benefit cuts or tax increases, assuring that all Social Security benefits will be paid. That is because the personal accounts finance so much of the future benefits of Social Security that future deficits between continuing payroll tax revenues and continuing benefit obligations of the program are eliminated entirely. The accounts are so powerful that they eliminate the future deficits in the disability portion of Social Security as well, even though no changes are made to disability benefits.
As a result, McCotter’s bill involves no change in the Social Security retirement age, cuts in the Social Security COLA, or other benefit cuts promoted by other proposals. Workers with personal accounts choose their own retirement age themselves, rather than the government choosing for them, with the incentive to delay retirement to the extent feasible to allow further account accumulations. Some workers with mostly intellectual jobs may delay retirement well into their 70s, which could never be imposed politically otherwise. Other workers with more physically demanding jobs would still be perfectly free to retire in their early 60s.
Because long-term market investment returns are so much higher than what Social Security even promises, let alone what it can pay, future retirees will actually enjoy higher benefits with the personal accounts. With those returns accumulating over a lifetime, the personal accounts will finance higher benefits than the Social Security benefits they replace under McCotter’s bill.
The bill involves the greatest reduction in government spending in world history, as the personal accounts take over the responsibility for financing through private personal savings and investment $8.555 trillion in future Social Security benefits, as scored by the Chief Actuary of Social Security. As a result, the Chief Actuary’s score indicates that the bill eliminates entirely the unfunded liability of Social Security. Moreover, based on the Chief Actuary’s score, the spending reductions to finance the accounts will add up to a minimum of another $3.75 trillion in savings, bringing the total reduced spending under the bill at a minimum to over $12 trillion. But block granting all remaining federal, means-tested welfare programs back to the states would likely save far more in future years than the $3.75 trillion needed to finance the transition to the personal accounts.
With the transition to the accounts funded by reduced government spending, there would be no transition debt at all. That means all of the savings and investment in the accounts would flow directly into the economy in full, boosting jobs, wages and economic growth today.
Personal Accounts and the Financial Crisis
But didn’t the financial crisis prove that such personal savings and investment for retirement is a bad idea, as President Obama claims, mocking the idea of personal accounts? To counter that criticism, I performed a study with William G. Shipman, former principal with State Street Global Advisors, perhaps the largest private pension investment management firm in the world. Our results were published in the Wall Street Journal in October, 2010.
We examined the case of a hypothetical senior retiring at the end of 2009 at age 66, who had the freedom to choose personal accounts when he entered the work force back in 1965 at the age of 21. Paying what he and his employer would otherwise pay into Social Security into the personal account instead, he was fool enough to invest his entire portfolio in the stock market for his 45-year working career. How would he have fared in the financial crisis, as compared to Social Security?
Let’s call our hypothetical worker Joe the Plumber. While working, he earned the average income each year for full-time male workers. His wife Mary, same age, also earned the average income each year for full-time females. She invested in the same personal account with Joe, an indexed portfolio of 90 percent large-cap stocks and 10 percent small-cap stocks, earning the exact returns reported each year since 1965.
This average income couple would have reached retirement at the end of 2009 with accumulated account funds, after administrative costs, of $855,175, almost millionaires. Indeed, they were millionaires, but the financial crisis lost them 37 percent of their account funds the year before they retired. This can be considered effectively a worst-case scenario, as the couple retired just one year after the worst 10-year stock market performance in American history, from 1999 to 2008.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?
H/T to National Review Online