Newsweeks Sloan favors Add-On Accounts) - Social Security: A Daring Leap

[papau]

http://www.msnbc.msn.com/id/6920720/site/newsweek

Social Security: A Daring Leap
President Bush makes his proposed private accounts sound like the opportunity of a lifetime. But the fine print shows they pose great risk for you—and the nation

By Allan Sloan
Newsweek


Feb. 14 issue -<snip>The current system is clearly unsustainable (BECAUSE FIT CUTS TO THE RICH WILL NOT BE ROLLED BACK SO AS TO REPAY THE MONIES STOLEN FROM THE PAYROLL TAX SURPLUS THAT WAS USED TO FINANCE THOSE TAX CUTS FOR THE RICH), despite what Democrats say about it being sound until the 2040s. Today's workers support current Social Security retirees, and the next generation is supposed to support them. The ratio of workers to recipients has fallen from 16-1 to the current 3-1, and will fall to a future 2-1. Keeping the current system afloat would require some combination of cutbacks in future benefits, more money from workers or taxpayers, or both. Given that Bush doesn't want to increase taxes, all that's left—if he prevails—is benefit cutbacks. And Plan 2 has serious cutbacks. An average worker retiring in 2075, for instance, would get a benefit 46 percent below the current formula. Later cuts would be even deeper. The plan does this by using a benefit formula based on inflation rather than on wages, which are roughly 1 percent a year higher. A few decades of compounding 1 percents sure adds up.

The one tax on income that Bush hasn't cut as president is the Social Security wage tax, which costs 80 percent of American workers more than federal income tax does. By keeping the tax the same and reducing future benefits, Bush is like a candymaker that cuts 46 percent off a chocolate bar but charges the same 75 cents for it. In other words, his plan would effectively increase the Social Security tax. Sure, the current formula's unsustainable—but, as we'll see, there are other ways to fix things.
<SNIP>

Bush, brilliantly, is marketing these accounts as empowering people who'd have no other assets. But I don't think things would work out well for these folks. There would be strict limitations on the accounts—you couldn't take money out of them before you retire, or even borrow against them. And the odds of a low-income person's being able to leave a significant account to her heirs—one of Bush's major selling points—strike me as remote.
<SNIP>

I'm in favor of private accounts constructed along the lines that Bush suggested. But the accounts ought to be in addition to the basic benefit, not as a replacement for about half of it. Democrats are crazy to oppose private accounts. They really do empower you. The current generation is used to investing, and is understandably skeptical about government promises. This isn't the 1930s, when only a handful of people bought stocks, and many of them came to regret it. It's the oughts, guys, get with it. FDR's been dead for 60 years. The world has changed.


If the president really wants to fix Social Security rather than pick a political fight—and the Democrats feel the same—it wouldn't be difficult. They'd compromise by putting more money into the system by raising wage taxes a tad, taking less out by increasing the retirement age and trimming benefit formulas and setting up private accounts funded by wage earners, not by government borrowings. Put a few willing negotiators in a room and a deal's done in a month. I won't hold my breath, though.

Bush has marketed the pants off the Democrats by setting the terms of debate. Do you want to pay higher taxes or lower taxes? Clearly, lower. Do you want to pay estate tax or not? Do you want private accounts, or don't you? He's done a fabulous job of showing the goodies—and of hiding the costs. People, naturally, have opted for the goodies. The Bushies are in full sales mode, including sticking recordings on Social Security's phone lines preaching that the system has to change. In the name of empowering my kids, he's asking them to pay full freight for my retirement and for trillions in new borrowings, while forking over the same wage taxes for lower benefits. If he can sell this one, the Marketing Hall of Fame should start planning his induction ceremony.

© 2005 Newsweek, Inc.
URL: http://www.msnbc.msn.com/id/6920720/site/newsweek/

[no name no slogan]

1. Hmmm....don't we already have "add-on" accounts?

IIRC the IRA, 401(k), 501(c)(3), Keogh, Roth IRA, etc. were created for JUST THIS PURPOSE: a tax-deferred way for regular people to save money for their own retirement.

I generally like Sloan-- he's okay for a 'mainstream' economist-- but I think he misses the mark here.

Why are we trying to re-invent the wheel when we have one that works rather well already? If Dubya truly wanted to encourage greater "freedom" in saving for retirement, they'd raise the IRA deductability limit to $10,000/yr for the working-class and subsidize contributions for those at the poverty level.

Oh wait, that sounds too much like "class warfare". Never mind.

[papau]

2. GOP fought Add-on account proposed by Clinton - now they will agree?

Destruction of Social Security is the only goal.

[KoKo]

3. Sloan is in a "back handed way" shilling for his Wall St. buddies on

this one. As scathing as he seems to Bush he compliments him and offers a proposal that isn't really necessary. Adding on....sheesh. We already have "add on's" with company sponsored 401-K's, etc.

Sad...it could have been a better article. But, it's Newsweek...what else did I expect.

BTW: just allow better interest rates for Bank Savings accounts and some folks would go back into despositing some of their pocket change. People used to use Savings Accounts before the late 90's when everyone thought Enron and the dot.coms would make them rich.

The very people on the low end of the economic ladder who could be saving in a traditional way would be forced into something risky Not good.

[Coastie for Truth]

5. Only for those In High Tax Brackets

While we have "Add Ons" - very, very few low tax bracket taxpayers have such accounts. If you are in a low tax bracket, say the 15% bracket - you do not get a tax advantage for pumping money into an IRA or 401(k) - compared to a high bracket taxpayer. That is the problem with "Add Ons."

Conservative Pete Peterson has suggested a REFUNDABLE TAX CREDIT for low bracket taxpayers to put money into an IRA or 401(k). It would work like this:

(Remember - a high bracket taxpayer who puts $1000 into an IRA or 401(k) gets a $360 tax deduction for his IRA/401(k) contribution)

(But a low bracket taxpayer who puts the same $1000 into an IRA or 401(k) only gets a $150 tax deduction for his IRA/401(k) contribution)

(Difference = $360-$150 = $210)

Peterson would remove this discrimination by giving the low bracket taxpayer a 36% Refundable Tax Credit.

This would be an ADD ON to Social Security --- and not a CARVE OUT from Social Security.

While we have "Add Ons" - very, very few low tax bracket taxpayers have such accounts.

[TexasLawyer]

4. Just another HO!