Now that the stock market has lost half its value, could you imagine if we had gone ahead with George W. Bush's plan to privatize Social Security and bet that money on stocks? Aren't you glad that Democrats stopped him and saved Social Security?

Well.

Of course, the Bush administration's proposal was not to "bet Social Security money on stocks." It was a proposal for voluntary partial privatization that would have allowed younger workers to opt into an arrangement where some of their taxes would have been diverted into vested personal accounts that, yes, could have been invested in equity vehicles — or not. There would certainly have been lower-risk options and even no-risk money market funds to choose from. And in the process, workers could have at least modestly reduced their dependence on a risky, unvested annuity stream that offers essentially zero returns at best.

So, yes, I can imagine that. I can imagine it quite easily.

Here's something else I can imagine: Imagine if Social Security had not been taken "off-budget" (i.e., if Social Security surpluses had not be used to conceal the true size of the federal budget deficit).

Imagine if all the Social Security surpluses collected by the federal government over the years had not been raided by greedy members of Congress and fraudulently presented to gullible voters as a "trust fund" — which is an absurd, empty accounting gimmick backed only by a pledge to raise taxes in the future (i.e., to recoup all those taxes already paid for Social Security but spent on Bridges to Nowhere and No Bureaucrat Left Behind "public investments").

Where would all those billions upon billions of surplus tax dollars have gone? Not into the stock market — no one ever seriously suggested that (except for the notorious radical conservative, Bill Clinton).

That money would almost certainly have gone to banks. The Social Security Administration or Treasury would simply have deposited that money in financial institutions, probably as specially negotiated long-term certificates of deposit.

With all that extra money in their deposit bases, banks would have had much stronger balance sheets and therefore would have been far less likely to need government cash now in the wake of the financial crises. Indeed, there could easily have not been any financial crises — especially if those Social Security surplus deposits came with strings attached (e.g., about taking on excessive risk) all those years ago.

Oh, and Social Security would still have all that money today tucked away safely for tomorrow. The reward would have been…

Well, more wealth than you can imagine!

—

Elsewhere:

The President's 2010 Budget lays the groundwork for the future establishment of a system of automatic workplace pensions, on top of and clearly outside Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. research has shown that the key to saving is to make it automatic and simple. Under this proposal, employees will be automatically enrolled in workplace pension plans — and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems.

Excuse me, but doesn't the Obama proposal sound an awful lot like the Bush proposal — you know, the one that liberals blasted as nightmarish?

There is one big difference: Bush's plan was opt-in and therefore truly voluntary; Obama's is opt-out and therefore (at least indirectly) compulsory.

Imagine that.

POST SCRIPT: How delicious it was to hear Secretary Geithner, barely 30 minutes after I posted this, insist in his congressional testimony that the Obama plan would most definitely "not require employees to invest in the stock market." Quite delicious indeed.

Previously:
–Will the Democrats Privatize Social Security?
–Times Editorial Repeats "401(k) = Stocks" Lie

If you have a 401(k) retirement plan at work, you don't need us to tell you that you've taken a hit in the past year. The really bad news is that the damage to your retirement security is likely worse than what the numbers say on your statement.
…
There's also no guarantee that today’s battered 401(k)'s will rebound powerfully. People close to retirement don't have time for a do-over. Even for those still far from retirement, there's no telling how stocks will perform in the future.

The entire editorial is premised on the false assumption that all 401(k) accounts are and must always be exclusively invested in equities.

In reality, federal law requires 401(k) plan administrators to offer a wide variety of investment vehicles, including at least one money market or other cash equivalent. With very few exceptions, employees have essentially unlimited freedom to choose lower-risk vehicles, including cash or cash equivalents.

It is true, of course, that the switch from defined-benefit pensions to defined-contribution retirement accounts places a new burden of financial literacy on employees. They must now plan for their retirement actively, taking into consideration factors such as investment objectives, time horizons and risk tolerances.

This "risky scheme" innuendo is exactly the same sort of lie that opponents of Social Security reform relentlessly foisted upon people: the false suggestion that even the slightest move toward voluntarily partial privatization would have involved compulsory investment in the stock market. That was simply never a part of any proposal by President Bush, or of any other proposal I'm aware of.

And there is also the other Great Omission™ by the opponents of defined-contribution accounts: vesting. How quickly they forget the shackles of having to work for the same company for 20 years or more, unable to quit for fear of forfeiting an all-or-nothing defined-benefit pension.

The portability of vested retirement funds liberated an entire generation of workers to move from employer to employer, in search of better compensation, working conditions, location, whatever. (Much the same argument could have applied to voluntary Social Security accounts. Alas…)

It is classic nanny-state hubris to presume that every employee of every employer in every circumstance would always prefer "freedom from worrying about retirement" to "freedom from having to work for the same employer for twenty years." It is classic yellow journalistic muckraking to lie about it.

Previously:
–McCain's Argument Against Social Security Reform
–Will the Democrats Privatize Social Security?
–The Working Poor, Retirement and Social Security

Traditional social policies to bolster income for the poor aren't enough to meet 21st-century economic realities, write Signe-Mary McKernan and Michael Sherraden in the new book Asset Building and Low-Income Families, from the Urban Institute Press.
…
Their analysis finds that building wealth — putting money in a bank account, saving in a retirement fund, owning a home — is vital for the economic security and advancement low-income families. Most government policies ignore this key goal, they point out, and some undermine it.

I wonder what government policy might most "undermine" wealth building and retirement saving among the working poor?

Perhaps the policy that seizes one-eighth of the working poor's paychecks, week in and week out, over their entire careers? The policy called, in increasingly Orwellian fashion, "Social Security"?

Just a hunch.

—

More:

Asset Building and Low-Income Families presents several policy options that complement current income supports. The authors explore converting the mortgage-interest deduction into a refundable tax credit, propose easy-to-open subsidized savings and retirement accounts, and recommend simplifying and raising asset limits in public programs.

How are "easy-to-open subsidized savings and retirement accounts" different from President Bush's left-enraging call for partial privatization of Social Security? Perhaps the fact that Bush's plan was strictly voluntary? Your guess is as good as mine.

Backpedaling a bit (sorry for the repetition):

The most common U.S. housing subsidy is the mortgage-interest tax deduction, which most low-income families cannot use because they owe little in taxes or do not itemize. In fact, McKernan, Sherraden, and Cramer cite data showing that 60 percent of the two largest federal homeownership expenditures — the mortgage-interest deduction and deductions for property taxes — go to the top 10 percent of households by income.

Asset Building and Low-Income Families presents several policy options that complement current income supports. The authors explore converting the mortgage-interest deduction into a refundable tax credit[.]

Two hasty stitches:

–Even the most partisan malcontents must take the sweet with the bitter: It's rather bizarre to lament the fact that the working poor don't benefit from a tax break because their tax burden is too low in the first place. (And recall, in the context of "stimulus programs" and "rebate checks" — the government cannot give a "tax rebate" to someone who does not pay taxes; it can only give him a welfare check.)

–A call for new or altered programs to further steer lower-income, economically at-risk households into buying homes that they might not otherwise be able to afford? What could possibly go wrong?

Previously:
–The Working Poor, Retirement and Social Security
–Some Thoughts on American Poverty
–Revisiting Social Security and Minorities
–Will the Democrats Privatize Social Security?
–Social Security "Kids Page" Exposes Apologists' Myths

Furthermore, while Social Security (as a unified program of taxes and benefits) is obscenely progressive in its redistributionist outcome (an individual who pays twice as much in Social Security taxes as someone else receives far less than twice as much in benefits), that is not the same as saying that Social Security is an "anti-poverty program," for three reasons:

1. It does not cover the non-working poor (i.e., who never pay into it).
2. It is not means tested.
3. A program that seizes one-eighth of a lower-income worker's paycheck — week in and week out, over an entire career — simply cannot be called an "anti-poverty program" under any sane lexicon.

Don't believe me? Then perhaps you'll believe the Social Security website:

The Social Security program is not and was never intended to be a program to provide benefits based on need. Rather, it is a system of social insurance under which workers (and their employers) contribute a part of their earnings in order to provide protection for themselves and their families if certain events occur.
…
The main source of Social Security income is the taxes that employees, employers, and the self-employed pay. This method of financing Social Security — a payroll tax on workers and their employers — remains the primary method of financing the program. The Social Security program has won widespread public acceptance and support largely because it is directly supported by the people who receive benefits from it.[*] Both benefit amounts and Social Security taxes are based on the worker’s earnings under the program. This aspect of Social Security helps to avoid any implication that the benefits are a form of government assistance or public charity.

That page is part of Social Security's "Kids and Families" subdomain. Here's more from the "Kid's Place" page:

Social Security is your piggy bank for the future. You save by making payments of part of your pay to Social Security as you work. Later when you can't work Social Security will pay you Social Security checks.

I can forgive the authors of this web page, designed for young children, for not including a footnote about Fleming v. Nestor. But grown-ups know that sometimes we fudge the truth a bit for children, to protect them from truths that they're not ready for. The problem comes, however, when we fudge the truth, not a bit but a lot, to delude ourselves about truths that we're not ready for.

Children grow up — do Social Security's apologists?

—

*Via Perfect Substitute, where I also very much enjoyed this comment:

"The Social Security program has won widespread public acceptance and support largely because it is directly supported by the people who receive benefits from it."

Wow. Wow all over that sentence.

Indeed.

Previously:
–Has Social Security Been a "Success"?
–The Working Poor, Retirement and Social Security
–Some Thoughts on American Poverty

Powerful House Democrats are eyeing proposals to overhaul the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.
…
Under [the] plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

Of course, the bulk of the outrage from this story, at least that I saw, was over that last part. For two reasons. First of course is its deliciously leftist, soak-the-(nowhere-near-)rich class warfare. (Do you really think a Wall Street CEO gives a hoot in heck about the tax implications of her annual $15,500 401(k) contribution? The 401(k) is a program for the middle class, not the "obscenely" wealthy.)

Second is the sheer inaccuracy of the proposal's premises. The tax benefit of a 401(k) or similar vehicle is tax deferment, not tax reduction. The money gets taxed when it's withdrawn rather than when it's earned. Oh the inequity!

(Yes, I'm aware that if the holder of a 401(k) account has the impudence to die before he withdraws the money, then the corpus of the account will generally escape income taxes. But do progressives really hate people so much that they damn them for dying prematurely? I would hope not.)

In any event, I was less astonished by the proposal regarding eliminating 401(k) tax advantages than with the proposed replacement program: A new, government-run mini-account that workers would fund from their paychecks. A new payroll deduction that would not revert to the government and would not buy an poorly performing life annuity to commence in the distant future and backed only by the full faith and credit of the United States Government. This new program would instead stay in a fully vested account, owned by the worker, presumably fully accessible and controllable upon retirement and transferable to the worker's estate in the event of her pre-retirement death.

Excuse me, but isn't that partial privatization of Social Security? The same sort of partial privatization that liberals denounced as dangerous and indeed evil?

This proposal (which, incidentally, is just a proposal — jawboned by a partisan academic in a backwater congressional hearing; there is no bill under consideration, nor is there likely ever to be one) is barely distinguishable from the Bush administration's proposal; the backbones of the two programs are essentially identical.

The only differences between the Bush proposal and this version are:

1. The Bush proposal was voluntary; this proposal is compulsory.
2. The Bush proposal would not have repealed or crippled 401(k) vehicles (i.e., the Bush plan pursued the policy goal of "fostering retirement saving" while this proposal pursues the policy goal of "class warfare").
3. The Bush proposal would have given participants greater control over how to invest the new accounts — stocks, bonds or cash, depending on risk tolerances; this proposal forces participants (i.e., everyone) to buy government bonds that pay a rather measly 3% coupon.

Some things never change, including the ability of politicians and central planner wannabes to damn the opposition for an idea, only to later repackage and praise it as their own.

Concurrently via Crime & Federalism and Below the Beltway.

No matter what Senator McCain may claim, here are the facts – if you make under $250,000, you will not see your taxes increase by a single dime – not your income taxes, not your payroll taxes, not your capital gains taxes. Nothing. Because the last thing we should do in this economy is raise taxes on the middle-class.

Social Security Administration, October 16:

Of the estimated 164 million workers who will pay Social Security taxes in 2009, about 11 million will pay higher taxes as a result of the increase in the taxable maximum.

I suppose we could act like politicians and insist that automatic increases in the wage cap are, somehow, not increases in payroll taxes. Or that someone making between $102,000 and $106,800 is, somehow, not someone "making less than $250,000." Or that someone making between $102,000 and $106,800 is, somehow, not "the middle class."

Or we can just call Barack Obama a liar.

I think I'll go with Option 2.

Previously:
–From "Obama v. McCain" to "Obama v. Social Security"
–Has Social Security Been a "Success"?
–The Working Poor, Retirement and Social Security
–Questions — Special "Obama Donut Hole" Edition
–Obama's "Little Bit More" for Social Security

Of course, as is always the case, year after year, one has to read a bit further down to find any mention of the flip side of that annual (and automatic) increase:

Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $106,800 from $102,000. Of the estimated 164 million workers who will pay Social Security taxes in 2009, about 11 million will pay higher taxes as a result of the increase in the taxable maximum.

So much for Barack Obama's pledge not to raise taxes* on anyone making less than $250,000 per year. Of course, he doesn't have to raise your taxes* — the government already does it for him automatically.

Additionally, so much for Obama's vague plan for a "donut hole" in Social Security taxes. Recall that I raised the question of the automatic increases in the wage cap back when the "donut hole" was first mentioned: Would the upper end of the "hole" increase automatically as the lower end increases automatically, or would the automatic increases merely shrink, and eventually eliminate, the "hole"?

In reality, you don't here much about the "donut hole" from the Obama campaign anymore. Instead, we get assurances from the candidate of "change we can believe in" that there will be absolutely no change in Social Security, under any circumstances, ever:

Despite the cries of privatization proponents, Social Security is not in crisis — it has a manageable cash-flow issue that we can ably solve over the upcoming years and decades.

Obama is confident that we can come together to find a workable solution. He believes that one strong option to improve Social Security's long-term solvency is asking people who earn more than $250,000 to pay a little more into the system. But Obama will not raise the retirement age or reduce Social Security benefits.

Even more important, Obama strongly opposes the privatization schemes that George Bush championed; Americans' retirements should not be subject to the whims of the stock market. Social Security is one of the most successful government programs in our nation's history.

Some hasty stitches, none of which are new:

• The next time you can't pay your bills, thanks to your own fiscal recklessness (say sometime around 2017), tell your creditors — as this Obama operative tells taxpayers — that you face, not a "crisis," but a "manageable cash flow issue." See how far it gets you.
• If one insists, ex ante, that raising the retirement age or reducing benefits are not options, then only two other options remain: raise taxes or raise the deficit. This, apparently, constitutes "ably solving" the (non-)crisis.
• What, exactly, constitutes "a little more"? (And while we're on the subject: What, exactly, constitutes "asking"?)
• Regardless of how much constitutes "a little more," how is it moral to "ask" the people who already pay almost all the taxes* to do all the "little more paying"?
• Would the "little more" that Obama would "ask" the highest-income taxpayers to pay into Social Security earn them higher benefits? If so, then how does that (i.e., taking in more, only to pay out more) address the underlying problem? If not, then how is it not naked, brazen, class-warfare income redistribution?
• Why is the Obama campaign lying and fear-mongering by suggesting that a voluntary, partial privatization reform plan "scheme" would (a) not be voluntary, (b) not be partial, and (c) necessarily entail investing in "the whims of the stock market" (as opposed to, e.g., money market and other low-risk investment options)? Is lying and fear-mongering "change we can believe in"?
• What, exactly, is the basis for claiming that Social Security is "one of the most successful government programs in our nation's history"? How does burdening the working poor with a 12.4% payroll tax, with no deductions or exemptions, constitute a "success"? Is vacuous chanting of tired (and false) bromides "change we can believe in"?
• Oh, and what happened to the "donut hole"?

—

*I've been enjoying the rather comical exchanges recently between supporters and opponents of Obama, fencing over talking point terminology regarding who pays "taxes." There is, of course, plenty of truth, half-truth and falsehood to go around. Here are the true facts:

• Approximately 32% of households, representing over 40% of the population, have no federal income tax burden.
• You cannot "lower income taxes" for those who pay no income taxes.
• You cannot give an income tax rebate to those who pay no income taxes; you can only give them welfare checks.
• The working poor (most of whom, remember, pay no federal income taxes) do pay other federal taxes: most notably Social Security tax and Medicare tax, but also federal gasoline tax, excise taxes and other taxes (hence my use of "taxes*" where what is really meant are "income taxes").
• Those Obama supporters who have been so quick to point out the asterisk in "taxes*" (i.e., that the working poor do indeed pay federal "taxes") are the same apologists for Obama's sotto voce ("ask" them for "a little more") class warfare on income tax policy and Social Security (non-)reform. I suppose Obama believes, as did Emerson, that a foolish consistency is the hobgoblin of little minds.

—

Previously:
–Has Social Security Been a "Success"?
–The Working Poor, Retirement and Social Security
–Questions — Special "Obama Donut Hole" Edition
–Obama's "Little Bit More" for Social Security

John McCain proposed Friday that the elderly be allowed to hang on to the stocks in their retirement funds and not be forced to sell them in a bad market.

The Republican presidential candidate would suspend requirements that people start selling off retirement investments when they turn 70 and a half.

"Spare investors from being forced to sell their stocks just in time when the market is hurting the most," McCain said to cheers at a western Wisconsin rally.

This story scares me for a very simple reason: Why the presumption, which one would hope is incorrect, that most retired Americns with 401(k) accounts are invested, heavily and perhaps exclusively, in stocks?

A 401(k) (or any other tax-advantaged retirement vehicle) is an account. It is not an "investment" and is certainly not a stock. A requirement (which by itself may or may not be reasonable) that the account be partially liquidated each year starting at age 70 1/2 does not necessarily mean — and in most circumstances ought not mean — "selling stocks."

All 401(k) programs offer a selection of investments, of varying risk and volatility. Any responsible program would have at least one money market fund — cash — and would not force participants to invest all their money in equity funds. Moreover, anyone at or near age 70 1/2 ought not to have much, if any, exposure to the stock market anyway.

So if McCain is right and compulsory withdrawals are forcing large numbers of retirees to sell stocks (i.e., stock funds within the account), then the corollary is that large numbers of retirees are idiots who are investing in stock funds rather than less volatile alternatives, which they generally should not be doing at that point in their life cycle.

(And these are supposedly the "smart ones" who contributed to 401(k) accounts in the first place!)

I had always defended Social Security reform, by which I mean voluntary partial privatization, against charges that it would mean investing in "risky" stocks, by reminding people that private accounts would surely include money market options. I also miss no opportunity to remind Wall Street's enemies that 401(k) accounts, regardless of their performance in any particular context, were tremendously beneficial to the American economy and collective mindset, by empowering people to move easily from employer to employer without worrying about forfeiting an antiquated defined-benefit pension (which itself is not a riskless enterprise).

I am course not arguing for paternalism (e.g., forcing people to move their 401(k) money out of stock funds at a certain age). I'm just wondering whether, after a generation of defined-contribution pension saving, people are still so financially illiterate as McCain's proposal would suggest.

Thoughts?

Without savings, low-wage workers will have to rely on other sources of retirement income, such as Social Security and pensions. Yet these sources of retirement income are based on earnings. The Social Security benefit formula replaces a greater share of earnings for low-wage workers than for higher-wage workers, but low-wage workers will still have lower benefits than their higher-wage counterparts.

Can you identify the missing word in that text? That's right: taxes.

The reason higher-income workers receive higher Social Security benefits is because they pay higher Social Security taxes.

As I've blogged repeatedly: Social Security can either be viewed as a form of compulsory retirement savings or as intergenerational welfare. It cannot simultaneously be both. (It can be presented, by the government or its apologists, as one or the other depending on the context or the audience, but it cannot be both at the same time.)

If we (i.e., the majoritarian mob) decide that no one should have a low-income retirement, then fine: Let's scrap the current Social Security scheme altogether and replace the current "lifetime earnings" benefit formula with a single, poverty-eliminating old-age pension — paid equally to all elderly regardless of their lifetime earnings. Simultaneously, we would abolish FICA taxes (which, recall, have no exemptions or deductions) and raise federal income tax rates by an appropriate amount to make the transition revenue-neutral.

The only thing standing in the way of such a reform plan is the unwillingness to admit that this would turn Social Security into intergenerational welfare. That was unacceptable in 1935, and it's unacceptable now. Social Security, to remain politically viable, requires the continued insistence that people "earn" benefits via dedicated taxes. With the corollary truth that some people will pay more taxes and therefore earn more benefits.

You can't have your retirement cake and eat it too: Either Social Security is a government-imposed, government-run retirement savings plan (in which some people will put in and get out more than others) — or it's the dole, complete with the stigma that attaches to being on the dole. It cannot be both.

And my challenge to Social Security's apologists remains on the table: Anyone who claims to champion the plight of the working poor must also champion the reform of a system that seizes one-eighth of the working poor's paychecks — week in, week out — over their entire careers. Anything else is simply irrational.

Go back to the quote: "Without savings, low-wage workers will have to rely on other sources of retirement income, such as Social Security and pensions." Absolutely correct. But the first and greatest impediment to saving is taxes — 12.4% of an entire paycheck is a lot of money that could have been saved, had it not been for Social Security.

Previously:
–Has Social Security Been a "Success"?
–Questions — Special "Obama Donut Hole" Edition
–Some Thoughts on American Poverty
–"Comment Left Elsewhere" of the Day (Means-Testing Medicare)
–Socialized Medicine: More on Means Testing

The Congressional Budget Office reported on Tuesday that the government's finances are deteriorating rapidly: the budget deficit for this year is expected to reach $407 billion, more than double last year's shortfall, and to exceed $500 billion in 2009. The takeover of Fannie and Freddie, necessary though it is, will add to the deterioration. Airbrushing that away will only open the door to uninformed — or negligent — decisions on spending and tax cuts.

The White House says that the extent of the government's control of Fannie and Freddie does not warrant including the companies' operations in the budget. That is absurd. The government has seized the companies, firing their executives and installing new ones, offering to invest up to $200 billion in the companies if necessary, and most significant, making an ironclad promise to pay their trillions of dollars in obligations, if need be. [September 13, 2008]

Except when they oppose it:

If the $10 trillion figure is essentially bogus, so is the claim that Social Security is in crisis. [January 3, 2005]

In suggesting that 2018 is doomsyear, the president is reinforcing a false impression that the trust fund is a worthless pile of I.O.U.'s — as detractors of Social Security so often claim. [January 10, 2005]

Social Security takes in more money than it needs to pay current beneficiaries, and the excess is invested in the Treasury securities that Mr. Bush was discussing. They carry the same legal and political obligations as all other forms of Treasury debt, every penny of which has always been paid in full and on time. [April 7, 2005]

So the calls for honest fiscal accounting and reporting of the Social Security "trust fund," which like any IOU from yourself to yourself is utterly worthless — was dismissed by the Times in editorial after editorial as (their terms) "silly" and "false" and "misguided" and all sorts of other pejoratives. But the Fannie and Freddie bailouts, which even under the worse case scenarios would be minuscule compared to the Social Security crisis, demands nothing less than the most transparent, plain-truth treatment.

Go figure — literally.

Previously:
–New York Times Continues "Ostrich-cizing" Social Security Reform
–Another NYT Social Security Lie: More Trust Fund Deception
–Social Security: NYT Repeats "Full Faith & Credit" Lie
–Treasury Acknowledges Social Security "Trust Fund" is Meaningless